2018 (1) TMI 240 - AT - Income Tax

Addition on account of notional interest due to delayed recovery of trade debts from AE - Held that - First ground of appeal in favour of the assessee , as there is uniformity in the act of the assessee in not charging interest from both AE and Non-AE debtors for delayed realisation of export proceeds. Calculation u/s. 10AA - Held that - We find that interest on electricity deposit(Rs. 18, 568/-)was on account of security deposited placed for availing electricity connection for its manufacturing unit and therefore, in our opinion, it was eligible for the purpose of calculation u/s. 10AA of the Act. The details filed by the assessee clearly prove that assaying income(Rs. 5, 73, 575/-)was on account of verifying the characteristics of gold, that refining income(Rs. 3, 200/-)arose out of refining gold and ₹ 42, 000/-were received on sale of residual dust. We hold that income arising out the above referred three activities is directly related to manufacturing and therefore, it is eligible for the purpose of calculation u/s. 10AA of the Act. Considering the peculiar facts of the case under appeal, we are deciding ground in favour of the assessee.

Issues Involved:

1. Adjustment on account of interest on delayed payment.
2. Recomputation of deduction under section 10AA of the Income-tax Act.
3. Disallowance of deduction under section 10AA on other incomes.

Issue-wise Detailed Analysis:

1. Adjustment on account of interest on delayed payment:

The first ground of appeal concerns the adjustment made on account of interest on delayed payment amounting to ?8.25 lakhs. During the assessment proceedings, the AO found that the assessee had engaged in International Transactions (ITs) with its associated enterprises (AEs) and referred the matter to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the ITs. The TPO observed that the margin earned by the assessee on cost was higher than the average margin of comparable companies, indicating that the ITs were at arm's length. However, the TPO noted considerable delays in receiving payments from overseas parties, with the average delay for AEs being 290 days and for non-AEs being 340 days. The TPO suggested an upward adjustment based on an interest rate of 10.68% for delayed realization of debts, amounting to ?8.10 lakhs. The DRP upheld the TPO's adjustment, stating that the assessee was allowing its AEs to utilize interest-free funds without compensation.

The Tribunal, however, dismissed the Revenue's appeal, citing the Bombay High Court's decision in CIT-9 vs. Indo American Jewellery Ltd., which established that no substantial question of law arose when there was uniformity in not charging interest from both AEs and non-AEs for delayed realization of export proceeds. The Tribunal found that the average delay in realization was similar for both AEs and non-AEs, thus supporting the assessee's position. Consequently, the first ground of appeal was decided in favor of the assessee.

2. Recomputation of deduction under section 10AA of the Income-tax Act:

The next ground of appeal pertains to the recomputation of deduction under section 10AA. The AO found discrepancies in the export turnover and the realized export turnover, leading to a recomputation of the deduction claimed under section 10AA. The AO held that the deduction should be based on the export turnover realized by the time of passing the draft order. The DRP confirmed the AO's order.

Before the Tribunal, the AR referred to the case of M/s. Niru Jewels P. Ltd. and the RBI Circular No. 91, which relaxed the realization period for SEZ units. The Tribunal restored the matter to the AO for recomputing the eligible deduction after considering the RBI Circular and relevant judicial precedents. The Tribunal emphasized that the export turnover should be computed consistently for both the numerator and the denominator, as held by the Bombay High Court in the case of Gems and Jewellery India Ltd. Thus, the second ground of appeal was decided in favor of the assessee, in part.

3. Disallowance of deduction under section 10AA on other incomes:

The final ground of appeal deals with the disallowance of deduction under section 10AA on other incomes such as repair charges, interest on electricity deposits, assaying income, refining income, and sale of residual dust. The AO excluded these incomes from the deduction calculation, and the DRP upheld the AO's decision, stating that these incomes were not incidental to the manufacturing activity.

Before the Tribunal, the AR argued that these incomes were directly related to the manufacturing activity. The Tribunal found that interest on electricity deposits was related to the manufacturing unit and should be eligible for deduction. Similarly, assaying income, refining income, and income from the sale of residual dust were considered directly related to manufacturing. Therefore, the Tribunal decided this ground in favor of the assessee.

Conclusion:

The appeal filed by the assessee was partly allowed, with the Tribunal ruling in favor of the assessee on the issues of adjustment on account of interest on delayed payment and disallowance of deduction on other incomes, and partially in favor of the assessee on the recomputation of deduction under section 10AA. The order was pronounced in the open court on January 3, 2018.

← Previous Next →