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TMI Blog2021 (2) TMI 1013X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in the case of CIT-8, Mumbai Vs. Tara Jewells Export (P) Ltd . [ 2015 (12) TMI 1130 - BOMBAY HIGH COURT] and CIT Vs. Thyssen Crup Industries India Pvt. ltd . [ 2015 (12) TMI 1076 - BOMBAY HIGH COURT] 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 and ambit of Chapter X of the Act. Apparently, the claim of the ld. A.R that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - ITA No.7199/Mum/2017, ITA No.6679/Mum/2018 - - - Dated:- 11-2-2021 - Shri S. Rifaur Rahman, Accountant Member And Shri Ravish Sood, Judicial Member For the Appellant : S/sshri Dhanesh Bafna, Ketan Ved, Nishant Shah Ms. Hirali Desai, A.Rs For the Respondent : S/shri Sunil Deshpande Sushil Kr. Mishra, D.Rs ORDER PER RAVISH SOOD, JM The captioned appeals filed by the assessee are directed against the respective assessment orders passed by the Assessing Officer under Sec.143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (for short Act ), dated 23.12.2014 and 28.09.2018 for A.Y 2013-14 and AY: 2014-15. We shall first take up the appeal for A.Y. 2013-14 wherein the assessee has assailed the impugned order on the following ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Appellant prays that the book value of the international transactions of freight receipts and expenses be held to be the arm's length price of the said transactions as per the Appellant's TP documentation, and the addition made on account of the above grounds be deleted. 3. On the facts and in the circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act without appreciating that the Appellant has neither concealed any particulars of its income nor furnished any inaccurate particulars of the income. The Appellant craves leave to alter, amend or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary either before or during the hearing. 3. Briefly stated, the assessee company which is a logistic service provider offering a comprehensive portfolio of international, domestic and specialised freight handling services had e-filed its return of income for A.Y. 2013-14 on 30.11.2012, declaring its total income under the normal provisions at ₹ 15,74,32,690/- and book profit u/s 115JB at ₹ 5,73,68,044/-.. Subsequently, the assessee filed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Operating Profit/Value added expenses (OP/VAE) as the profit level indicator (PLI) the assessee had on the basis of multiple year data worked out its margin at 30.22% as against the arithmetic mean margin of 27.79% of the comparable companies and claimed its international transactions of Freight receipts expenses as being at arm s length. TPO directed the assessee to provide single year margin of the comparable companies that were selected by his predecessor in the immediately preceding year i.e A.Y 2012-13 for determining the arm s length price w.r.t the international transactions of freight receipts expenses. Further, the TPO called upon the assessee to compute the margins of the comparables selected in the TP study report using OP/TC as the PLI after applying two more filters in addition to the filters that were already considered in the TP study report, as under : service income to total income greater than 75% filter; and turnover filter of 1/10th times to 10 times. On a without prejudice basis, the assessee submitted its detailed explanation and the final set of comparables that could be used for determining the arm s length margin. As per the details pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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(3) r.w.s 144C(1), dated 23.12.2016. In his aforesaid order the A.O proposed to make a transfer pricing adjustment of ₹ 28,69,87,594/-. 7. Aggrieved, the assessee objected to the additions which 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 that the variation in the revenue and cost of the so-called pass through costs proved that the TPO had rightly concluded that the assessee was making profits as regards the same. It was observed by the DRP that the specific invoice-wise evidences referred to by the TPO in his order revealed that the assessee and it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein 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 that the same was for the reason that neither the said companies figured in the TP study report nor any request for including the same in the final list of comparables was made by the assessee before the TPO. It was further observed by the DRP that even the order of the TPO was silent on inclusion/exclusion of the aforesaid concerns in the list of comparables. Accordingly, 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. 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 underta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... using 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 ₹ 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 by the TPO/DRP from the final list of comparables was justified; and (iii). that as to whether or not the TPO/DRP had erred in not restricting the TP adjustment only to the extent of the international transactions undertaken by the assessee with its AE s. 10. We shall first deal with the contention of the assessee 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 for benchmarking its international transactions. As observed by us hereinabove, the assessee selecting itself as the tested party had benchmarked its aforesaid international transactions as per the TNMM at entity level. It had used three year data and had t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 aforesaid international transactions. As observed by us hereinabove, the DRP had upheld the rejection of PLI of OP/VAE and substitution of the same for OP/TC by the TPO. It is the claim of the ld. A.R that keeping in view the facts of the assesses case and the nature of the functions performed in logistics industry the assessee had rightly adopted the PLI on the basis of Value Added Expenses (VAE) as opposed to the Total Cost (TC). In logistics companies the element of costs can safely be bifurcated into direct costs and value added costs . The direct costs are the expenses which are incurred by the logistics company for procuring services from a third party service providers viz. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogistics 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 the most appropriate approach. In order to drive home his aforesaid contention the ld. A.R had drawn support from Rule 10B(e)(i) which sets out the determination of PLI viz., net profit margin in relation to different bases depending upon the facts and circumstances of each case. As pointed out by the ld. A.R, the intent to select the appropriate PLI as per Rule 10B(e)(i) was to best measure the relationship between the profits of the controlled taxpayer and the functions of such taxpayer. The ld. A.R taking us through Rule 10B(e)(i) submitted, that the same envisaged that as per the TNMM the net profit margin realised by an enterprise from an international transaction entered int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foresaid 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- -vis the assessee. Accordingly, it was averred by the ld. A.R, that the functions and liabilities were effectively delegated by the assessee to the carrier and no part of the same was effectively assumed by the assessee. On a similar footing, it was submitted by the ld. A.R that in the case of ocean business also the assessee merely acted as an agent. Further, in order to support its claim that where in a case the assesse acts as an agent of the airliner/shipliner, and thus acting as an intermediary does not bear any transportation risk it would not be entitled to earn any mark-up on the transportation function, the OP/VAE should be accepted as an appropriate PLI, the ld. A.R had relied on certain judicial pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 contentions the ld. D.R had relied on the order of the ITAT, Delhi in the case of Mitsubishi Corporation Pvt. Ltd. Vs. DCIT, Circle 6(1), New Delhi (ITA No. 5042/Del/2011, dated 21.10.2014). 24. We have deliberated at length on the issue under consideration i.e rejection by the lower authorities of the PLI of OP/VAE by the assessee and substitution of the same by PLI of OP/TC. As is discernible from the orders of the lower authorities the PLI of OP/VAE had been rejected for the reasons viz. (i). that, as the freight element booked in the books by the assessee has a component of profit (or value added), therefore, the assessee claiming the same as pass through costs had wrongly reduced the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). DHL India takes the assistance of DHL AE for the same. DHL India negotiates the terms of the transaction with the Shipper. The consignee pays the freight to DHL AE. DHL India pays the freight to the carrier. DHL India invoices and collects from the Shipper the OC. The same is booked as revenue. DHL AE invoices and collects from the consignee the freight and DC. (e). Outbound Prepaid : Shipper (India) hands over the consignment to DHL India to forward the same to the consignee (outside India). DHL India takes the assistance of DHL AE for the same. DHL India negotiates the terms of the transaction with the Shipper. In the present case the Shipper pays ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtify 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 of OP/VAE by the assessee and had advocated the substitution of the same by PLI of OP/TC. (iii). We have perused the aforesaid observations of the TPO and are unable to persuade ourselves to subscribe to the same. As observed by us hereinabove, the costs pertaining to services obtained by the assessee from third parties viz. shippers/airliners, clearing and forwarding agents, transport service provider etc. neither involved any service element of the assessee nor the assessee had carried any risk or employed any of its assets with respect to the same. In our considered view, the net margin realised by the assessee pursuant to its international transactions with its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the agreements which the assessee had entered into with various carriers (i.e airlines) who are members of IATA, and also the sample invoices raised by the assessee on its clients, it can safely be concluded that the assessee while providing logistics support services in air business had merely acted as an agent of the airlines. A perusal of the terms and conditions of Cargo agency agreements which the assessee had entered into with various airline carriers which were members of IATA, reveals that the assessee was to act as an agent for the various member carriers. [(Page 804) of the assesse s Paper book (for short APB )]. As per the agreement , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in the present case, in the absence of either of the aforesaid factor there would be no justification for including the said third party costs i.e transportation costs as apart of the base. (v). As per the TPO, the element of freight could be considered as a pass through expense only if no profit or mark up is obtained on freight. However, as observed by the TPO, the case of the present assessee would not fall in the said category as the handling charges which were charged by the assessee varied from customer to customer, as they depended on the mark up which it obtained from its customers based on negotiations. In our considered view, there is substantial force ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of value of the international transactions undertaken by the assessee with its AEs. As observed by us hereinabove, it was also the claim of the assessee before the DRP that for working out the TP adjustment the TPO was obligated to consider only the operating costs attributable to the AE sales. Although the DRP admitted that the said issue had been decided by the Hon ble High Court of Bombay in the case of CIT Vs. Firestone International (Pvt.) Ltd. (2015) 234 Taxman 141 (Bom) in favour of the assessee as was there before them, but then, being of the view that the Special Leave Petition ( SLP ) filed by the revenue against the said order was pending ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssen 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 and ambit of Chapter X of the Act. Apparently, the claim of the ld. A.R that the TPO had wrongly worked out the TP adjustment in respect of the AE transactions by considering the total operating costs instead of the operating costs attributable to the AE sales is prima facie found to be correct. 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 +/- 5% of the ALP then no adjustment shall be called for in its hands. 16. We shall no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 2010-11 as had been relied upon by the ld. A.R, we find, that finding favour with the contentions of the assessee as regards exclusion of two companies which were selected by the TPO in the final list of the comparables, viz. (i). Shreyas Relay System Ltd; and (ii). Om Logistics Ltd., the Tribunal concurring with the assessee had directed the A.O/TPO to exclude the same from the final list of comparables. As the functional profile of the assessee remains the same as in the case of the aforementioned assessee, viz. DHL Logistics Private Limited (supra), thus, the aforesaid claim of the assessee for exclusion of both of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assed 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 ₹ 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 Cost ('TC') ratio as the PLI; b. rejecting the economic analysis undertaken by the Appellant in the Transfer Pricing Study Report ('TPSR'); c. including companies in the comparability analysis which are not comparable to the Appellant in functions, asset base and risk profile; d. rejecting companies similar to the Appellant in functions, asset base and risk profile while performing comparability analysis; e. not restricting the value of the TP adjustment to the extent of the value of the international transaction undertaken by the Appellant with its AEs; f. rejecting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... ogistics Limited 28.21% 8.95% Mean 24.31% 4.75% Assessee s Margin 23.50% 2.25% On the aforesaid basis 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 7.71,94,29,587 Operating Cost B 7,54,92,49,249 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the assessee for A.Y 2013-14 observed, that the PLI of OP/VAE was a very fragile PLI and in fact one which was not used earlier in the case of any logistic concern providing freight forwarding services. It was further observed 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 declining on the part of the TPO to include in the final list of comparables 5 companies as was sought by the assessee, viz. (i). First Flight Couriers Ltd; (ii). Overnite Express Ltd; (iii). 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards the claim of the assessee that the TPO/DRP had erred in rejecting the assessee s PLI of OP/VAE for benchmarking its international transactions of freight receipts and expense and substituting the same by OP/TC, we find that as the facts and the issue leading to the controversy in question for the year under consideration remains the same as were there before us in the assessee s own case for the immediately preceding year i.e A.Y 2013-14 in ITA No. 7199/Mum/2017, thus, our order therein passed in context of the said issue shall apply mutatis mutandis for the purpose of disposal of the present issue for the year under consideration. Accordingly, in terms of our observations recorded in context of the issue in question while disposing off the assessee s appeal for A.Y 2013- 14 in ITA No. 7199/Mum/2017, we herein 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. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest bearing loan funds were diverted by the assessee for the purpose of acquiring capital assets. In the backdrop of his aforesaid deliberations the A.O vide his draft assessment order passed u/s 143(3) r.w.s 144C(1), dated 19.12.2017 proposed to disallow interest expenditure of ₹ 2,67,72,000/-. On objections filed by the assessee with the DRP, it was observed by the panel that the assessee in order to impress upon it that no part of the interest expenditure w.r.t the borrowed capital was liable to be disallowed had for the very first time filed detailed submissions before it. It was noticed by the DRP that the A.O had only made disallowance in respect of capital advance for Bhiwandi land and not in respect of other similar advances. Adverting to the proviso to Sec. 36(1)(iii) of the Act, it was observed by the DRP that interest paid in respect of capital borrowed for acquisition of an asset was to be disallowed for the period beginning from the date on which the capital 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sesee has assailed before us the addition /disallowance of interest expenditure of ₹ 3,49,61,654/- made by the A.O u/s 36(1)(iii) of the Act. Mr. Ketan Ved, the ld. A.R for the assessee appellant assailed the disallowance of interest expenditure u/s 36(1)(iii) by the A.O/DRP. It was submitted by the ld. A.R that the A.O while passing the final assessment order under Sec. 143(3) r.w.s 144C(13), dated 28.09.2018 had failed to appreciate the directions of the DRP in the right perspective. It was the claim of the ld. A.R that as the capital advances/investments in the respect of the lands/properties in question were made by the assessee in the years prior to those in which the interest bearing loans were raised, and the assessee at the relevant point of time on all such occasions when the respective advances were given had sufficient self owned funds, therefore, in the absence of any nexus between the interest expenditure and the capital advances/investments in question no disallowance of any part of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, as under : Location F.Y. during which payment of advance was made Closing balance as on 31.03.2014 (in Rs.) Bhiwandi F.Y. 06-07 to 09-10 22,30,97,120 Ahmedabad F.Y. 07-08 08-09 3,50,00,000 Pune Wagholi-II F.Y. 09-10 11-12 1,22,60,000 Panvel F.Y. 08-09 2,10,00,000 Total 29,13,47,120 As the assessee had failed to disprove the existence of any one-to-one nexus between the capital advances and the interest expenditure, the A.O, thus, had made a disallowance under Sec. 36(1)(iii) of ₹ 3,49,61,654/- (12% of ₹ 29,13,47,120/-) and added the same to the total income of the assessee. 33. We have deliberated at length on the issue under consideration and perused the orders of the lower authorities as well as considered the contentions advanced by the ld. A.R before us. On a perusal of the orders of the lower authorities, we find that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould purchase only 32.06 acres of land and it was agreed between the parties to revise the price to ₹ 58.42 lakhs per acre, thereby resulting in final consideration of ₹ 18,72,94,520. However, JPMPL failed to complete the due diligence in respect of the property, Further, However they did not furnish the necessary documents of title to prove the change of user of the property or the prove that the said property could be used for constructing a warehouse. Given that JPMPL had committed several breaches of contract, the assessee entered into arbitration proceedings against JPMPL seeking specific performance of the contract that was entered into. On 9 November 2017 the arbitrator passed the award that JPMPL was required to convey the land measuring 32.06 acres and handover quiet, vacant and peaceful possession of the property to the assessee. Detail of payment of the advance are mentioned in the attached award dated 9 November 2017. It is evident that the payment of advance towards land at Bhiwandi was made long before the loans existing as on 31 March 2014 were taken. Towards land at Ahmedabad The assessee company entered into a Memorandum of Understanding ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00,000 was paid as an advance to secure the obligations under the contract as follows: Si: No. Date Amount (Rs.) 2 31 December 2008 1, 00,00,000 3 7 January 2009 1,00,00.000 Total 2,00,00,000 From the above facts, it may be observed that the advances towards land were not made during the year under consideration i.e. financial year 2014-15 but from financial year 2006-07 to 2009-10. The payments towards the abovementioned advances were made out of equity infusion of ₹ 161.48 crores on 7th August 2007 and ₹ 79.96 crores on 25 March 2008 from PWC Logistics Singapore Pte Ltd. Further, it may also be noted that loans pertaining to which interest has been incurred during the year, were taken from financial year 2010-11 onwards which was much later than the period during which the advances were made. Hence, from the above, it is clear that there is no nexus between t he loans taken and advances given towards purchase of land. Reliance is also placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrowings 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) could have been attributed to the said advances. In the backdrop of his aforesaid contentions, we find, that it is the primary claim of the assessee that as the respective capital advances were given during the period falling much prior to the year in which the interest bearing loans/borrowings were raised by the assessee, thus, in the absence of any nexus of such capital advances with the interest expenditure no disallowance of any part of the interest expenditure was called for under Sec. 36(1)(iii) in its hands. Apart from that, we find that the assessee explaining the sources from where the capital advances in question were made, had submitted, that the same were from the equity infusion of ₹ 161.48 crores on 7th August, 2007 and ₹ 79.96 crores on 25th March, 2008 from PWC logistics Singapore Pte Ltd. Insofar the interest bearing loans pertaining to which the correlating interest expenditure was debited by the assessee in its profit and loss a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 considering the exhaustive submissions which were advanced by the assessee in order to impress upon it that the capital advances in question did not have any nexus with the interest free loans/borrowings which were raised much subsequent thereto, had categorically directed the A.O that in case if the assessee is able to prove its aforesaid claim of having made the investments in the earlier years then no interest expenditure would be liable to be disallowed. However, we find, that the A.O while passing the final assessment order under Sec. 143(3) r.w.s. 144C(13), dated 28.09.2018 had summarily deal with the aforesaid issue, and by merely stating that the assessee had interest liabilities in financial year 2006-07 to financial year 2009-10 when most of the payments were made towards capital advances, had therein worked out the disallowance under Sec. 36(1)(iii) at ₹ 3,49,61,654/- (12% of ₹ 29,13,47,120/) and added the same to t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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