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2023 (1) TMI 89 - AT - Income TaxTP adjustment - Arms length price of international transaction of overdue export proceeds - HELD THAT - In the present case on the bills/ invoices itself assessee has mentioned the credit period on export receivable of AE and Non AE. In case of independent third parties on similar transaction with similar credit period of similar goods no interest is charged. This fact is proved by the assessee for this year by producing the bills of AE as well as Non AEs - we find that non-charging of interest on advances being overdue export proceeds from Associated Enterprises as a comparable internal CUP as for similar time on similar conditions, for almost similar period no interest is charged from Non Associated Enterprises. In view of this, we find that Arms Length Price of overdue Export proceeds and receivable from Associated Enterprises is ₹ Nil. Assessee has failed to show any evidence that there exists a trade practice of not charging interest on overdue advances of export proceeds. Even common sense defies such an argument. Assessee has also failed to show any evidence that due to recession the interest was not charged. Evidence were not laid down that , there was recession in the business of the assessee in this year or when there was boom , assessee was charging interest on such advances. We reverse the orders of the lower authorities; direct the learned Transfer Pricing Officer/ Assessing Officer to delete the above adjustment. Accordingly, ground no.1 of the appeal is allowed. Assessee has given advances - HELD THAT - As assessee has the share capital of ₹ 9.80 crores and reserves and surplus of ₹117 crores which is much more than the amount advanced for fixed assets. It is the claim of the assessee that it has not incurred any interest expenditure which is covered by the Provision of Section 36(1) (iii) of the Act. We find that assessee has interest free funds available which were more than the amount of advance for capital asset. Therefore, the issue is squarely covered by the decision of Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT . In view of this, we direct the learned Assessing Officer to delete the disallowance and accordingly, we reverse the orders of the lower authorities. Ground no. 1.1 of the appeal is allowed.
Issues Involved:
1. Transfer pricing adjustment regarding notional interest on export receivables. 2. Disallowance of proportionate interest expenditure under Section 36(1)(iii) of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment: The appellant contested the transfer pricing adjustment upheld by the Commissioner of Income Tax (Appeals) [CIT(A)], arguing that the Transfer Pricing Officer (TPO) did not issue a written show cause notice as required by Section 92C(3) of the Income Tax Act, 1961. The TPO had made an adjustment of Rs. 24,27,405/- towards notional interest on delayed export receivables from Associated Enterprises (AEs). The CIT(A) upheld the TPO's decision, considering delayed receivables as an international transaction under Section 92B of the Act. The appellant argued that the amendment to Section 92B by the Finance Act, 2012, should be prospective and not retrospective. They also contended that receivables from the sale of cut and polished diamonds are not capital financing and thus not covered under the explanation to Section 92B. The appellant further argued that the TPO did not select any prescribed method under Section 92C(1) for the adjustment, making it legally unsound. Additionally, they claimed that the practice of not charging interest on delayed receivables from AEs is consistent with their practice with non-AEs, and that working capital adjustments already account for the impact of outstanding receivables. The Tribunal found that the TPO and CIT(A) correctly considered the outstanding receivables as a separate international transaction. However, the Tribunal noted that the appellant had shown that similar credit periods were allowed to both AEs and non-AEs without charging interest, making the internal Comparable Uncontrolled Price (CUP) method applicable. The Tribunal concluded that the arm's length price (ALP) of the overdue export proceeds from AEs is nil, reversing the lower authorities' orders and directing the deletion of the adjustment. 2. Disallowance of Proportionate Interest Expenditure: The appellant contested the disallowance of Rs. 5,79,000/- under Section 36(1)(iii) for interest expenditure, arguing that the funds used for purchasing office premises were from interest-free funds and not borrowed funds. The CIT(A) upheld the disallowance, interpreting that the purchase of fixed assets was financed from borrowings. The Tribunal found that the appellant had sufficient interest-free funds (Rs. 141 crores) to cover the advance of Rs. 3.17 crores for fixed assets. Citing the Supreme Court's decision in CIT vs. Reliance Industries Ltd. (410 ITR 466), the Tribunal held that the presumption is that the investment was made from interest-free funds. Consequently, the Tribunal directed the deletion of the disallowance, reversing the lower authorities' orders. Conclusion: The Tribunal allowed the appeal in part, directing the deletion of both the transfer pricing adjustment and the disallowance of interest expenditure. The decision was pronounced in the open court on 14.12.2022.
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