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2017 (11) TMI 634 - AT - Income TaxTransfer pricing adjustment towards interest on receivables - whether interest on receivables is an international transaction? - Held that - As going by the ld. CIT(A) s version, there would have been no transfer pricing addition if the assessee had received the amount from one AE and paid to other AE, which would have been only an internal arrangement between the AEs. Since the balances with these three AEs are, admittedly, on account of trading transactions, which belong to the same class of transaction , we fail to comprehend as to why transactions with AVL Fahrzeugdiagnose GmbH and AVL Zollner Marine GmbH should not be aggregated with transactions with AVL List Graz. When the ld. CIT(A) was satisfied that interest on payables to AVL List Graz called for set off against interest on receivables from the same party for the purpose of determining the amount of transfer pricing adjustment, which position has also been accepted by the Department, then he ought to have considered similar transactions with AVL Fahrzeugdiagnose GmbH and AVL Zollner Marine GmbH as also part of the same international transaction. We, therefore, set aside the impugned order on this score and hold that the international transactions of trade receivables and trade payables with all the three AEs should be aggregated and processed as a single transaction of interest on receivables/payables. If the position is viewed in such a manner, there remains no amount of interest receivable from the AE liable to be added to the assessee s total income as a transfer pricing adjustment. Disallowance u/s 14A - Held that - An admitted position that the assessee did not earn any exempt income during the year and, still, the disallowance has been made u/s 14A. The Hon ble Delhi High Court in Cheminvest Ltd. vs. CIT (2015 (9) TMI 238 - DELHI HIGH COURT), has held that if there is no exempt income, there can be no question of making any disallowance u/s 14A of the Act. In view of the binding precedents mandating for not making any disallowance u/s 14A of the Act in the absence of any exempt income, which are squarely applicable to the facts of the instant case, we overturn the view taken by the ld. CIT(A) and order for the deletion of disallowance sustained u/s 14A of the Act. International transaction of interest on receivables - Assessment Year 2010-11 - Held that - We find from the assessee s Profit & Loss Account there is an item of Other income with the value of ₹ 22,33,35,416/-. The last item of this Schedule is Interest. In addition to interest from bank, the assessee also declared to have earned interest from Others to the tune of ₹ 37,95,288/-. This shows that the assessee did earn interest from Others. It is not clearly borne out as to whether such interest was received on account of trade receivables from unrelated parties or on some other account. Under such circumstances, we are of the considered opinion that interest of justice would meet adequately if the impugned order is set aside and the matter is restored to the file of the Assessing Officer/TPO for benchmarking the international transaction of Interest on receivables on the basis of the internal CUP as discussed above and thereafter, to determine the amount of transfer pricing adjustment, if any. Needless to say, the assessee will be allowed a reasonable opportunity of hearing.
Issues Involved:
1. Transfer Pricing Adjustment towards Interest on Receivables 2. Disallowance under Section 14A of the Income-tax Act, 1961 Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment towards Interest on Receivables: Assessment Year 2009-10: - The first issue pertains to the confirmation of addition on account of transfer pricing adjustment towards interest on receivables. - The assessee, engaged in manufacturing and trading of pollution monitoring equipment, reported ten international transactions. The Assessing Officer (AO) referred the determination of the arm’s length price (ALP) of these transactions to the Transfer Pricing Officer (TPO). - The TPO identified certain receivables from Associated Enterprises (AEs) not received within a reasonable period, considering them as international transactions under Explanation 1(c) to section 92B inserted by the Finance Act, 2002. - The TPO applied the Comparable Uncontrolled Price (CUP) method, using the Prime lending rate of RBI plus 500 basis points (17.22%) as a benchmark, resulting in a transfer pricing adjustment of ?56,53,235/-. - The CIT(A) allowed a credit period of 180 days and the benefit of netting interest on receivables and payables with the same party, reducing the addition to ?5,08,487/-. - The Tribunal held that interest on receivables is an international transaction and should be benchmarked accordingly. It was decided that the international transactions of trade receivables and payables with all AEs should be aggregated and processed as a single transaction. Consequently, no interest receivable from the AE was liable to be added as a transfer pricing adjustment. Assessment Year 2010-11: - The assessee continued similar operations and reported eight international transactions. - The AO allowed a credit period of 180 days and netting of interest receivable with interest payable, applying a benchmark interest rate of 14.88%, resulting in a transfer pricing adjustment of ?6,96,516/-. - The Tribunal reiterated that interest on receivables is an international transaction and netting of interest should be allowed on an aggregate basis. - The Tribunal disapproved the application of the interest rate on bonds (14.88%) as a benchmark for trade receivables, emphasizing the need for a comparable uncontrolled transaction. - The Tribunal directed the AO/TPO to benchmark the international transaction of ‘Interest on receivables’ based on internal CUP (Comparable Uncontrolled Price) and determine the transfer pricing adjustment, if any. 2. Disallowance under Section 14A of the Income-tax Act, 1961: Assessment Year 2009-10: - The assessee did not offer any disallowance under Section 14A. The AO computed disallowance under Rule 8D to the tune of ?52,449/-, being half percent of the average value of investments. - The CIT(A) upheld the addition. - The Tribunal observed that the assessee did not earn any exempt income during the year. Following the Delhi High Court rulings in Cheminvest Ltd. vs. CIT and CIT vs. Holcim India P. Ltd., the Tribunal held that no disallowance under Section 14A can be made in the absence of exempt income and ordered the deletion of the disallowance. Assessment Year 2010-11: - This issue was not pressed in the appeal for this year. Conclusion: - The appeals for the Assessment Year 2009-10 were partly allowed, with the Tribunal ruling in favor of the assessee on both the issues of transfer pricing adjustment and disallowance under Section 14A. - For the Assessment Year 2010-11, the appeal was allowed for statistical purposes, with the matter of transfer pricing adjustment being remanded back to the AO/TPO for fresh determination based on internal CUP.
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