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TMI Blog2018 (4) TMI 502X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod applied by the assessee as well as by the TPO. Accordingly, we do not find any reason to interfere with the order of ld. CIT (A) qua this issue. Interest received from AE - There is no dispute that the assessee has advanced a loan in foreign currency to its AE and charged interest @ 10%. We find that the issue of charging interest from AE in respect of the money advanced in foreign currency, the arm’s length interest is to be considered by taking the LIBOR instead of PLR - the associate enterprise (AE) had utilized the loan in its stock and debtors, which was apparent from the balance sheet of the associate enterprise (AE). The assessee had not incurred any brokerage or processing fees in advancing the loan to the associate enterprise (AE). Appellant company had not given any loan or advances to Data Foods (P) Limited., Sri Lanka during the financial year 2006-07. Accordingly the adjustment made on account of loan given to M/S Data Houseware (P) Ltd., U.K. was not justified. Further the appellant was a secured creditor as it had sold goods to the concerned AE also. The position of the appellant company was that of a unpaid seller since the AE owed to it an amount comprising o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that the expenditure for the year under consideration is at 4.32% of the turnover in comparison to 4.96% for the assessment year 2006-07 and 4.37% for the assessment year 2005-06. Further, the addition made by the AO in this respect for the assessment year 2005-06 was deleted by the Tribunal in assessee’s own case. The factual details given by ld. CIT (A) have not been controverted before us. Disallowance made on foreign travel expenses - Held that:- Disallowance made by the AO was deleted by the ld. CIT (A) by accepting the explanation of the assessee that the foreign tour of Managing Director was not personal but was for attending the conference of International Association of Seed Crushers in London. There is no quarrel on the point that if the foreign tour was undertaken by the MD to attend the alleged conference then the same will be considered as an expenditure incurred for the purpose of business of the assessee. However, the assessee has not produced the details of the timing of the foreign tour undertaken by the MD and specific date of the journey as well as the timing of the conference of International Association of Seed Crushers as claimed by the assessee. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of ₹ 2,50,312/- on a/c of misc. expenses. 3. That the ld. Commissioner of Income-tax (A) has erred in law as well as on the facts and circumstances of the case in deleting the addition/disallowance of ₹ 1,00,000/- on a/c of printing and stationery expenses. 4. That the ld. Commissioner of Income-tax (A) has erred in law as well as on the facts and circumstances of the case in restricting the addition/disallowance to ₹ 47,952/- out of total addition of ₹ 1,00,000/- on a/c of repair and maintenance expenses. 5. That the ld. Commissioner of Income-tax (A) has erred in law as on the facts and circumstances of the case in deleting the addition/disallowance of ₹ 2,50,000/- on a/c of consumable stores and chemical expenses. 6. That the ld. Commissioner of Income-tax (A) has erred in law as well as on the facts and circumstances of the case in deleting the addition/disallowance of ₹ 20,000/- on a/c of packing material expenses. 7. That the ld. Commissioner of Income-tax (A) has erred in law as well as on the facts and circumstances of the case in deleting the addition/disallowance of ₹ 5,00,000/- on a/c of packing material expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.12 lac) Out of these three international transactions entered into by the assessee with its associated enterprises, the TPO accepted sale of ceramic (crockery) items at arm's length. The TPO has taken up exercising of determining the arm's length price in respect of other two transactions which we will deal with one by one as under : Purchase of bakery shortening for trading 3. The assessee has purchased bakery shortening from its associated enterprises, namely, Data Foods, Sri Lanka of ₹ 18,42,23,773/-. To benchmark its international transaction, the assessee applied Resale Price Method (RPM) as most appropriate method (MAM) and claimed that its international transaction is at arm's length. The TPO did not accept the TP analysis of the assessee as well as the Most Appropriate Method (MAM) applied by the assessee. The TPO was of the view that Transaction Net Margin Method (TNMM) is the most appropriate method in the case of the assessee and accordingly the TPO has undertaken the exercise to determine the arm's length price by selecting 11 comparable companies. It is pertinent to note that in the show cause notice, the TPO proposed to select 7 comparable companies. How ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the same product as the AE of the assessee has sold the same product to the unrelated parties at a higher rate and, therefore, when there is a comparable uncontrolled price then no adjustment is called for in the case of the assessee. He has further submitted that even otherwise the arm's length price determined by the TPO by taking the Mean margin at 4.07% is within the range of (+)(-) 5% of the assessee's margin and accordingly in view of the second proviso to section 92C(2) no adjustment can be made on account of international transaction price of bakery shortening. 4. Having considered the rival submissions and careful perusal of record, we note that the assessee's operative margin from the trading of bakery shortening is at 1.63% whereas the TPO while determining the arm's length price by applying the TNMM as most appropriate method and OP/Total Cost (TC) as PLI has arrived at Mean margin of 4.07%. Therefore, the price of international transaction undertaken by the assessee is within the tolerance range of (+)(-) 5% of the arm's length price determined by the TPO. Accordingly, as per the second proviso to section 92C(2) the price of international transaction in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable uncontrolled price (CUP) method. The power to determine the arm's length price under comparable uncontrolled price (CUP) method was not unabridged. The TPO had referred to the decision of Income-Tax Appellate Tribunal, Bench-Delhi in the case of Perot Systems TSI (India) Limited Vs DCIT (37 SOT 358) ITAT, (Delhi) however it was clearly distinguaishable as the charging of interest for intra ground loans had been upheld in the said case, whereas, this was not the issue here. The assessee had not disputed the charging of interest on intra-group loans. In the cited case, the loan was advanced interest free to associate enterprise (AE), whereas in the present case, the appellant company (tested case) had charged the interest on the loan advanced to associate enterprise (AE). The argument of the TPO in the cited case was that one of the AEs was situated in a tax haven and non charging of the interest by the assessee from the AEs, had resulted in higher income in the hands of the AEs and the income of the assessee in Inida had reduced by the corresponding amount. Thus it had brought down the overall tax incidence of the group by shifting profit from Indian jurisdiction to Bermuda wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (London International Bank Official Rate) downloaded from the British Bankers Association website. During the financial year 2001-02 LIBOR for US dollar loan was 2.39%. On that LIBOR, the Assessing Officer added average basis point charged by other companies and for this purpose he took rate for 5 companies. The arithmetic mean came to 1.64%. Accordingly, Assessing Officer computed the arm's length rate to be LIBOR + 1.64% using CUP method. However the application of the LIBOR rates in the case of loans and advances to associate enterprise (AE) located outside the geographical boundaries of India was upheld by judicial authorities. The LIBOR rate during the relevant period ranged from 5.20% to 5.44% and after adding thereto 1.64% average basis point as upheld by Income-Tax Appellate Tribunal, Bench-Delhi, the effective arm's length rate of interest worked out to 6.84% to 7.08% as against that the appellant company had charged the interest @ 10%. In the present case, the rate of interest on the borrowing from SBBJ was 8.75% at the relevant point of time i.e. at the time of giving of loan, as against that the appellant had charged the rate of interest @ 10% on the amount lent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and sweets to employees and customers and FBT has been paid on the portion relating to employees. Further, the ld. CIT (A) noted that the miscellaneous expenses also included licence and inspection fees of ₹ 2,28,680/- and subscription fee of ₹ 1,32,110/-. The ld. CIT(A) has considered the fact that out of the total expenses of ₹ 25,03,119/-, an amount of ₹ 7,41,322/- has been paid in cash and remaining was paid through account payee cheque. Accordingly, the ld. CIT (A) restricted the disallowance to the extent of 10% only in respect of expenditure incurred in cash. Thus the assessee is also aggrieved by the impugned order of the ld. CIT (A) and raised ground no. 2 against the disallowance sustained by the ld. CIT (A). 7.2. We have heard the ld. D/R as well as the ld. A/R and considered the relevant material on record. The ld. D/R has submitted that the AO has clearly made out the case that the assessee has not fully vouched the expenses and supported by self made vouchers and, therefore, the AO was justified in making the disallowance of 10% of the expenses. He has relied upon the order of the AO. 7.3. On the other hand, the A/R of the assessee has submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20,93,568/-. Further, the remaining expenditure was incurred on account of licence and inspection fees, subscription fee, electricity charges, annual listing fees, books & periodicals. Therefore, though the assessee has incurred the expenditure in cash to the extent of ₹ 7,41,322/-, however, majority of the said amount of ₹ 7,41,322/- has been incurred for tea, refreshments, cold drinks and sweets to the employees and customers. So far as the expenditure incurred towards fringe benefits to employees, the assessee has already paid the FBT and accordingly by considering this fact, we restrict the disallowance of the expenditure incurred in cash to 5% instead of 10% sustained by ld. CIT (A). In the result, ground no. 2 of the revenue's appeal is dismissed and ground no. 2 of the Cross Objection is partly allowed. 9. Ground No. 3 is regarding disallowance made on account of printing and stationary expenses which was deleted by ld. CIT (A). 9.1. The AO noted that the assessee has debited a sum of ₹ 8,99,252/- under the head Printing & Stationary expenses. Since all the expenses were not supported by bills and some of them are self made vouchers, therefore, the AO ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 23,41,631/- was incurred in cash. Thus the ld. CIT (A) has restricted the disallowance at 10% of the amount which was incurred in cash. Relevant finding of the ld. CIT (A) is in 5.3 as under :- "5.3 The AO had also disallowed an amount of ₹ 1,00,000/- out of repairs & maintenance expenses on the ground that the expenses were paid in cash through self made vouchers. On going through the ledger account of repairs & maintenance expenses, it is seen that out of total expenses of ₹ 23,41,631/-, an amount of ₹ 4,79,526/- was paid in cash only. The majority of expenditure was paid through account payee cheques. It was not the case of the AO that the expenses were unreasonable or excessive looking to the turnover of the appellant company. The appellant had maintained complete bills/supporting for the repairs & maintenance expenses of ₹ 23,41,631/-. Further the payments were made to the labour/civil/electrical contractors after deducting TDS. The expenditure was incurred out of business expediency and the AO had failed to point out any discrepancy in the vouchers maintained by the appellant. In view of the above facts, the disallowance of ₹ 1,00,000/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled to point out any discrepancy in the vouchers maintained by the appellant. The AO had not conducted any inquiries from the suppliers of chemicals & consumables and the disallowance was made in a routine manner. The addition had therefore no legs to stand. I therefore direct the AO to delete the addition of ₹ 2,50,000/- on account of chemical & consumable stores expenses made by her. This ground of appeal is allowed." 14. We have heard the ld. D/R as well as the ld. A/R and considered the relevant material on record. It is clear from the finding of the ld. CIT (A) reproduced above that the assessee has maintained complete bills/supporting vouchers for the expenses incurred on account of chemicals and consumable stores. The AO has not conducted any enquiry or found out any discrepancy in the vouchers. Thus the adhoc disallowance made by the AO was rightly deleted by ld. CIT (A) and, we do not find any reason to interfere with the finding of ld. CIT (A) qua this issue. 15. Ground No. 6 is regarding the disallowance made on account of depreciation on Wind mill which was deleted by the ld. CIT (A). 16. We have heard the ld. D/R as well as the ld. A/R and considered the rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of packing material expenses on the ground that the appellant company did not maintain the quantitative details of packing material. However it was an undisputed fact that the appellant had maintained records for quantitative details of packing material. Further the percentage of packing material expenses vis-à-vis turnover was at 4.32% in the year under reference. The same was lower in comparison to 4.96% in AY 2006-07 and 4.37% in AY 2005-06. I further find that similar addition on account of disallowance out of packing material expenses for AY 2005-06 had been deleted by my predecessor and Hon'ble Jaipur Tribunal in order ITA No 599/JP/2011 dated 25.02.2011. The AO has not pointed out any material discrepancy in the records maintained by the appellant before making such a huge addition of ₹ 50,00,000/-. No inquiries of any sort were made from the suppliers of packaging material. The appellant had made the payments through banking channels and complete bills/supporting were available. It was held by Honourable Mumbai Tribunal in the case of Arthur & Anderson & Co. Vs Addl. CIT (2010-TIOL-416-ITAT) that the very concept of token disallowance was bad in law, becaus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e out of foreign travelling expenses. On perusal of details filed by the appellant, it is evident that Sh. Vijay Kumar Data, Managing Director had not undertaken any tour to Lahore as alleged by the AO. In fact, he had gone to London to participate in the conference of International Association of Seed Crushers. The appellant was also exporting goods to UK. The purpose of the foreign tour was not personal as alleged by the AO. Further out of total expenses of ₹ 1,42,906/-, an amount of ₹ 96,369/- was incurred on air travelling, boarding & lodging of Sh. Vijay Kumar Data. The visit to London was for the purpose of business and the AO was not justified in disallowing the entire expenses incurred on visit to London. It was held by Hon'ble Jaipur Tribunal in the case of G L Gems Ltd. vs. ACIT (2010-004-ITR-TRIB-525) that even if bills and vouchers for food, lodging and travel were not available with the assessee, one should see whether the expenditure was reasonable or not. If the expenditure was reasonable then same should not be doubted particularly when the expenses were incurred for business purpose. In view of above facts, I direct the AO to delete the addition of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the year and, therefore, no disallowance is called for on account of interest expenditure under section 14A. Having considered the rival submissions as well as the relevant material on record, we note that the ld. CIT (A) has considered this issue in para 6.1 and 6.2 as under :- "6.1 I have duly considered the submissions of the appellant. The appellant has filed a statement showing the annual increase in the interest free funds and investment in the shares, income thereof both were taxable and non-taxable and a statement showing the annual increase in the interest bearing funds in the form of secured and unsecured loans and working capital limits and their investment in the current assets to evidence the fact that the investment in the shares had come from the non-interest bearing funds on year to year basis from FY 1998-99 to FY 2006-07. In FY 2000-01, the appellant company had made investments of ₹ 179.1 lakhs in shares out of opening reserve and surplus of ₹ 2143.29 lakhs and interest free funds of ₹ 143.33 lakhs. In FY 2003-04, the appellant company had made investments of ₹ 412.02 lakhs in shares out of opening reserve and surplus of ₹ 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the ld. CIT (A) has considered the availability of interest free funds of assessee being share capital, reserve and surplus which is much more than the investment in the shares. Further, when rule 8D is not applicable for the year under consideration, the disallowance on account of administrative expenses has to be made on some reasonable basis. Accordingly, in view of the above facts and circumstances of the case, when the assessee is having its own sufficient funds then no disallowance is called for on account of interest expenditure. As regards the disallowance on account of administrative expenses, we are of the view that 10% of the dividend income will be a reasonable and proper estimate for disallowance of expenditure on account of common indirect administrative expenses for earning the exempt income under section 14A. Hence this ground of the revenue's appeal is partly allowed. 26. Ground No. 10 is regarding an addition made by the AO under section 2(22)(e) of the Act. 27. The AO has noted that the assessee is having substantial interest in the group companies from whom the assessee has taken loan and advances. Accordingly, the AO has invoked the provisions of section 2( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dit balance. The various transactions are on account of purchases and sales and by no stretch of imagination, these transactions partake the character of payments by way of loans or advances. The deeming provisions of section 2(22)(e) are limited to the particular purpose for which these have been enacted. These cannot be applied to the transactions undertaken in the ordinary course of business. The transactions are entered out of commercial expediency and not by way of loans or advances. Since there is no material change in the facts and circumstances of the year under reference, I direct the AO to delete the addition of ₹ 2,08,35,193/- on account of deemed dividend. This ground of appeal is allowed." Thus the ld. CIT (A) has deleted the addition by following the order of this Tribunal for the assessment year 2006-07 and also by taking into consideration the fact that these amounts are outstanding due to regular commercial transactions by the assessee and the sister concerns. We further note that the Hon'ble Jurisdictional High Court in the assessee's own case for the assessment year 2006-07 has confirmed the order of this Tribunal vide judgment dated 04.08.2017 in DBIT Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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