2020 (11) TMI 333 - AT - Income Tax

TP Adjustment - addition on account of notional interest on export receivables - scope of amendment in Sec. 92B - assessee submits that outstanding receivables are not international transaction for A.Y 2009-10 - outstanding receivable is merely incidental transaction of sale of goods and not per-se separate international transaction - Whether amendment in Sec. 92(B) by way of insertion of Explanation was brought in the statue book by Finance Act, 2012, which has no retrospective application? - HELD THAT - We have noted that explanation to Sec. 92B of the Act has been inserted vide Finance Act, 2012 and held as prospective . Further, we have noted that there is average delay in receivable from AE of 39 days and in case of none AEs 44 days. There is no dispute that the assessee is not charging interest from none AE on such export receivable. Coordinate Bench of Tribunal in Gitanjali Exports Corporation Ltd. 2016 (3) TMI 1337 - ITAT MUMBAI also held that where no interest is charged from Non-AEs, i.e. independent transactions, as well, there cannot be any occasion to make an ALP adjustment, for notional interest, on delay in realisation of trade debts from AEs. When the assessee is adopting the uniform policy for none charging interest on export receivable from AE and none AE and moreover the transaction with regard to sale of cut and polished diamonds has been accepted by the TPO at ALP, no notional interest was warranted. In the result Grounds No. 1 to 5 of the appeals are allowed. Disallowance of mark to market loss - assessee is following mercantile system accounting and AS-11 - HELD THAT - The Hon ble Supreme Court in case of Woodward Governor India (P) Ltd., 2009 (4) TMI 4 - SUPREME COURT held that losses on revaluation of unmature foreign exchange forward contract and such are not notional losses and are allowable as expenditure u/s 37 of the Act. In M/S. D. CHETAN CO. 2016 (10) TMI 629 - BOMBAY HIGH COURT held that forward contracts for purpose of hedging in course of normal business activities of import and export done to cover up losses on account of differences in foreign exchange valuations would not be speculative activity, but business activity.Therefore, we direct the AO to delete the disallowance. In the result, Ground No. 6 7of the appeal is allowed. Disallowance u/s 14A read with Rule 8D(ii) 8D(iii) - HELD THAT - As decided in RELIANCE UTILITIES POWER LTD. 2009 (1) TMI 4 - BOMBAY HIGH COURT and HDFC BANK LTD. 2014 (8) TMI 119 - BOMBAY HIGH COURT no disallowance under Rule 8(D)(ji) is warranted in case the reserve and surplus of the assessee are in far excess to the investment made by the assessee. Assessee has surplus reserve available with it at the end of financial year, when the investments were made foreign exempt income and therefore no disallowance under Rule 8(D)(ii) is warranted. Delhi High Court in the case of Joint Investments (P.) Ltd. 2015 (3) TMI 155 - DELHI HIGH COURT held that the window for disallowance is indicated in section 14A and is only to the extent of disallowing expenditure incurred by the assessee in relation to tax exempt income. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case. Considering the fact that disallowance u/s 14A of the Act cannot exceed the exempt income in view of the decision of Bombay High Court in PCIT Vs. HSBC Invest Direct (India) Ltd 2019 (2) TMI 731 - BOMBAY HIGH COURT we direct the AO to restrict the disallowance u/s 14A of the Act at ₹ 1.62 lakhs only. In the result this ground of appeal is also partly allowed.

Summary

Issues Involved:
1. Transfer pricing adjustment related to notional interest on export receivables.
2. Disallowance of mark to market loss on forward contracts.
3. Disallowance under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment Related to Notional Interest on Export Receivables:
The appellant argued that the order of the Transfer Pricing Officer (TPO) and the consequential assessment order were void as no written show cause notice was issued as required under Section 92C(3) of the Income Tax Act. The appellant contended that delayed realization of export sale proceeds should not be treated as a separate international transaction under Section 92B of the Act. The TPO had suggested an upward adjustment of ?1.51 crore towards notional interest on delayed realization of export receivables from Associated Enterprises (AEs). The appellant argued that they did not charge interest on delayed payments from both AEs and non-AEs, and thus, the practice should be considered at arm's length. The Tribunal noted that the amendment to Section 92B by the Finance Act, 2012, was not retrospective. It was observed that the appellant had a uniform policy of not charging interest from both AEs and non-AEs, and the average delay in receivables from AEs was less than that from non-AEs. Therefore, the Tribunal concluded that no notional interest adjustment was warranted, and grounds 1 to 5 were allowed in favor of the appellant.

2. Disallowance of Mark to Market Loss on Forward Contracts:
The appellant, engaged in the business of importing and exporting diamonds, entered into foreign currency forward contracts to hedge against foreign exchange fluctuation risks. The appellant followed the mercantile system of accounting and AS-11, revaluing outstanding foreign currency monetary items at the closing rate as of 31st March. The Assessing Officer (AO) disallowed ?2.86 crore as a notional loss, arguing that the contracts were settled after the financial year. The Tribunal referred to the Supreme Court's decision in CIT Vs. Woodward Governor India (P) Ltd., which held that such losses are not notional and are allowable as business expenditure under Section 37(1). The Tribunal also noted the Bombay High Court's decision in CIT Vs. D. Chetan & Co., which held that forward contracts for hedging purposes in the normal course of business are not speculative but business activities. Therefore, the Tribunal directed the AO to delete the disallowance, allowing grounds 6 and 7 in favor of the appellant.

3. Disallowance under Section 14A of the Income Tax Act:
The AO disallowed ?32,62,934/- under Section 14A read with Rule 8D, attributing it to interest and indirect expenses related to exempt income. The appellant argued that no expenses were incurred for earning the exempt income, which was derived from past investments funded through their own surplus and reserves. The Tribunal noted that the appellant's reserves and surplus were significantly higher than the investments, aligning with the decisions in Reliance Utility and Power Ltd. and CIT Vs. HDFC Bank Ltd. The Tribunal also referred to the Delhi High Court's decision in Joint Investments (P.) Ltd. v. CIT, which held that disallowance under Section 14A cannot exceed the exempt income. Consequently, the Tribunal restricted the disallowance to ?1.62 lakhs, the amount of exempt income earned by the appellant, and partly allowed ground 8.

Conclusion:
The appeal was partly allowed, with the Tribunal ruling in favor of the appellant on the issues of transfer pricing adjustment and mark to market loss disallowance, while partially allowing the disallowance under Section 14A.