2023 (11) TMI 387 - AT - Income Tax

Assessee wins on Section 14A disallowance, transfer pricing adjustment deleted, subsidiary interest allowed

The ITAT Chennai allowed the assessee's appeal and dismissed the Revenue's appeal. For disallowance under section 14A, the tribunal restricted interest ... Disallowance u/s 14A - sufficiency of own funds - HELD THAT:- As regards to disallowance in both the years, the assessee is having more interest free funds than the investments. As regards to assessment year 2012-13, the assessee has given revised computation and already made suo-motto disallowance before CIT(A). But as regards to assessment year 2013-14 is concerned, the assessee’s interest free funds available is at Rs. 114.93 crores as against which investment giving rise to exempt income stood at Rs. 100.72 crores. Hence, for assessment year 2012-13, we direct the AO to restrict the disallowance of interest expenses under Rule 8D(2)(ii) at Rs. 51,29,547/- and in assessment year 2013-14, no disallowance should be made. As regards to value of investment under Rule 8D(2)(iii) i.e., 0.5% of average value of investment for the assessment year 2012-13, disallowance should be restricted at Rs. 8,79,583/- and for assessment year 2013-14, it should be restricted to the extent of amount already disallowed by the assessee at Rs. 36,12,589/-. Disallowance of interest claim - Claim disallowed on the ground of diversion of borrowed funds used for the purpose of non-business purposes - HELD THAT:- The assessee explained the nature of business of the assessee that includes sand mining and shipping business, which the subsidiary company is also doing. The assessee explained this fact from the copy of ledger account that the subsidiary incurred expenditure at harbor and other places on behalf of assessee company. Hence, the ld.counsel before us now stated that the assessee’s advance free loan to subsidiaries is for the purpose of business and hence, the same should have been allowed. We noted that the assessee is able to prove that the assessee’s subsidiaries namely Pradeep Shipping Pvt. Ltd., and Trimex Sands Pvt. Ltd., both are subsidiaries and engaged in the business as that of the assessee and it is called the expansion of business. Even in these subsidiaries and that of the assessee, there is common management and unity of control is there. Once this fact is there, the Revenue cannot disallow the interest expenditure because it is incurred for the purpose of business. Hence, we allow the interest and direct the AO accordingly. The appeal of the assessee is allowed. TP adjustment on account of transfer pricing relating to barite-Lumps - CIT(A) deleted the addition by observing that the TPO has proceeded to compute the margins of AE with non-AE to whom there is only a single export transaction made post increase in the price and so the CUP treated by TPO is not exact one - HELD THAT:- We noted that apart from the above difference pointed out by CIT(A) in his order that the single transaction adopted by TPO for comparing the AE and non-AE transactions for which CUP method is applied. Apart from this, we noted from the sheet that the mark up cost for transaction with AE is 40.16% as against 41.93% with non-AE. This difference is within the range of +/- 5% variations allowed under the second proviso to sub-section (2) of section 92C of the Act. Once this is a fact, we find no infirmity in the order of CIT(A) and hence, we confirm the same. This issue of Revenue’s appeal is dismissed. Disallowance u/s 40(a)(ia) - non-deduction of TDS on compensatory charges - HELD THAT:- We noted that the payments made to APMDC is clearly in the nature of compensatory and these cannot be called as interest which are contemplated in the provisions of section 194A of the Act, for the purpose of deduction of TDS. Hence, we find no infirmity in the order of CIT(A), who has rightly deleted the disallowance and we confirm the same. Accordingly, this appeal of the Revenue is dismissed. Issues Involved:1. Disallowance of expenses related to exempt income under Section 14A of the Income Tax Act.2. Disallowance of interest claim due to diversion of borrowed funds for non-business purposes.3. Transfer pricing adjustment on account of barite-lumps.4. Disallowance of expenses for non-deduction of TDS on compensatory charges.Summary:Issue 1: Disallowance of Expenses Related to Exempt Income (Section 14A)The Tribunal addressed the appeals for the assessment years 2012-13 and 2013-14 regarding the disallowance of expenses related to exempt income under Section 14A of the Income Tax Act, read with Rule 8D(2)(ii) and 8D(2)(iii) of the Income Tax Rules. The AO had disallowed interest expenses and administrative expenses, leading to aggregate disallowances of Rs. 5,14,38,221/- for AY 2012-13 and Rs. 5,00,34,676/- for AY 2013-14. The CIT(A) upheld these disallowances, but the Tribunal found that the assessee had sufficient interest-free funds to cover the investments. Consequently, the Tribunal directed the AO to restrict the disallowance to Rs. 60,09,130/- for AY 2012-13 and to make no disallowance for AY 2013-14.Issue 2: Disallowance of Interest Claim (AY 2009-10)The Tribunal examined the disallowance of interest claimed by the assessee due to the diversion of borrowed funds for non-business purposes, including investments in subsidiaries and donations. The AO had disallowed Rs. 3,30,08,590/-. The CIT(A) upheld this disallowance. However, the Tribunal found that the investments in subsidiaries were for business expansion, and the donations were made from interest-free funds. Therefore, the Tribunal allowed the interest claim and directed the AO to allow the expenditure.Issue 3: Transfer Pricing Adjustment (AY 2009-10 and 2013-14)The Tribunal reviewed the transfer pricing adjustments made by the AO/TPO for the sale of barite lumps to associated enterprises (AEs). The AO/TPO had computed the adjustments based on a higher markup on costs for transactions with non-AEs. The CIT(A) deleted these adjustments, noting that the TPO had not considered the impact of foreign exchange fluctuations and the appropriateness of the CUP method. The Tribunal upheld the CIT(A)'s decision, confirming that the differences in markup were within the permissible range of +/- 5% as per the second proviso to Section 92C(2) of the Act.Issue 4: Disallowance for Non-Deduction of TDS on Compensatory Charges (AY 2009-10)The Tribunal addressed the disallowance of Rs. 26,44,193/- for non-deduction of TDS on compensatory charges paid to Andhra Pradesh Mineral Development Corporation (APMDC). The AO had treated these payments as interest under Section 194A. The CIT(A) deleted the disallowance, considering the payments as compensatory and not interest. The Tribunal upheld the CIT(A)'s decision, confirming that the payments were compensatory and not subject to TDS under Section 194A.Conclusion:The appeals filed by the assessee in ITA Nos. 77 & 78/CHNY/2022 were partly allowed, ITA No. 993/CHNY/2022 was allowed, and both the appeals of the Revenue in ITA Nos. 1035 & 1120/CHNY/2022 were dismissed. The order was pronounced in the open court on 11th October 2023 at Chennai.