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TMI Blog2021 (9) TMI 464X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue : Shri Vatsalya Saxena For the Assessee : Shri Nimesh Vora ORDER PER S. RIFAUR RAHMAN, A.M. The captioned appeal has been filed by the Revenue challenging the impugned order dated 27th February 2019, passed by the learned Commissioner (Appeals)-57, Mumbai, pertaining to the assessment year 2014-15. 2. In the present appeal, the Revenue has raised inasmuch as 33 grounds, however, only two issues arose out of these grounds viz., (i) disallowance of ₹ 95,19,605, under section 14A of the Act and (ii) disallowance of transfer pricing adjustment of ₹ 4,18,52,115, as interest charged on the assessee's investment said to be capital surplus of $ 1,21,21,437 (₹ 75.14 crore) in its A.E. - RSL Inc., USA. For better clarity, the grounds raised by the Revenue are reproduced below:- "Ground no.1: Disallowance u/s 14A amounting to ₹ 95,19,605/- 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in disallowing a sum of ₹ 95,19,605/- u/s. 14A of the IT Act read with rule 8D(2) of the Income Tax Rules 1962. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case and law, the Ld. CIT(A) failed to appreciate section 43 of the Companies Act 2013, wherein it is provided to charge interest at the rate of 12% per annum, if shares are not allotted within 60 days of receipt of the money, to draw a reasonable parallel to charge interest at arm's length though the Act may not be applicable to the AE. 10. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating that conversion of share application money to share capital on last day of financial year does not provide immunity to assessee from charging interest for the whole year. 11. On the facts and in the circumstances of the case and law, the Ld. CIT(A) erred in deleting the TP adjustment by stating that recharacterisation of transaction is unjustified without appreciating that this case falls in exception as laid down by decision of Hon'ble Delhi High Court in case of CIT vs. EKL Appliances Ltd. as shares were issued on last day of financial year and till march it was in the name of share application money in the books of accounts of assessee." Ground No. 2 Transfer Pricing Issue:- 1. Whether on the facts and circumstances of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E by relying on the decision of Bombay High Court in case of Vodafone India Service P. Ltd vide Writ Petition No. 871 of 2014 without appreciating the differentiating facts of the case involved and the case law quoted? 8. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in failing to appreciate that the above Vodafone India Service P. Ltd decision is not applicable in the instant case, as the surplus capital which is capital in nature has not been treated as income here and that it has been treated as loan retaining its capital nature as such and that only interest has been charged and suggested as income in this case? 9. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is right in ignoring the amendment by way of Explanation (i)(c) inserted by Finance Act 2012, with retrospective effect from 1.4,2002 whereby the capital investment could be covered as an international transaction under "capital financing" and such transaction would yield accrued interest which is 'income' for the purposes of section 92(1), so as to be dealt under Chapter X of the Income tax Act? 10. Whether on the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw, the Ld.CIT(A) is correct in ignoring the fact that the assessee has entered into an "arrangement, understanding or action in concert" with its AE within the meaning of section 92F(v) whereby huge funds have flown out of India for no return, which no unrelated independent party would have done within the meaning of section 92F(ii), which in turn became possible because of the special relationship existed between the assessee and its AE? 18. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct failing to "look through" the "substance" of the transaction and instead "looked at" the superficial "form" of nomenclature of the transaction to arrive at the decision that the investment is capital surplus in nature whereas in substance it is "loan" in nature and that the nomenclature of capital surplus was used to avoid taxation of interest leading to base erosion in India? 19. Whether on the facts and circumstances of the case and in law, the CIT(A) is correct in ignoring the essential character of the capital surplus transaction is "loan" in "substance" which the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred expenditure that might be relatable to such exempt income, the assessee was asked as to furnish clarification regarding disallowance u/s. 14A and was asked to furnish working in accordance with the manner laid down in Rule 8D. In response, the assessee vide submissions filed on 26th September 2017, has made the following submissions:- "During the year under consideration we have not earned any exempt income. Our investments held during the year do not give rise to exempt income, any income if earned thereon will be taxable. Hence, provisions of section 14A are not applicable." 5. The Assessing Officer considering the submissions of the assessee and other provisions of the Act as well relying upon certain case laws computed the disallowance under section 14A of the Act in accordance with the provisions of rule 8D, held that the assessee has not claimed any expenditure of administrative nature and there is no expenditure directly relatable to earning of exempt income. He held that the entire expenditure claimed is on account of interest only and hence the disallowance is required to be made in accordance with rule 8D(2)(ii) being proportionate interest on averag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laws relied upon by the Ld. CIT(A) in this regard fortifies the same and settles the legal position. (vii) Kamat Hotels (India) Ltd vs. Dy. Commissioner of Income-tax (OSD)-8(2), Mumbai - [2018] 89 taxmann.com 225 (Mumbai - Trib.) - It is held that section 14A will not apply if no exempt income is received or receivable during the relevant previous year. (viii) The Commissioner of Income Tax vs. M/s Delite Enterprises (Bombay High Court Income Tax Appeal No.110 of 2009). On the other hand the decisions referred to by the AO in the assessment order while making disallowance u/s 14A r.w.r. 8D are not applicable to the facts of the assessee's case since the assessee has not earned any exempt income on the investments during the year. In view of above discussion and the facts of the case, it is held that the AO was not justified in mechanically following section 14A r.w.r 8D. As no exempt income was earned in the year under appeal no disallowance u/s 14A of the Act is called for. Also similar issue has been decided in Assessee's own case for AY 2011-12, 2012-13 & 2013-14. The facts and circumstances in the present assessment year remain the same and hence following t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew has been taken by the Hon'ble Delhi High Court in the case of Cheminvest Limited v. CIT [378 ITR 33]. 49. In the case of ACIT v. M/s. Ballarpur Industries Ltd., in ITA.No. 346 to 379/NAG/2014 dated 04.12.2015 the Nagpur Bench of the Tribunal following the decision of the Hon'ble Delhi High Court in the case of Cheminvest v. CIT (supra) held as under: "6. We have heard both the sides at some length and carefully perused the orders of the authorities below in the light of the precedence cited. As far as the exemption for the years under consideration were concerned, it was an admitted factual position that the AO has not mentioned any such amount. Meaning thereby, there was no exempt income earned by the assessee for the years under consideration. In reply to one of our questions, the learned AR, Mr. K. P. Dewani has also made a statement at Bar that no dividend was declared, hence, there was no earning of exempted dividend income. He has also clarified that for the purpose of invocation of the provisions of section 14A of the IT Act, the AO has applied the formula only in respect of disallowance of proportionate interest expendi-ture. There was no allegation of the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Authorities have recorded a clear finding of fact that there was no exempt income earned by the assessee. While holding so, the Authorities relied on the judgment of the Delhi High Court in Income Tax Appeal No. 749/2014, which holds that the expression "does not form part of the total income" in Section 14A of the Income Tax Act, 1961 envisages that there should be an actual receipt of the income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. The Income Tax Appellate Tribunal held that the provisions of Section 14A of the Income Tax Act, 1961 would not apply to the facts of this case as no exempt income was received or receivable during the relevant previous year. It is not the case of the Assessing Officer that any actual income was received by the assessee and the same was includible in the total income. In the facts of the case, the Authorities held that since the investments made by the assessee in the sister concerns were not the actual income received by the assessee, they could not have been included in the total income. The findings of facts recorded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was paid as share application/loan and determined the arm's length price of interest amount as USD 7,70,748. This was converted using exchange rate of ₹ 61.99 as on 23rd December 2013 (as per RBI publication) and arm's length price of interest amount in INIR was worked out at ₹ 4,18,52,115. The Assessing Officer accepted the adjustment made by the Transfer Pricing Officer while passing the assessment order. The assessee filed appeal against the adjustment made by the Assessing Officer/Transfer Pricing Officer. 12. The learned CIT(A) following the orders passed in assessee's own case for the assessment year 2012-13, 2013-14, decided the issue in favour of the assessee and against the Revenue. The relevant portion of the learned CIT(A)'s decision on the issue is reproduced below:- "16. Decision I have considered the facts of the case and submissions of the Appellant. The undersigned has gone through the order of the TPO/AO and has examined the contentions of the Appellant on this issue. It is seen that for the period under the proceedings, the entire amount is standing as an Additional paid in capital (APIC). The facts of the case are identical to facts i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad transfered any profit to the Associated Enterprises outside India by not charging interest on the outstanding payment which has been realised after the due date and accordingly deleted the interest charged on late realisation of the export proceeds. 5. On appeal filed by the Revenue, the ITAT upheld the order of CIT (A). While, upholding the order of CIT (A), the ITAT held that interest income is associated only with the lending or borrowing of money and not in case of sale. We express no opinion on the above reasoning of the ITAT and keep that reasoning open for debate in an appropriate case. However, in the facts of the present case, the specific finding of the ITAT is that there is complete uniformity in the act of the assessee in not charging interest from both the Associated Enterprises and Non Associated Enterprises- debtors and the delay in realization of the export proceeds in both the cases is same. In these circumstances, the decision of the Tribunal in deleting the notional interest on outstanding amount of export proceeds realized belatedly cannot be faulted." "71. Similarly, in the case of CIT v. M/s. Lingingstones in ITA.No. 887 of 2014 dated 28.11.2016 th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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