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2016 (2) TMI 699 - AT - Income TaxNotional adjustment of interest on delayed payment from Associated Enterprise - Held that - Transaction relating to extended credit period provided to A.E. is required to be aggregated with other international transactions for computing ALP and cannot be done separately. For doing so rate of interest has to be on the basis of LIBOR basis point and not domestic PLR. As in the present case TPO himself has worked out LIBOR rate of 2.69% same can be considered. As neither the department nor the assessee has undertaken this exercise. We remit this issue to the file of the AO/TPO for verifying this aspect and determining the ALP of international transaction with A.E. after affording full opportunity to the assessee to establish its case. - Decided in favour of assessee for statistical purposes. Disallowance of interest under section 36(1 )(iii) - Held that - The assessee during the course of assessment proceedings on its own offered the disallowance of interest expenditure attributable to interest free advances given to its AE. It is also a fact on record that before DRP the assessee has not challenged the disallowance of the aforesaid interest expenditure. This fact clearly proves that the assessee had accepted the disallowance of interest expenditure of 94, 44, 829/- and that being the clear factual position in our view the assessee cannot raise this issue. Accordingly we decline to entertain this ground raised by the assessee. Eligible deduction u/s 10AA - whether AO ought to have reduced not the gross interest income but the net interest income for qualifying the profits of the business for determining the eligible deduction u/ 10AA - Held that - The assessee has fairly admitted that this issue was not raised before the DRP. Therefore when the assessee has not raised any objection on this issue before the DRP in our view the assessee cannot raise such issue before us at this stage as the assessee has accepted the decision of the AO in the draft assessment proceedings wherein he excluded the interest income while computing the deduction u/s 10AA of the Act. The final assessment order passed by the AO is only to give effect to the direction of DRP wherein this issue was not raised by the assessee. As the DRP has not decided this issue and the final assessment order is only for implementing the direction of the DRP in terms of section 144C(13) of the Act the assessee cannot raise this issue at this stage Therefore we decline to entertain with this ground Eligible deduction under section 10AA - whether A. O. Ought to have increase the profits of the business by the amount of interest disallowed under section 36(1)(iii) ? - Held that - As can be seen the facts and material relating to the interest expenditure claimed by the assessee are available before the AO as the assessee itself disallowed interest expenditure relatable to interest free advances. Whether any statutory disallowance made by A.O. would enhance the profit of the assessee thereby making him eligible to claim deduction u/s 10AA on such enhanced profit is a purely legal issue. Therefore assessee s claim of deduction u/s 10AA has to be examined by keeping in view principle laid down in judicial precedents. However considering the fact that this issue was neither raised before the AO nor before the DRP and has been raised for the first time before this forum we deem it proper to remit the issue to the file of the AO for deciding the same after due opportunity of being heard to assessee. This ground of appeal is allowed for statistical purposes.
Issues Involved:
1. Notional adjustment of interest on delayed payment from Associated Enterprise (AE). 2. Disallowance of interest under section 36(1)(iii) of the Income Tax Act. 3. Computation of eligible deduction under section 10AA of the Income Tax Act. 4. Additional ground related to interest disallowed under section 36(1)(iii) and its impact on profit for deduction under section 10AA. Issue-wise Detailed Analysis: 1. Notional Adjustment of Interest on Delayed Payment from Associated Enterprise (AE): The core issue revolves around whether the Dispute Resolution Panel (DRP) should have directed the Assessing Officer (AO) to delete the notional adjustment of interest on delayed payment from an AE amounting to Rs. 18,89,938. The assessee, engaged in manufacturing and selling studded jewelry, reported international transactions with AEs. The Transfer Pricing Officer (TPO) found that the assessee had extended credit facilities to its AE without charging interest, resulting in a benefit passed to the AE. The TPO adopted an interest rate of 12.30% per annum for the delayed realization of debts from the AE, which was later adjusted by the DRP to 9.30%. The Tribunal held that the extended credit facility to AE is an international transaction and should be aggregated with other transactions for determining the Arm's Length Price (ALP). The Tribunal remitted the issue to the AO/TPO for verification and determination of ALP using the LIBOR rate of 2.69%. 2. Disallowance of Interest under Section 36(1)(iii) of the Income Tax Act: The AO disallowed interest expenditure of Rs. 94,44,829 under section 36(1)(iii) due to interest-free advances given to an associate concern. The assessee admitted to the disallowance during the assessment proceedings to avoid prolonged litigation and did not raise this issue before the DRP. The Tribunal found that the assessee had accepted the disallowance and thus, dismissed the ground raised by the assessee, declining to entertain it. 3. Computation of Eligible Deduction under Section 10AA of the Income Tax Act: The AO reduced the gross interest income of Rs. 21,16,182 from the business profit while computing the deduction under section 10AA. The assessee argued that the net interest income of Rs. 13,46,522 should be considered instead. However, the assessee did not raise this issue before the DRP. The Tribunal held that since the issue was not raised before the DRP, the assessee cannot raise it at this stage, and thus dismissed this ground. 4. Additional Ground Related to Interest Disallowed under Section 36(1)(iii) and its Impact on Profit for Deduction under Section 10AA: The assessee contended that if the interest expenditure disallowed under section 36(1)(iii) is sustained, it should form part of the business income for computing deduction under section 10AA. The Tribunal acknowledged that the facts relating to the interest expenditure were available before the AO and considered it a purely legal issue. The Tribunal remitted the issue to the AO for examination and decision after providing the assessee an opportunity to be heard. Conclusion: The appeal of the assessee was partly allowed for statistical purposes. The Tribunal provided detailed directions on each issue, emphasizing the need for proper verification and adherence to legal principles in determining the ALP and computing deductions under the relevant sections of the Income Tax Act.
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