2017 (4) TMI 463 - AT - Income Tax

Addition in respect of apportionment of interest on working capital factory overhead and director s remuneration to 10B unit - CIT(A) deleted addition on the ground that the assesseecompany had maintained separate books of account in respect of 10B unit and non-10B unit and without pointing any discrepancies in the books of account maintained the AO was not justified in apportioning the above expenditure to 10B unit - Held that - AO had not found any defects in the books of account nor had he rejected the books of account. It is neither the case of the AO that any of the expenses was not properly allocated to 10B units nor was the case of the AO that the expenditure which is incurred exclusively for 10B unit was not claimed as a deduction. The AO merely proceeded on surmises and conjecture to make addition which is not permissible under law and therefore we do not find any reason to interfere with the finding of the CIT(A). Hence the appeal of the revenue is dismissed. Addition in respect of apportionment of salary expenditure to 10B unit - Held that - AO has a strong basis to infer that there has been overlapping of functions of the employees between the two units. Thus we see no reason to interfere in his action in reallocating expenses within the meaning of section 145(3) of the Act. - Decided against assessee Addition in respect of ALP in respect of receivables due from AEs - Held that - TPO made adjustment on account of notional interest for non-realization of its dues. There is no dispute that the transaction in question is not an independent transaction. It is an integral part of transaction of sale made to AE and therefore it has to be considered along with main transaction. It is only w.e.f. assessment year 2012-13 amendment to section 92A was brought in the statute book. Since amendment is not applicable to the assessment year under consideration law laid down by several co-ordinate benches like Goldstar Jewellery Ltd. vs. JCIT (2015 (2) TMI 58 - ITAT MUMBAI) is applicable wherein held that there can be no separate international transaction of interest in the international transaction of sale. Early or late realization of sale proceeds is only incidental to transaction of sale but not a separate transaction in nature. The impugned transaction of interest on delayed realization of sale proceeds is not international transaction. - Decided in favour of assessee

Summary

Issues Involved:
1. Apportionment of interest on working capital, factory overheads, and director’s remuneration between EOU (10B unit) and non-10B units.
2. Apportionment of salaries to the 10B unit.
3. ALP adjustment in respect of outstanding receivables exceeding six months from Associated Enterprises (AEs).
4. Grant of credit for TDS of ?67,87,988/-.

Detailed Analysis:

1. Apportionment of Interest on Working Capital, Factory Overheads, and Director’s Remuneration:
The revenue appealed against the deletion of additions related to the apportionment of interest on working capital (?23,93,491/-), factory overheads (?1,03,70,449/-), and directors' remuneration (?20,01,831/-) to the 10B unit. The CIT(A) had deleted these additions on the grounds that the assessee maintained separate books of account for the 10B and non-10B units, and the AO did not find any discrepancies in these books. The Tribunal upheld the CIT(A)’s decision, noting that the AO’s additions were based on conjecture and surmise without any defects found in the books of account. Therefore, the appeal of the revenue was dismissed.

2. Apportionment of Salaries to the 10B Unit:
The assessee contested the CIT(A)’s confirmation of the addition of ?17,03,108/- related to the apportionment of salaries to the 10B unit. The AO had estimated the salary costs and apportioned them based on the turnover ratio between the EOU and non-EOU units. The CIT(A) upheld this apportionment, citing overlapping functions of employees between the units. The Tribunal found no material from the assessee to contradict the AO’s findings and reasoning, thus dismissing this ground of the cross objections.

3. ALP Adjustment in Respect of Outstanding Receivables:
The assessee also objected to the ALP adjustment for notional interest on outstanding receivables from AEs. The TPO had made adjustments based on notional interest for delayed realization of dues. The Tribunal referred to precedents, including the Goldstar Jewellery Ltd. case, which held that the credit period allowed to AEs is not an independent transaction but part of the sale transaction. It concluded that no separate ALP adjustment is permissible for the interest on delayed realization of sale proceeds. Thus, this cross objection was allowed.

4. Grant of Credit for TDS:
The assessee raised an issue regarding the non-adjudication of the ground related to the grant of credit for TDS of ?67,87,988/-. The Tribunal noted that the CIT(A) did not provide any findings on this issue, making the ground non-maintainable. Consequently, this part of the cross objections was not entertained.

Conclusion:
The Tribunal dismissed the revenue’s appeal and partly allowed the assessee’s cross objections. The apportionment of interest on working capital, factory overheads, and director’s remuneration was upheld in favor of the assessee. The apportionment of salaries to the 10B unit was upheld against the assessee. The ALP adjustment for outstanding receivables was disallowed, favoring the assessee. The issue of TDS credit was not adjudicated due to lack of findings from the CIT(A).