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2019 (5) TMI 1837 - AT - Income TaxTransfer pricing adjustment on account of interest charged on share application money forwarded to AE - applying LIBOR plus 300 BPS by assessee - HELD THAT - Assessee has charged interest by applying LIBOR plus 300 BPS for immediately preceding year and such rate has been accepted by the Department without any further adjustment. The assessee has changed rate of interest to LIBOR plus 200 BPS without there being change in circumstances. Although, the assessee advanced rule of consistency, but yet it has failed to explain why rate of interest has been changed from LIBOR plus 300 BPS to LIBOR plus 200 BPS. Further, the assessee has failed to make out a sufficient reason for changing rate of interest applying on share application money forwarded to its AE. Considering the assessee s own calculation of LIBOR plus 300 BPS for AY 2011-12 and 2013-14 and such rate has been accepted by the Department, we are of the considered view that assessee ought to have charged LIBOR plus 300 BPS on share application money forwarded to its AE. Therefore, we direct the AO/TPO to recalculate interest receivables on share application money forwarded to AE by applying LIBOR plus 300 BPS. Transfer pricing adjustment on outstanding export receivables - TPO has made an adjustment on all export invoice where export realization was beyond the period of 85 days by applying interest @ 4.5% being 200 BPS mark up on the interest taken on packing credit as availed on 2.5% by the assessee - HELD THAT - There is no dispute with regard to the fact that the assessee has not charged any interest on receivables from both AE as well as Non-AE. Further, where there is complete uniformity in act of assessee in not charging interest from both AE and Non-AE debtors for delay in relation of export proceeds, therefore, the AO is not justified in making addition of notional interest to the assessee ALP on aforesaid ground in course of transfer pricing adjustment. As weighted average realization in case of AE was lesser than Non-AE, no TP adjustment should be made. This finding is fortified by the decision of Indo American Jewellery Ltd. 2013 (1) TMI 804 - BOMBAY HIGH COURT where it was held that there was complete uniformity in act of assessee in not charging interest from both AE and Non-AE debtors for delay in realization of export proceeds, no adjustment to ALP in course of transfer pricing proceedings. Therefore, we are of the considered view that the AO/TPO was erred in making addition towards notional interest receivables on export receivables and hence direct the AO to delete the additions made towards interest on export receivables. Addition u/s 14A - Disallowance of expenditure incurred in relation to exempt income - assessee has earned exempt income being dividend which was claimed exempt u/s 10(34) - assessee has also made Suo-moto disallowance towards expenditure incurred in relation to exempt income - HELD THAT - As decided in own case Tribunal deleted additions made by the AO towards further disallowances over and above suo-moto disallowances made by the assessee towards expenditure incurred in relation to exempt income on the ground that before invoking provisions of rule-8D, the AO required to record satisfaction having regard to the books of accounts of the assessee that suo-moto disallowance computed by the assessee is incorrect. Thus we direct the AO to delete further disallowance made towards expenditure incurred in relation to exempt income u/s 14A. Computation of book profit u/s 115 JB - by making adjustment towards disallowance of expenditure incurred in relation to exempt income - HELD THAT - Issue is also squarely covered in favour of the assessee by the decision of the ITAT Delhi Special Bench in the case of ACIT vs Vireet Investment P. Ltd. 2017 (6) TMI 1124 - ITAT DELHI where the Tribunal categorically held that provision of clause (f) of Explanation 1 to section 115JB(2) is to be made without restoring to computation as contemplated under section 14A r.w.r. 8D. Therefore, we direct the AO/TPO not to make adjustment towards disallowance as computed u/s 14A of the Act read with Rule-8D while computing book profits.
Issues Involved:
1. Transfer pricing adjustment on account of interest charged on share application money advanced to Associate Enterprise (AE). 2. Transfer pricing adjustment on account of interest on delay in realization of export receivables from AEs. 3. Disallowance of expenses incurred in relation to exempt income under Section 14A of the Income Tax Act, 1961. 4. Adjustment of disallowance of expenses incurred in relation to exempt income while computing book profit under Section 115JB of the Income Tax Act, 1961. Detailed Analysis: 1. Transfer Pricing Adjustment on Interest Charged on Share Application Money Advanced to AE: The assessee charged interest on share application money forwarded to its AE at 6 months LIBOR plus 200 BPS. The TPO rejected this rate, arguing that the LIBOR plus markup approach only covers risk reward when transactions are made in forex. The TPO applied an additional 300 BPS, resulting in a total interest rate of 5.5%. The CIT(A) upheld this adjustment. The assessee contended that the interest rate should be based on the currency in which the loan is repaid and cited previous acceptance of LIBOR plus 300 BPS by the Department. The Tribunal concluded that the assessee should have charged LIBOR plus 300 BPS, consistent with previous years, and directed the AO/TPO to recalculate interest receivables accordingly. 2. Transfer Pricing Adjustment on Interest on Delay in Realization of Export Receivables from AEs: The TPO made an adjustment for interest on outstanding export receivables, arguing that the assessee allowed undue benefit to its AE by extending the credit period beyond that allowed to non-AEs. The CIT(A) affirmed this adjustment. The assessee argued that it did not charge interest on receivables from both AE and non-AE customers and provided industry practice evidence. The Tribunal found that there was uniformity in not charging interest from both AE and non-AE debtors and that the weighted average realization period for AEs was less than for non-AEs. Consequently, the Tribunal directed the AO to delete the addition made towards notional interest on export receivables. 3. Disallowance of Expenses Incurred in Relation to Exempt Income under Section 14A: The AO applied Rule 8D to compute disallowance of expenses related to exempt income, resulting in an additional disallowance beyond the assessee's suo-moto disallowance. The CIT(A) allowed partial relief by directing the AO to consider only net interest expenditure. The Tribunal noted that the AO must record satisfaction regarding the correctness of the assessee's disallowance before invoking Rule 8D, as mandated by Section 14A(2). The Tribunal found no such satisfaction recorded by the AO and directed the deletion of the additional disallowance, consistent with earlier Tribunal decisions in the assessee's case. 4. Adjustment of Disallowance of Expenses Incurred in Relation to Exempt Income while Computing Book Profit under Section 115JB: The AO made adjustments to book profits under Section 115JB by including disallowances under Section 14A. The Tribunal referred to the ITAT Delhi Special Bench decision in ACIT vs Vireet Investment P. Ltd., which held that computation under clause (f) of Explanation 1 to Section 115JB(2) should be made without resorting to Section 14A read with Rule 8D computations. The Tribunal directed the AO/TPO to exclude such disallowances while computing book profits. Conclusion: The Tribunal partly allowed the assessee's appeal, directing recalculations and deletions of certain adjustments, while dismissing the Revenue's appeal. The Tribunal emphasized the importance of consistency, proper justification, and adherence to statutory requirements in transfer pricing and disallowance computations.
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