9911796707
TMI Blog2021 (2) TMI 1013X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;) is a vitiated order, as the Dy. Commissioner of Income-tax, Circle-9(1)(1) ('Assessing Officer' or 'AO')/DRP erred both on facts and in law in making/confirming the addition made by the Ld. AO to the Appellant's income. The Appellant prays that the assessment order passed by the AO be quashed. 2. On the facts and in the circumstances of the case and in law, the Ld. AO / DRP erred in confirming the upward adjustment of INR 22,61,25,615 to the income of the Appellant in respect to the international transaction of freight receipts and expenses. In doing so, the DRP has erred in agreeing with the Transfer Pricing Officer ('TPO') / AO action of: a. rejecting Operating Profit ('OP') to Value Added Expenses ('VAE') ratio selected by the Appellant as the Profit Level Indicator ('PLI'), and instead using OP to Total Cost (TC) ratio as the PLI; b. rejecting economic analysis undertaken by the appellant by disregarding search of comparables undertaken by the appellant by considering OP/VAE as PLI; c. including companies in the comparability analysis which are different from the Appellant in functions, asset base and risk pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rutiny assessment under Sec. 143(2) of the Act. 4. Observing that the assessee had during the year entered into international transactions with its Associated Enterprise (for short 'AEs') in excess of an amount of Rs. 15 crores, the A.O made a reference under Sec. 92CA(1) of the Act to the Dy. Commissioner of Income-tax (Transfer Pricing)- 1(1)(1), Mumbai (for short "TPO") vide his order dated 11.08.2014 after obtaining approval of the Pr. CIT-9, Mumbai. 5. During the course of proceedings it was observed by the TPO that the assessee had entered into the following international transactions during the year in question : Sr. No. Nature of the Transactions Amount (Rs.) Method adopted Amount Method adopted 1. Freight Expenses 277,37,84,357/- TNMM 257,42,03,615/- CUP 2. Freight Revenue 167,54,23,515/- TNMM 145,82,64,735/- CUP 3. Issue of equity shares 12,57,67,894/- Other Method N.A N.A 4. Reimbursement of expenses 2,62,43,633/- CUP 1,93,47,585/- CUP It was noticed by the TPO that the assessee had benchmarked its international transactions, viz. freight receipts; freight expenses; and reimbursement of expenses using External TNMM at entity level. Using ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable Companies OP/VAE OP/TC 1. SDV International Logistics 14.61% 2.16% 2. Allcargo Logistics Ltd. (Multimodal Segment) 14.82% 3.76% 3. Shreyas Relay Systems Limited 42.66% 6.96% 4. Sical Logistics Limited 82.85% 8.75% 5. Om Logistics Limited 7.82% 7.82% Mean 32.55% 5.89% Assessee's Margin 30.22% 2.54% On the basis of the above the TPO worked out the arm's length price of the international transactions of freight receipts & expenses, as under: Particulars Reference Amount (Rs.) Operating Revenue A 8,79,00,19,390 Operating Cost B 8.57,21,09,721 Operating Profit for the year C = A - B 21,79,09,669 Arm's Length margin (OP/TC) D 5.89% Arm's Length profit E = B* D 58.46,17,883 Arm's Length Revenue F = B + E 9,07,70,06,984 Transfer Pricing adjustment G = A - F 28,69,87,594 Accordingly, the TPO vide his order passed u/s 92CA(3), dated 31.10.2016 made a transfer pricing adjustment of Rs. 28,69,87,594/- to the arm's length price of the international transactions of the assessee. 6. The A.O after receiving the order passed by the TPO under Sec.92CA(3), dated 31.10.2016 passed a draft assessment order under Sec.143( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by the DRP that the assessee had made false claims regarding the pass through costs, and thus, the TNMM was based on improper financial and factual data. In the backdrop of its aforesaid observations the DRP was of the view that as the assessee had not benchmarked its international transactions as per the provisions of Sec. 92C(1) r.w.s 92C(3) of the Act, thus, its objection that the A.O could take recourse to Sec. 92C(3) only under the circumstances enumerated in clauses (a) to (d) was not maintainable. .As regards the seeking of inclusion of certain comparables by the TPO viz. (i). Shreyas Relay System Ltd; (ii). Sical Logistics; and (iii) Om Logistics Ltd, the DRP though accepted the objection of the assessee wherein it had sought exclusion of Sical Logistics that was included as a comparable by the TPO, but upheld the inclusion of the remaining two companies as comparables, viz. (i). Shreyas Relay System Ltd; and (iii) Om Logistics Ltd. As regards the declining on the part of the TPO to include in the final list of comparables two companies as was sought by the assessee, viz. (i). TKM Global Logistics Limited; and (ii). Hindustan Cargo Limited, it was observed by the DRP th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements relied upon by them. Our indulgence in the present appeal has been sought for adjudicating as to whether the A.O/DRP had rightly worked out the TP adjustment as regards the freight segment of the assessee. Ld. Authorised Representative (for short "A.R") for the assessee at the very outset of the hearing of the appeal submitted that the issues involved in the present appeal were squarely covered by the order of this Tribunal in the case of DHL Logistics Private Limited vs. DCIT, Circle 9(3)(1), Mumbai, ITA No. 1030/Mum/2015, dated 20.12/.2019. (copy enclosed). After perusing the orders of the lower authorities in the backdrop of the contentions advanced by the ld. Authorised representatives for both the parties, we find, that the assessee has assailed the TP adjustment of Rs. 22.61 crore made by the A.O/TPO on three grounds, viz. (i). that as to whether or not the TPO/DRP were justified in rejecting the PLI of OP/VAE adopted by the assessee and substituting it with OP/TC; (ii). that as to whether or not the inclusion and exclusion of comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stics in the final list of comparables, therein determined the mean PLI (OP/TC) of the comparables at 5.89% as against 2.54% of the assessee and made a TP adjustment of Rs. 28,69,87,594/- w.r.t the entire international transactions of the freight segment of the assessee. 11. As observed by us hereinabove, the A.O/DRP had rejected the PLI of OP/VAE adopted by the assessee for benchmarking its international transactions of Freight receipts & expenses and had substituted the same by the PLI of OP/TC. Insofar the validity of the PLI of OP/VAE for benchmarking the international transactions of freight receipts and expenses is concerned, we find, that the said issue had earlier came up before this Tribunal in the case of DHL Logistics Private Limited vs. DCIT, Circle 9(3)(1), Mumbai, ITA No. 1030/Mum/2015, dated 20.12/.2019, a similarly placed logistic service provider. Approving the adoption of OP/VAE as the PLI for determining the arm's length price of its international transactions of freight receipts and expenses, the Tribunal had observed as under: "22. We shall first focus on the rejection by the TPO/DRP of the PLI of OP/VAE that was applied by the assessee for benchmarking its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . A.R, that the services of a logistics service provider could only be measured on the basis of the adequacy of its gross margin over the value added expenses so incurred by it. Accordingly, it was the claim of the ld. A.R that applying PLI of OP/TC would mean that the assessee was expected to earn a return on such third party/direct costs despite the fact that it was not performing any of the functions therein involved. On the basis of his aforesaid contentions, it was claimed by the ld. A.R that a comparison of the margin of the assessee in the backdrop of its Value Added Expenses as against that of its comparables would be the appropriate basis to measure the profitability of its logistics business. It was submitted by the ld. A.R, that a comparison of the returns/margins of the assessee on the basis of its 'total costs' which would include 'direct costs' that would vary from time to time depending on the volume of the business, would present a skewed result of the assesses profitability and thus could not be considered as an appropriate PLI in its case. It was submitted by the ld. A.R, that having regard to the assesses functional analysis the applying of the PLI of OP/VAE was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee at all times was governed by the carriers. Also, as per the terms of the 'agreement' the assessee was bound to represent itself as an "agent" in all its communications viz. letterheads, telephone listings, office signs etc. with the customers, and was specifically prohibited from representing or projecting itself as a "Principal". Further, the 'agreement' also provided for indemnification of the assessee by the member carrier in the event of a loss/damage arising in the course of transportation pursuant to the sale made by the assessee. As such, it was the claim of the ld. A.R that the assessee did not assume any risks while undertaking its business. In order to fortify his aforesaid claim the ld. A.R had drawn our attention to the "house airway bill" that was issued by the assessee to its customer, which revealed that the assessee had executed the same as an agent of the carrier. Lastly, it was submitted by the ld. A.R that the functions (carriage of goods) and liabilities (indemnification of the loss etc.) assumed by the assessee vis-a-vis the customer (as per its standard terms and conditions) corresponded to those assumed by the carrier vis-à-vis the assessee. Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. D.R that the assessee assumed the entire responsibility, whether those were the goods received from the customer or from its AE, for delivery of the same to the consignee. Also, it was submitted by the ld. D.R that the assessee guaranteed proper, timely and safe delivery of the goods, as well as provided the details of current status of the goods to the client. Apart from that, it was averred by the ld. D.R that the assessee was responsible for managing the goods and handling complaints in case of loss/misdelivery of goods. On the basis of his aforesaid contentions, it was the claim of the ld. D.R that as the assessee in its field of logistic management was rendering functions by assuming responsibility for proper, safe and timely delivery of goods, providing details of current status of the consignment, and was also responsible for handling complaints in case of loss/misdelivery of goods, therefore, it could not be placed at par with the case of a pure risk free distributor. Accordingly, it was the claim of the ld. D.R before us that PLI of OP/VAE could not have been adopted for benchmarking the international transactions of the assessee. In support of his aforesaid conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shipments : * The Shipper (outside India) hands over the consignment to DHL AE to forward the same via ocean to the consignee in India. DHL AE takes the assistance of DHL India for the same. * DHL AE negotiates the terms of the transaction with the Shipper. In this case, the consignee pays for the freight (ocean). * DHL India invoices and collects from the consignee the OC, Freight (ocean) and the DC. Freight and DC are considered as revenue for DHL India. * DHL AE invoices and collects from DHL India the OC and Freight (ocean). (c). Inbound Prepaid : * The Shipper (outside India) hands over the consignment to DHL AE to forward the same to the consignee in India. DHL AE takes the assistance of DHL India for the same. * DHL AE negotiates the terms of the transaction with the Shipper. DHL AE invoices the shipper for OC and Freight. The Shipper pays for OC and Freight to DHL AE. DHL AE further pays the freight to the carrier. * DHL India invoices and collects from the consignee the DC. The same is accounted as revenue by DHL India. (d). Outbound Collect : * Shipper (India) hands over the consignment to DHL India to forward the same to the consignee (outside India). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as handling charges. On the basis of his aforesaid observations, it was concluded by the TPO that the additional amount charged by the assessee from its client would in fact represent the 'mark up' on freight. Accordingly, it is in the backdrop of his aforesaid observations that the TPO had concluded that the handling charges which were charged by the assessee varied from customer to customer because they were dependent upon the 'mark up' on freight which it was obtaining from them on the basis of negotiations. Accordingly, it was observed by the TPO that the fright element booked by the assessee in its books of accounts had a component of profit in it. In order to fortify his aforesaid observations, it was further observed by the TPO that the fact that the assessee had debited the 'freight expenses' and credited the 'freight receipts' in its books of accounts revealed that the operating profit of the assessee comprised not only of its 'handling charges' but also the differential freight i.e the excess of the freight which it charged from its clients as against that paid to the shipping line. On the basis of the aforesaid observations, the TPO/DRP had rejected the adoption of PLI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... behalf of the AE which had been reimbursed by the AE, could not have been included in the total costs of the assessee for the purpose of determining its profit margin. Also, the Hon'ble High Court of Delhi in the case of LI and Fung India Pvt. Ltd. Vs. CIT (2014) 361 ITR 85 (Del), had observed, that for applying the TNMM the assesse's net profit margin realised from the international transactions had to be calculated only with reference to the cost incurred by it and not by any other entity either third party vendors or the associated enterprise. It was further observed by the Hon'ble High Court, that Rule 10B(e)(i) of the Income-tax Rules, 1962, does not enable consideration or imputation of cost incurred by third parties or unrelated parties for the purpose of computing the assesse's 'net profit' margin for application of the TNMM. Accordingly, it was concluded by the Hon'ble High Court, that attribution by the TPO of the costs of the third party, when the assessee did not engage in that activity, and more importantly when those costs were clearly not the assesse's cost, but those of a third party, was clearly impermissible. (iv). Apart from that, we find that from a perusal of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of "ocean business" also the assessee had merely acted as an agent. Further, we find that all the 'agreements' entered into by the assessee with the carriers (under both air and ocean business) were soft block agreements which provided an option to the assessee to cancel the same without incurring any penalty, therefore, no inventory risk was assumed by the assessee. (Page 860 to 865 of 'APB'). As regards the observation of the TPO, that the main component of the income of the assessee is on account of the differential freight element which it is able to obtain from the shipping companies on account of bulk booking of space on the liner, we are in agreement with the contention advanced by the ld. A.R that the advantage to the assessee on account of bulk booking was on account of its value addition activities i.e generating more customers and not on account of transportation function. In fact, we are persuaded to subscribe to the claim of the ld. A.R that transportation cost could have been included as a base only if the assessee had undertaken the transportation activity itself or would have undertaken the risks associated with the transportation function. However, as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I of OP/VAE. Grounds of appeal Nos. 1, 3.1 and 3.2 are allowed in terms of our aforesaid observations." As the issue involved in the present appeal remains the same as was there before the Tribunal in the aforesaid case, therefore, concurring with the view therein taken we respectfully follow the same. Accordingly, we herein observe that as no infirmity did emerge from the adoption of the PLI of OP/VAE by the assessee for benchmarking of its international transactions of freight receipts and expenses, there was, thus, no justification for substitution of the same by the PLI of OP/TC by the TPO/DRP. We, thus, in terms of our aforesaid observations direct the A.O/TPO to benchmark the international transactions of freight receipts and expenses by taking TNMM as the most appropriate method and PLI of OP/VAE. 12. We shall now deal with the grievance of the assessee that conceptually the TP adjustment made in the hands of the assessee could even otherwise not be sustained. The ld. A.R taking us through the computation of the T.P adjustment submitted that the TPO while working out the same had erroneously considered the same at a gross level and had not restricted the same to the extent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into service by the ld. A.R to drive home his aforesaid contention. Admittedly, a TP adjustment envisaged in Chapter X is only in respect of the international transactions of the assessee with its AEs and cannot be extended to the transactions entered into by the assessee with the independent unrelated third parties. Insofar the aforesaid settled position of law as had been so canvassed by the ld. A.R before us is concerned, we are persuaded to be in agreement with the same. In fact, we find that the Hon'ble High Court of Bombay in the case of CIT-8, Mumbai Vs. Tara Jewells Export (P) Ltd. (2016) 381 ITR 404 (Bom) and CIT Vs. Thyssen Crup Industries India Pvt. ltd. (2016) 381 ITR 413 (Bom), had clearly observed, that in terms of Chapter X of the Act the TP adjustment is mandated only in respect of International transactions and not the transactions entered into by the assessee with independent unrelated parties. We find that in case if a TP adjustment is allowed in respect of transactions entered into by the assessee with unrelated third parties then the same would be result into increasing of the profit in respect of such independent transactions which would be beyond the scope a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee before the TPO. As observed by us hereinabove, the DRP observed that even the order of the TPO was silent on inclusion/exclusion of the aforesaid two concerns in the list of comparables. As such, in the absence of any reference of the aforesaid two comparables in the order of the TPO or in the TP study report, the DRP declined to entertain the aforesaid claim of the assessee. 17. In the backdrop of the aforesaid factual scenario, we shall deal with the sustainability of the inclusion/exclusion of the companies from the final list of comparables. Before us, the ld. A.R except for stating that the inclusion/exclusion of the same comparables in the final list of comparables had been looked at by the Tribunal in the case of DHL Logistics Private Limited vs. DCIT, Circle 9(3)(1), Mumbai, ITA No. 1030/Mum/2015, dated 20.12/.2019, did not advance any other contention in furtherance of his claim for inclusion/exclusion of the comparables in question. We, thus, confine ourselves to the extent the inclusion/exclusion of the comparables had been assailed before us. On a perusal of the aforesaid order of the Tribunal in the case of DHL Logistics Private Limited (supra) for A.Y 2010- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugned order on the following grounds of appeal before us: "Each of the grounds and/ or sub-grounds of the appeal are independent and without prejudice to the others. 1. On the facts and in the circumstances of the case and in law, the Assessment Order passed in pursuance to the directions issued by the Ld. Dispute Resolution Panel ('DRP') is a vitiated order as the DRP erred both on facts and in law in making/ confirming the addition made by the Ld. Assistant Commissioner of Income-tax - 9(1)(1) ('AO') to the Appellant's income. The Appellant prays that the assessment order passed by the AO be quashed. 2. On the facts and in the circumstances of the case and in law, the Ld. AO/ DRP erred in confirming the upward adjustment of Rs. 17,78,40,052 to the income of the Appellant with respect to the international transactions of freight receipts and expenses. While doing so, the DRP erred in upholding the action of the Transfer Pricing Officer ('TPO') in: a. rejecting Operating Profit ('OP') to Value Added Expenses ('VAE') ratio selected by the Appellant as the Profit Level Indicator ('PLI'), and instead using OP to Total Cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approval of the Pr. CIT-9, Mumbai. 22. During the course of proceedings it was observed by the TPO that the assessee had entered into the following international transactions during the year in question : Sr. No. Nature of the Transactions Amount (Rs.) Method adopted Amount Method adopted 1. Freight Expenses 234,13,74,223/- TNMM 277,37,84,357/- TNMM 2. Freight Revenue 207,75,60,974/- TNMM 167,54,23,515/- TNMM 3. Issue of equity shares - - 125,767,894/- Other Method 4. Reimbursement of expenses 2,21,58,677/- TNMM 2,62,43,633/- TNMM 5. Recovery of expenses 1,83,14,728/- TNMM - - It was noticed by the TPO that the assessee had benchmarked its international transactions, viz. freight receipts; freight expenses; reimbursement of expenses; and recovery of expenses using External TNMM at entity level. Using Prowess and extracted additional companies from CapitalinePlus, i.e companies for which data was not available in Prowess, the assessee in its Transfer Pricing Study Report (for short 'TP Study Report') had identified 7 comparable companies engaged in the business of providing freight forwarding services as comparables, namely (i). TKM Global Logis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 49 Operating Profit for the year C = A - B 17,01,80,338 Arm's Length margin (OP/TC) D 4.75% Arm's Length profit E = B* D 35,85,89,339 Arm's Length Revenue F = B + E 7,90,78,38,588 Transfer Pricing adjustment G = A - F 18,84,09,001 Accordingly, the TPO vide his order passed u/s 92CA(3), dated 31.10.2016 made a transfer pricing adjustment of Rs. 18,84,09,001/- to the arm's length price of the international transactions of the assessee. 23. The A.O after receiving the order passed by the TPO under Sec.92CA(3), dated 27.10.2017 passed a draft assessment order under Sec.143(3) r.w.s 144C(1), dated 19.12.2017. In his aforesaid order the A.O proposed to make a transfer pricing adjustment of Rs. 18,84,09,001-. Further, the A.O proposed a disallowance u/s 36(1)(iii) of Rs. 2,67,72,000/-. 24. Aggrieved, the assessee objected to the additions that were proposed by the A.O in his draft assessment order, dated 23.12.2016 before the Dispute Resolution Panel-1, Mumbai, (for short 'DRP'). The DRP after deliberating at length on the issue under consideration observed the TPO had clearly brought out the fact that the assessee was rendering significant services with reference to f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hindustan Cargo Ltd; (iv). TKM Global Logistics Ltd; and (v). TVS Logistics Services Ltd., the DRP for the reasons stated in his order upheld the exclusion of the same from the final list of comparables by the TPO. As regards seeking of exclusion of certain companies selected by the TPO from the final list of comparables, the DRP though rejected the assessee's claim in so far exclusion of , viz. (i). All Cargo Global Logistics Ltd; (ii). Om Logistics Ltd; and (iii). Shreyas Relay System Ltd, but found favour with its claim for exclusion of one of the comparable i.e Sical Logistics Limited. Further, as regards the objection of the assessee that the A.O/TPO had erred in not restricting the TP adjustment only to the extent of the international transactions undertaken by the assessee, it was observed by the DRP that the TPO should consider the adjustment on international transactions only if the assessseee was able to authentically determine the element of cost and profit/loss in respect of each such transaction with its AEs. It was observed by the DRP that if the assessee was not able to prove the element of cost and profit/loss in respect of each of its transaction with its AEs, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of OP/VAE. 27. We shall now deal with the grievance of the assessee that the TPO/DRP had erred in not restricting the value of the TP adjustment to the extent of the value of the international transaction undertaken by the assessee with its AEs. As the facts and the issue pertaining to the controversy in hand remains the same as were there before us in the case of the assessee for the immediately preceding year i.e A.Y 2013-14 in ITA no. 7199/Mum/2017, therefore, our view therein taken shall apply mutatis mutandis for the purpose of disposal of the present issue. We, thus, in terms of our aforesaid observations direct the A.O/TPO to restrict the TP adjustment only qua the international transactions of the assessee with its AEs. Accordingly, we restore the matter to the file of the A.O/TPO for the limited purpose of working out the TP adjustment only in respect of the transactions of the assessee with its AEs, and if the same is found to be within the safe harbour range of +/- 3% of the ALP then no adjustment shall be called for in its hands. 28. We shall now deal with the claim of the assessee that the A.O/DRP had erred in disallowing an amount of Rs. 3,49,61,654/- under the 'pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was borrowed for acquisition of the asset till the date on which such asset was first put to use. Observing that the interest paid in respect of the capital borrowed for the purpose of acquisition of the capital assets was required to be disallowed, the DRP, not finding favour with the claim of the assessee that as the capital advance were given to the parties in the earlier years when the assessee had sufficient funds of its own and there was no nexus between the interest debited in its books of account on the loans raised and the capital advance that was given prior to raising of such interest bearing funds, rejected the same. DRP while rejecting the aforesaid claim of the assessee was of the view that the onus was on the assessee to prove that there was no nexus between the capital advance and the interest bearing loans. In support of his aforesaid observation reliance was placed by the DRP on the order of the Hon'ble High Court of Punjab & Haryana in the case of CIT Vs. Abhishek Industries Ltd. (2006) 286 ITR 1 (P&H). Backed by its aforesaid deliberations, the DRP in all fairness directed the A.O to afford an opportunity to the assessee to prove that the capital advance/investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest expenditure was called for under Sec. 36(1)(iii) of the Act. It was further averred by the ld. A.R that no disallowance of any part of the interest expenditure was ever made by the A.O in the preceding years i.e those subsequent to the year in which the acquisition of the respective properties was made by the assessee. It was further submitted by the ld. A.R, that pursuant to the judgment of the Hon'ble Supreme Court in the case of CIT (LTU) Vs. Reliance Industries Ltd. (2019) 307 CTR 0121 (SC), in a case where the assessee had sufficient self owned funds to justify the investments, it was to be presumed that the said investments were made out of the same. 31. Per contra, the ld. D.R relied on the orders of the lower authorities. It was submitted b the ld. D.R that as the assessee had diverted the interest bearing funds for making capital advances/investments in capital assets, the A.O, thus, had rightly disallowed the correlating interest expenditure as per the 'proviso' to Sec. 36(1)(iii) of the Act. 32. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record in context of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest bearing loans/borrowings. In order to appreciate the issue in the right perspective, it would be relevant to cull out the explanation of the assessee as regards the capital advances/investments that were made by it w.r.t acquisition of the respective properties, which as extracted from the assessee's reply before the DRP reads as under: "Advance towards land at Bhiwandi:- In the year 2006, the assessee was on the lookout for a suitable property to construct an industrial warehouse. Jaggannath Parmeshwar Mills Pvt. Ltd. (JPML) was acting as an aggregator of lands for I he purpose of sale to parties. JPMPL expressed its willingness and ability to sell to the assessee, 33.25 acres of land in Bhiwandi, Thane. As the assessee found the property ideal for its purpose, it gave an advance of Rs. 20,00,000 to JPMPL on 02 January 2007 and accordingly they entered into an agreement. As per the Agreement to sell dated 21s' May, 2007, JPMPL agreed to sell to the assessee and the assessee agreed to purchase the property being land situated at Bhiwandi, Thane for an aggregate consideration of Rs. 17,62,25,000. The consideration was due to JPMPL only it fulfills its obligation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,25,00,000 Total 3,50,00,000 From the above, it is clear that the payment towards advances was made for the Ahmedabad land during the financial year 2007-08 and 2008-09. " Advance towards land at Pune-Wagholi The assessee company entered into a Memorandum of Understanding dated 26 May 2009 with Mr. Shrikant Kulkarni to purchase land at Pune Wagholi. An advance of Rs. 78,00,000 was paid to Mr. Shrikant Kulkarni during the financial year 2009- Was per the agreement. The agreement had a clause whereby the parties to the MOU mutually agreed to increase the advance, which was to be adjusted against the total sale consideration. Hence, subsequently, an amount of Us.44,60,000 was paid to Mr. Kulkarni on 14 April 2011. Details of advance paid towards the land at Pune - Wagholi are mentioned hereunder: Sr.No, Date Amount (Rs.) 1 17 April 2009 25,00.000 2 9 June 2009 25,00,000 3 15 June 2009 28,00,000 4 14 April 2011 44.60,000 Total 1.22,60,000 Advance towards land at Panvel The assessee company entered into a Memorandum of Understanding with Rudrakasha Vanijya Pvt. Ltd., an aggregator of land. As per the MOU dated 23 December, 2008, a sum of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s spread over the period 14th May, 2007 to 22.12.2018 i.e prior to the raising of the interest bearing loans/advances as reflected in the assessee's balance sheet on 31st March, 2014. Again, a similar claim had been raised by the assessee in respect of the capital advance given for land at Pune, Wagholi, wherein it was claimed that the aggregate amount of Rs. 1,22,60,000/- was advanced over the period 17th April, 2009 to 14th April, 2011, which too was much prior to the raising of the aforementioned interest bearing loans/advances. Similarly, as regards the capital advance given for land at Panvel, it was the claim of the assessee that an amount of Rs. 2 crore was given over the period 31st December, 2008, to 7th January, 2009. Insofar, the aforesaid giving of capital advances with respect to the aforesaid four properties is concerned, it has been the claim of the assessee that as the same were made much prior to the raising of the interest bearing loans/borrowings and were sourced out of the sufficient self owned funds as were available with it at the relevant point of time on all the occasions, thus, no disallowance of any part of the interest expenditure under Sec. 36(1)(iii) co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question of law, the Hon'ble Apex Court while approving the view taken by the Hon'ble High Court of Bombay had observed, as under: "7. Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03. 8. In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question." In the backdrop of the aforesaid settled position of law, we concur with the claim of the ld. A.R that in case the interest free funds available with the assessee were sufficient to explain the capital advance/investment, it could safely be presumed that the same were made by the assessee from the interest free funds available with it. On a perusal of the order of the DRP, we find that the panel in all fairness had after co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by us hereinabove cannot be subscribed on our part. In the backdrop of our aforesaid deliberations, we are of a strong conviction that the aforesaid issue requires to be revisited and therein re-adjudicated by the A.O after calling for and considering the entire set of facts pertaining to the same. At this stage, we may herein clarify that in case if the assessee in the course of the 'set aside' proceedings is able to establish that it had at the relevant point of time sufficient interest free funds available with it to justify the capital advances given w.r.t the aforesaid properties, then, it would be presumed that the aforesaid capital advances/investments were made by it from the interest free funds so available with it. Accordingly, in all fairness and in the interest of justice we restore the issue to the file of the A.O for the purpose of readjudication of the same in terms of our aforesaid observations. Needless to say, the A.O in the course of the 'set aside' proceedings shall afford a reasonable opportunity of being heard to the assessee who shall remain at a liberty to substantiate its aforesaid claim on the basis of fresh material and submissions. The Ground of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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