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TMI Blog2022 (9) TMI 1083X X X X Extracts X X X X X X X X Extracts X X X X ..... eriod of 90 days and prayed that the same may be allowed for the year under considered. Since the TPO has not done a separate bench marking for the interest on delayed receivables, we remit the issue back to the TPO for fresh consideration. TPO is directed to consider the payables by the assessee to AEs and also the fact that TPO in the AY 2014-15 has given a credit period of 90 days while computing the interest on receivables. Needless to say that the assessee may be given reasonable opportunity of being heard. Depreciation on networking equipment - HELD THAT:- We find that the issue is no longer res-integra and has been decided in the case of Mphasis Ltd. [ 2021 (3) TMI 1072 - KARNATAKA HIGH COURT] wherein held that computer accessories such as switches and routers form part of peripherals of computer system and hence entitled to depreciation at 60%. Following the same, we allow this ground by the assessee. Disallowance u/s. 14A - HELD THAT:- In the instant case, the AO has considered the entire investments for the purpose of arriving at the average investments, which is not in conformity with the ratio laid down by the decision of VIREET INVESTMENT (P.) LTD. [ 2017 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,33, 857 under the MAT provisions u/s. 115JB. The case was selected for scrutiny and notice u/s. 143(2) was duly served on the assessee. Since the assessee had international transactions with its Associated Enterprises (AE), a reference was made to the Transfer Pricing Officer [TPO]. The TPO concluded that the assessment u/s. 92CA by making an adjustment of Rs.3,73,72,659 with respect to the interest on delayed receivables. The AO passed a draft assessment order incorporating the TP adjustment and further made disallowance towards depreciation on networking equipments and disallowance u/s. 14A. The assessee raised its objections before the DRP. The DRP gave a marginal relief by reducing the disallowance u/s. 14A. The AO passed the final assessment order as per the directions of the DRP against which the assessee is in appeal before the Tribunal. Interest on delayed receivables 5. During the course of TP proceedings, the AO treated interest on delayed receivables as a separate international transaction and called on the assessee to furnish invoice-wise details of all trade receivables from AE during the year. The TPO made a TP adjustment by applying interest @ 6 months LIB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, this issue was considered by the Tribunal in assessee s own case for AY 2014-15 and in para 23 to 23.9 of the order dated 21.5.2020 this Tribunal held as under:- 23. Ground No. 14-17 alleged by assessee against adjustment of notional interest on outstanding receivables. From TP study, it is observed that payments to assessee are not contingent upon payment received by AEs from their respective customers. Further Ld.AR submitted that working capital adjustment undertaken by assessee includes the adjustment regarding the receivables and thus receivables arising out of such transaction have already been accounted for. Alternatively, he submitted that working capital subsumes sundry creditors and therefore separate addition is not called for. 23.1. Ld.TPO computed interest on outstanding receivables under weighted average method using LIBOR + 300 basis points applicable for year under consideration that worked out to 3.3758% on receivables that exceeded 30 days. It has been argued by Ld.AR that authorities below disregarded business/commercial arrangement between the assessee and its AE's, by holding outstanding receivables to be an independent international transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non-payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case noted a decision of the Hon'ble Bombay High Court in the case of CIT v. Patni Computer Systems Ltd. [2013] 33 taxmann.com 3/215 Taxman 108 (Bom.), which dealt with question of law: (c) 'Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. Dy. CIT [2018] 91 taxmann.com 286 has observed that: There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd v. DCIT [2017] 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO has not done a separate bench marking for the interest on delayed receivables, we remit the issue back to the TPO for fresh consideration. The TPO is directed to consider the payables by the assessee to AEs and also the fact that TPO in the AY 2014-15 has given a credit period of 90 days while computing the interest on receivables. Needless to say that the assessee may be given reasonable opportunity of being heard. Depreciation on networking equipment 12. In this regard, it was submitted that the networking equipment broadly comprises of servers, routers, server hard disk and other network accessories. These form an essential part of computer and function as an input processor, storage and output devices, and cannot operate independent of a computer system. Therefore, it was submitted that the said items are eligible for depreciation at the rate of 60%. Reliance in this regard was placed on the following decisions: PCIT v. Mphasis Ltd . (reported in (2021) 128 taxmann.com 138 (Kar.)); CIT v. BSES Yamuna Powers Ltd. (reported in (2013) 40 taxmann.com 108 (Delhi)); and OnMobile Global Limited v. ACIT (reported in (2014) 45 taxmann.com 346 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case. The basic issue for consideration is that the investment, which did not yield any exempt income, should enter or not enter into the computation under Rule 8D, while arriving at the average value of investment, income from which does not or shall not form part of the total income. 11.1 In the present case, our decision is restricted only to the extent of interpretation of language employed in Rule 8(2)(iii). The submission of ld. counsel for the assessee is that this issue is now covered by the decision of the Hon'ble Delhi High Court in the case of CIT v. Hofcin India (P.) Ltd. (supra), wherein it has been held that if no dividend income was earned, section 14A could not be invoked. The Hon'ble Delhi High Court has referred to the decisions, which we have noted earlier i.e.: - Shivam Motors (P) Ltd's. case (supra) - Winsome Textile Industries Ltd's. case (supra) - Lakhani Marketing Inc. case (supra) - Corrtech Energy (P.) Ltd's. case (supra). - CIT v. Hero Cycles Ltd. [2010] 323 ITR 518/189 Taxman 50 (Punj. Har.). 11.2 The submission of ld. Principal CIT(DR) is that ITAT in the case of Delhi Special Bench in the case of Che ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neys. Both of them made a claim for deduction of the amount of interest paid on borrowed moneys but this claim was negated by the ITO and on appeal by the AAC on the ground that during the relevant assessment year the shares did not yield any dividend and, therefore, interest paid on the borrowed moneys could not be regarded as expenditure laid out or expended wholly and exclusively for the purposes of making or earning income chargeable under the head 'income from other sources', so as to be allowable as a permissible deduction u/s 57(iii). The Tribunal. however, on further appeal, disagreed with the view taken by the taxing authorities and upheld the claim of each of the two assessees for deduction u/s 57(iii). 11.6 In the backdrop of these facts the Tribunal's order was upheld by the Hon'ble High Court and Hon'ble Supreme Court. The Hon'ble Supreme Court, inter alia, held that it is the purpose of the expenditure that is relevant in determining the applicability of section 57(iii) and that purpose must be making or earning of income. It was further held that section 57(iii) does not require that this purpose must be fulfilled in order to qualify the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses, operating and other expenses, depreciation and financial expenses. 11.9 In both the assessment orders, the Assessing Officer held that the respondent-assessee had not commenced business activities as they had not undertaken any manufacturing activity or made downstream investments. It was observed that the respondent-assessee, after receiving approval of Foreign Investment Promotion Soard (FIPS) dated 20.12.2000 acquired shares capital of Ambuja Cement India Ltd. This, the Assessing Officer felt, was not sufficient to indicate or hold that the respondent-assessee had started their business. He, accordingly, disallowed the entire expenditure of Rs. 8.75 Crores for the Assessment Year 2007-08 and Rs. 7.02 Crores for the Assessment Year 2008-09. 11.10 Ld. CIT(A) did not agree with the findings of Assessing Officer that the business of the respondent- assessee had not been set up or commenced. The CIT(A) observed that the respondent-assessee had been set up with the business objective of making investment in cement industry after due approval given by the Government of India, Ministry of Commerce and Industry vide letter dated 18.12.2002 and 20.12.2012. It was observed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section 14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the appellant-Revenue. No contrary decision of a High Court has been shown to us. The Punjab and Haryana High Court in Commissioner of Income Tax, Faridabad v. M/s. Lakhani Marketing Incl, ITA No. 970/2008, decided on 02.04.2014, made reference to two ' earlier decisions of the same Court in CIT v. Hero Cycles Limited, [2010] 323 ITR 518 and CIT vs. Winsome Textile Industries Limited, [2009] 319 ITR 204 to hold that Section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in Commissioner of Income Tax-I v. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj.). The third decision is Of the Allahabad High Court in Income Tax Appeal No. 88 of 2014, Commissioner of Income Tax II Kanpur, v. M/s. Shivam Motors (P) Ltd. decided on 05.05.2014. In the said decision it has been held:- As regards the second question, Section 14A of the Act provides that fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer and has also not been doubted by the CIT(A).' 11.14 Now the position of law as stands is that the decision of Hon'ble Jurisdiction High Court is directly on the point in dispute whereas the decision of Hon'ble Supreme court in the case of Rajendra Prasad Moody (supra) has been rendered in the context of section 57(iii), the applicability of which has been ruled out by Hon'ble Delhi High Court in the case of Cheminvest (supra). 11.15 Under Article 227 of the Constitution of India, the courts function under the supervisory jurisdiction of Hon'ble High Court. The decisions rendered by Hon'ble High Court are binding on all subordinate courts working within its jurisdiction. In this regard we may refer to the following decisions:- '(i) CIT v. Thana Electricity Supply Ltd. (1994) 206 ITR 727 (Bom.), wherein on the issue of whose decision is binding on whom , the. Hon'ble Bombay Court considered in detail the hierarchy of the cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the law laid down by it. Such obedience would also be conducive to their smooth working; otherwise there would be confusion in the administration of law and respect for law would irretrievably suffer, (ii) CIT v. Sunil Kumar (1995) 212 ITR 238 (Raj.), it was observed as under: The point which has been raised could have been considered to be debatable because other High Courts have taken a different view. But since the view taken by this court is binding on the Tribunal and other authorities under the Act in this State, it could not be considered to be a debatable point in view of the decision of this court in the case of CIT v. M.L., Sanghi [1988] 170 ITR 670. (iii) Indian Tube Company Ltd. v. CIT others (1993) 203 ITR 54 (Col.) , it was observed as under: In the impugned order, respondent No.1 has rejected the petitioner's contention by stating that, although the Calcutta High Court had held that an assessee was entitled to interest on such refund calculated up to the date of the order passed consequent upon an appeal or revision of the original assessment, this view had not been accepted by the Bombay High Court, the Allahabad High Court and the Kerala Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that an income, which is exempt in current year, will continue to be so in future years and, therefore, that investment should also be excluded, is hypothetical and cannot be accepted. 11.18 In view of above discussion, the matter is restored back to the file of AO for recomputing the disallowance u/s 14A in terms of above observations. Thus, revenue's appeal is dismissed and assessee's cross-objection, on the issue in question, stand allowed for statistical purposes, in terms indicated above. 20. In the instant case, the AO has considered the entire investments for the purpose of arriving at the average investments, which is not in conformity with the ratio laid down by the decision of the Delhi Special Bench (supra) . Respectfully following this decision of the Special Bench, we remit the issue back to the AO to recompute the disallowance u/s. 14A r.w. R.8D(2)(iii) taking into account only those investments for computing average value of investment which yielded exempt income during the year. Non-granting of deduction u/s. 80G 21. After hearing both the parties, we direct the AO to verify and allow deduction u/s. 80G towards the donations made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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