Tribunal partially allows appeal, directs deletion of transfer pricing adjustment and interest disallowance under Income Tax Act.

The Tribunal allowed the appeal in part, directing the deletion of both the transfer pricing adjustment regarding notional interest on export receivables and the disallowance of proportionate interest expenditure under Section 36(1)(iii) of the Income Tax Act. The decision was pronounced on 14.12.2022.

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Issues Involved:
1. Transfer pricing adjustment regarding notional interest on export receivables.
2. Disallowance of proportionate interest expenditure under Section 36(1)(iii) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The appellant contested the transfer pricing adjustment upheld by the Commissioner of Income Tax (Appeals) [CIT(A)], arguing that the Transfer Pricing Officer (TPO) did not issue a written show cause notice as required by Section 92C(3) of the Income Tax Act, 1961. The TPO had made an adjustment of Rs. 24,27,405/- towards notional interest on delayed export receivables from Associated Enterprises (AEs).

The CIT(A) upheld the TPO's decision, considering delayed receivables as an international transaction under Section 92B of the Act. The appellant argued that the amendment to Section 92B by the Finance Act, 2012, should be prospective and not retrospective. They also contended that receivables from the sale of cut and polished diamonds are not capital financing and thus not covered under the explanation to Section 92B.

The appellant further argued that the TPO did not select any prescribed method under Section 92C(1) for the adjustment, making it legally unsound. Additionally, they claimed that the practice of not charging interest on delayed receivables from AEs is consistent with their practice with non-AEs, and that working capital adjustments already account for the impact of outstanding receivables.

The Tribunal found that the TPO and CIT(A) correctly considered the outstanding receivables as a separate international transaction. However, the Tribunal noted that the appellant had shown that similar credit periods were allowed to both AEs and non-AEs without charging interest, making the internal Comparable Uncontrolled Price (CUP) method applicable. The Tribunal concluded that the arm's length price (ALP) of the overdue export proceeds from AEs is nil, reversing the lower authorities' orders and directing the deletion of the adjustment.

2. Disallowance of Proportionate Interest Expenditure:
The appellant contested the disallowance of Rs. 5,79,000/- under Section 36(1)(iii) for interest expenditure, arguing that the funds used for purchasing office premises were from interest-free funds and not borrowed funds. The CIT(A) upheld the disallowance, interpreting that the purchase of fixed assets was financed from borrowings.

The Tribunal found that the appellant had sufficient interest-free funds (Rs. 141 crores) to cover the advance of Rs. 3.17 crores for fixed assets. Citing the Supreme Court's decision in CIT vs. Reliance Industries Ltd. (410 ITR 466), the Tribunal held that the presumption is that the investment was made from interest-free funds. Consequently, the Tribunal directed the deletion of the disallowance, reversing the lower authorities' orders.

Conclusion:
The Tribunal allowed the appeal in part, directing the deletion of both the transfer pricing adjustment and the disallowance of interest expenditure. The decision was pronounced in the open court on 14.12.2022.

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