2023 (3) TMI 458 - AT - Income Tax

TP Adjustment of AE Receivable - Assessee had outstanding receivable from its Associated Enterprises (AE) - TPO held that excessive outstanding receivables have to comply with TP provisions - only relief granted was on account of applicable rate and TPO was directed to benchmark the same on the basis of interest rates on short term fixed deposits prevailing at relevant point of time - HELD THAT - It emerges that the assessee has not charged any interest on outstanding receivables from AEs and non-AEs. The loans advanced to AEs have been benchmarked separately. It also emerges that the assessee is a zero-debt entity and do not incur significant interest expenditure. Therefore, to allege that the assessee accommodated its AEs in the guise of receivables would not be a correct proposition. Therefore, this addition is not sustainable. We order so. The corresponding grounds raised by the assessee stand allowed. Disallowance u/s 40(a)(i) - payment made to foreign entities - HELD THAT - It emerges that the assessee could not file any documentary evidences in support of the payment so made to foreign entities. The claim of the assessee has to cross the hurdles of Sec.37(1) as well as the provisions of Sec.40(a)(i). We find that similar payments were made by the assessee in AY 2011-12 and adjudication of this issue was done by Tribunal 2019 (12) TMI 441 - ITAT CHENNAI , it was held that the services were not technical in nature - this issue stand restored back to the file of Ld. AO for fresh consideration with a direction to the assessee to file requisite evidences in support of the claim. The decision of this Tribunal as rendered for 2011-12 shall be duly considered by Ld. AO. The corresponding grounds stands allowed for statistical purposes. Foreign Exchange Loss on forward contracts - HELD THAT - AR explained that the assessee was exposed to foreign exchange risk which was sought to be covered by forex derivatives. Accordingly, these transactions could not be termed as speculative or notional loss in nature. AR submitted that the quantum of transactions is commensurate with the forex exposure of the assessee and represented by underlying assets. Considering the same, we restore this issue back to the file of Ld. AO for fresh consideration with a direction to the assessee to substantiate its claim. MAT computation on Disallowance u/s 14A - only plea of Ld. AR is that this disallowance is not to be added while computing Book Profits u/s 115JB - HELD THAT - We direct AO to exclude the same while computing Book Profits u/s 115JB.

Summary

Issues:
Transfer Pricing Adjustment on Sales Receivables; Disallowance u/s 40(a)(i); Foreign exchange loss; Disallowance u/s 14A.

Transfer Pricing Adjustment on Sales Receivables:
The appeal involved a Transfer Pricing Adjustment on Sales Receivables for the Assessment Year 2012-13. The Transfer Pricing Officer determined an Arm's Length Price (ALP) for international transactions, resulting in adjustments to the taxable total income. The appellant contested the adjustments made by the Deputy Commissioner of Income Tax (DCIT) regarding interest on sales receivables and services from foreign vendors. The Appellate Tribunal found that the appellant, being a zero-debt entity, did not charge interest on outstanding receivables, making the addition unsustainable. Therefore, the Tribunal allowed the corresponding grounds raised by the appellant.

Disallowance u/s 40(a)(i):
The issue of disallowance under section 40(a)(i) arose from the appellant's outsourcing of work to foreign vendors without deducting tax at source. The appellant failed to provide sufficient evidence to support the nature of services availed, leading to disallowance by the Assessing Officer. The Tribunal, considering a similar issue in a previous year, directed the Assessing Officer to re-examine the claim with proper evidence. The Tribunal allowed the corresponding grounds for statistical purposes.

Foreign Exchange Loss:
The appellant claimed a deduction for foreign exchange loss on forward contracts, which was disallowed by the Assessing Officer based on CBDT instructions. The appellant argued that the transactions were not speculative and were essential to mitigate foreign exchange risks in export business. The Tribunal, finding merit in the appellant's argument, remanded the issue back to the Assessing Officer for further consideration with substantiated evidence.

Disallowance u/s 14A:
Regarding disallowance under section 14A, the appellant earned tax-free dividends but did not contest the disallowance computed by the Assessing Officer. The Tribunal directed the Assessing Officer to exclude the disallowance while computing Book Profits under section 115JB.

In conclusion, the appeal was partly allowed by the Appellate Tribunal on 21st October 2022, addressing the issues of Transfer Pricing Adjustment, Disallowance u/s 40(a)(i), Foreign Exchange Loss, and Disallowance u/s 14A comprehensively based on the arguments presented and evidence provided by the appellant.