2024 (3) TMI 878 - AT - Income Tax

Disallowance of expenditure relatable to exempt income u/s. 14A of the Act r.w.r.8D - HELD THAT - The assessee has not challenged the disallowance of other expenses @ 0.5% on average value of investment u/r.8D(iii) of the Income Tax Rules 1962 amounting to Rs. 87, 90, 136/- and thus we are inclined to upheld the findings of the Ld.CIT(A). Disallowance of interest on borrowings u/r.8D(ii) - Assessee has filed necessary details to prove availability of sufficient own funds in excess of investments made in shares and securities and mutual funds which yielded exempt income - assessee is having sufficient own funds in excess of investments made in shares and securities and thus in our considered view the case of the assessee is squarely covered by the decision South Indian Bank Ltd. 2021 (9) TMI 566 - SUPREME COURT wherein as clearly held that if investments in securities is made out of common funds and the assessee has available non-interest bearing funds larger than the investment made in tax free securities in such cases disallowance u/s. 14A of the Act cannot be made. AO directed to delete the additions made towards disallowance of expenditure u/s. 14A of the Act r.w.r.8D of the Income Tax Rules 1962 on interest expenditure. Computation of book profit u/s. 115JB resorting to the computation as contemplated u/s. 14A of the Act r.w.r.8D - As decided Vireet Investment (P.) Ltd 2017 (6) TMI 1124 - ITAT DELHI computation under Clause (f) to Section 115JB of the Act is to be made without resorting to the computation as contemplated u/s. 14A of the Act r.w.r.8D of the Income Tax Rules 1962. Thus CIT(A) is erred in upholding the reasons given by the AO to recompute book profit u/s. 115JB of the Act by making additions towards disallowance of expenditure relatable to exempt income u/s. 14A of the Act r.w.r.8D of the Income Tax Rules 1962. Thus direct the AO to delete additions made towards disallowance u/s. 14A of the Act r.w.r.8D of the Income Tax Rules 1962 to book profit computed u/s. 115JB. Assessment of interest income during pre-commencement period under the head income from other sources - HELD THAT - As following the decision of Karnal Co-operative Sugar Mills Ltd. 1999 (4) TMI 7 - SC ORDER we are of the considered view that the assessee has rightly reduced interest income from capital work-in-progress. CIT(A) without appreciating the relevant facts has upheld assessment of interest income under the head income from other sources . Thus we set aside the order of the ld. CIT(A) on this issue and also direct the AO to accept the method followed by the assessee for treatment of interest income in its books of accounts. TP adjustment - downward adjustment towards international transactions with its AE in respect of import of capital goods and enhancement by the CIT(A) towards downward adjustment in respect of import of capital goods from AE - HELD THAT - Unless there is change in facts in subsequent year settled position or accepted position cannot be changed. In the present case the revenue having accepted other method followed by the assessee for benchmarking import of capital equipments from AE and further accepted price paid by the assessee to be at ALP for Asst. years 2011-12 and 2012- 13 cannot dispute imports of capital equipment from AE and price paid by the assessee to AE under very same equipment supply agreement between the parties for the impugned assessment year. Therefore we are of the considered view that on this ground itself downward adjustment made by the ld. TPO and enhancement made by the ld. CIT(A) cannot be sustained. Whether adopting Other Method requires looking at the cost to the Appellant or costs or profits of AE ? - TPO is totally erred in rejecting other method as prescribed u/r.10AB of the IT Rules 1962 by assigning improper and incorrect reasons. TPO also erred in adopting TNMM as most appropriate method which is further fortified by the observation of the Ld.CIT(A) where the Ld.CIT(A) rightly rejected TNMM as most appropriate method for the detailed reasons given in their order and said findings of the Ld.CIT(A) is final and not challenged by the Revenue. Further once it is accepted position in the given facts and circumstances of the case that only other method is suitable to bench mark import of capital goods from the AE then the method followed by the assessee to compare per MW cost of power project with similar other power projects in India along with the valuation report from Chartered Engineer order of Central Electricity Regulation Commission and project appraisal report of project financiers M/s Power Finance Corporation Limited and M/s Rural Electrification Corporation Limited and the balance loan from nationalised banks and financial institutions to be accepted as it is. If you go by logic adopted by the Ld.TPO and Ld.CIT(A) that the assessee has almost paid more than 50% excess consideration for import of capital equipment from AE it appears that the project approved by the CERC and financed by various state Financial Institutions under power sector and their appraisal of project is flawed appears to be totally incorrect absurd and illogical. Therefore we are of the considered view that the method followed by the assessee to bench mark import of capital goods from AE under any other method is perfectly in accordance with prescribed method for bench marking this kind of transactions between an assessee and its AE. TPO is erred in making downward adjustment towards cost of equipment imported from AE including enhancement of downward adjustment by the Ld.CIT(A). Hence we approve the TP study conducted by the assessee including selection of other method as per Rule 10 AB and thus we are of the considered view that the transactions of the assessee with its AE for import of capital equipment in terms of equipment supply agreement are at arm s length price and thus no adjustment is required to the price paid for import of equipment to the AE. Thus we set aside the order of the Ld.CIT(A) on this issue and direct the AO/TPO to delete downward adjustment made towards cost of capital equipment imported from AE and consequent reduction of downward adjustment to capital work in progress. Enhancement of assessment in respect of disallowance of interest u/s. 36(1)(iii) - CIT(A) assumed that said downward adjustment is diversion of interest bearing funds to AE for non-business purpose and disallowed interest expenditure u/s. 36(1)(iii) - HELD THAT - Downward adjustment made by the TPO and upheld by the Ld.CIT(A) including enhancement has been deleted by us. Since the downward adjustment towards price paid for cost of equipment imported from AE has been deleted and further the amount paid by the assessee towards cost of equipment imported from AE is held to be at arm s length price in our considered view additions made by the Ld.CIT(A) by way of enhancement towards interest disallowances u/s. 36(1)(iii) of the Act cannot be sustained. Thus we set aside the order of the Ld.CIT(A) on this issue and direct the Assessing Officer to delete additions towards disallowance of interest u/s. 36(1)(iii) from reduction of capital work in progress for the year ending 31.03.2014 relevant to AY 2014-15. Appeal filed by the assessee is partly allowed.

Summary

Issues Involved:
1. Disallowance under Section 14A.
2. Assessment of interest earned on fixed deposits.
3. Downward adjustment by the TPO.
4. Reliance on unaudited statements of the AE.
5. Reliance on a survey report.
6. Arm's length price fixation.
7. Enhancement by CIT (Appeals) using safe harbor provisions.
8. Enhancement by CIT (Appeals) directing disallowance of interest.
9. Orders barred by limitation and violation of natural justice principles.

Summary of Judgment:

Issue 1: Disallowance under Section 14A
The Tribunal found that the assessee had sufficient own funds in excess of investments made in shares and securities. Therefore, disallowance of interest expenditure under Rule 8D(ii) was not justified, citing the Supreme Court's decision in South Indian Bank Ltd. v. CIT. Additionally, disallowance under Section 14A cannot be added back to book profits computed under Section 115JB, following the ITAT Special Bench decision in ACIT v. Vireet Investment (P.) Ltd.

Issue 2: Assessment of Interest Earned on Fixed Deposits
The Tribunal held that interest earned on short-term fixed deposits, which were inextricably linked to the project, should reduce the capital work-in-progress. This decision was based on the Supreme Court rulings in CIT v. Bokaro Steels Ltd. and CIT v. Karnal Co-operative Sugar Mills Ltd. The Tribunal rejected the AO's reliance on Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT, as the business was not yet set up.

Issue 3: Downward Adjustment by the TPO
The Tribunal found that the TPO and CIT(A) erred in rejecting the "Other Method" adopted by the assessee for benchmarking international transactions. The Tribunal emphasized the rule of consistency, noting that the TPO had accepted the same method in previous years. The Tribunal also criticized the TPO for adopting TNMM and selecting an inappropriate comparable company, M/s Sicagen India Ltd.

Issue 4: Reliance on Unaudited Statements of the AE
The Tribunal found that the reliance on unaudited financial statements of the AE, obtained under the Exchange of Information Scheme, was erroneous. These statements were not provided to the assessee, violating principles of natural justice.

Issue 5: Reliance on a Survey Report
The Tribunal held that the reliance on a survey report, which was not furnished to the assessee, was erroneous. The Tribunal emphasized that all material used by authorities should be furnished to the assessee, and statements recorded during a survey are not admissible as evidence.

Issue 6: Arm's Length Price Fixation
The Tribunal accepted the assessee's method of benchmarking the cost per megawatt of the power project, considering the Central Electricity Regulatory Commission's (CERC) benchmarks. The Tribunal found that the cost incurred by the assessee was in line with CERC benchmarks and other comparable projects.

Issue 7: Enhancement by CIT (Appeals) Using Safe Harbor Provisions
The Tribunal rejected the CIT(A)'s application of safe harbor provisions, which categorized the AE as a low-risk trader and applied a 5% margin on overhead costs. The Tribunal found this approach unjustified and not applicable for the assessment year in question.

Issue 8: Enhancement by CIT (Appeals) Directing Disallowance of Interest
The Tribunal found that the enhancement of interest disallowance under Section 36(1)(iii) was hypothetical and based on assumptions. Since the downward adjustment to the cost of equipment was deleted, the disallowance of interest was also not sustainable.

Issue 9: Orders Barred by Limitation and Violation of Natural Justice Principles
The Tribunal did not specifically address this issue in detail, but the overall judgment emphasized adherence to principles of natural justice and consistency in tax assessments.

Final Order:
The appeal filed by the assessee was partly allowed, with significant adjustments and disallowances made by the TPO and CIT(A) being overturned.