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2019 (5) TMI 1837
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....ble CIT(A) has erred in law and on facts and in circumstances of the case in upholding the addition of interest of Rs. 9,53,074 on delay in realization of export receivables from AEs. 3.0 Ground No.3 The Hon'ble CIT(A) has erred in law and facts in upholding the additional disallowance of Rs. 74,44,433; one-half per-cent of the average value of investments under section 14A of the Income Tax Act, 1961 {'the Act'} by applying Rule 8D of the Income tax Rules, 1962 ('the Rules). 4.0 Ground No.4 The Hon'ble CIT (A) has erred in law and on facts and in circumstances of the case in upholding the additional disallowance of Rs. 74,44,433; onehalf per-cent of the average value of investments under section 14A of the Act in computing the Book Profit under section 115JB of the Act. 3. The Revenue has raised following grounds of appeal:- 1. "Whether on the facts and circumstances of the case and in law,the Ld.CIT(A) has erred in directiong to consider net interest debit to Profit & Loss Account for calculation of disallowance u/s14Ar. w. Rule 8D of the IT Rules 1962, without appreciating the fact that there is no Such concept ....
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....y the assessee to charge interest on share application money to its AEs is not acceptable, because adding mark up to the LIBOR covers the risk reward only when the transaction is made in forex. When money is advanced to the AE by buying hard currencies from selling INR, there is additional risk of exchange rate difference. The assessee has not covered itself against currency risk, entity risk, country risk and administrative cost in charging LIBOR plus 200 BPS to the AE. A mark up of 300 BPS is therefore applied to the rate of interest charged by the assessee. Accordingly workout interest receivables on share application money and determined total interest of Rs. 81,58,533/- and also after reducing interest received by the assessee of Rs. 51,91,791/-, the balance amount of Rs. 29,66,742/- has been suggested to make adjustment towards interest received on share application money. Similarly, in respect of interest on export receivables, after analyzing the facts, the AO observed that the assessee has allowed undue benefit to its AE by extending credit period which is more than credit period allowed to non-AEs, therefore, taking note of the fact that the assessee has charged interest ....
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....f in respect of additions made towards disallowance of expenditure incurred in relation to exempt income u/s 14A by directing the AO to consider only net interest expenditure for the purpose of disallowance under Rule-8D-2(ii) of the Rules, 1962. 8. Aggrieved by the order of the Ld. CIT((A), the assessee as well as the Revenue is in appeal before us. 9. The first issue that came up for our consideration from ground no.1 of the assessee's appeal is transfer pricing adjustment on account of interest charged on share application money forwarded to AE for Rs. 28,66,742/-. 10. The facts with regard to impugned dispute are that the assessee has charged interest at 6 months LABOR plus 200 BPS as interest on share application money given to AE. The said loan was forwarded in US $. The assessee has availed overdraft facility from local bank at Botswana at interest rate of 2.5%. All these evidences are part of assessment proceedings. The TPO held that neither PULA nor INR are basket currency of LIBOR, hence it is not applicable to the assessee. The TPO further held that the LIBOR was not acceptable because the Mark-up to the LIBOR covers the risk reward only when the transaction is ....
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....ed on share application money given to AE. Though, the assessee has advocating principle of consistency, but assessee itself did not follow consistency in charging interest on share application money which is evident from the fact that the assessee has charged LIBOR plus 300 BPS in earlier year, whereas changed rate of interest to LIBOR plus 200 BPS for the year under consideration without there being any change in facts. Therefore, there is no error in the adjustment made by the TPO/AO in respect of international transactions and hence the additions made by the AO should be sustained. 13. We have heard both parties, perused the material available on record and gone through the orders of authorities below. There is no dispute with regard to the fact that assessee has charged interest on share application money forwarded to AE and such interest has been charged by applying LIBOR plus 200 BPS and later converted into Indian Rupee to determined interest receivable from AE. The assessee has justified charging LIBOR plus 200 BPS on the ground that interest rate should be market determined applicable to the currency concerned in which loan has to be repaid. Interest rate should not be....
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....ere export realization was beyond the period of 85 days by applying interest @ 4.5% being 200 BPS mark up on the interest taken on packing credit as availed on 2.5% by the assessee. The Ld. CIT(A) affirmed the additions made by the AO on the ground that there was no complete uniformity between credit period to AE and Non AE and hence transaction was not at arm's length. The Ld. CIT(A) also held that weighted average as computed by the assessee for establishing 39 day credit period to AE included the advances received by it and hence rejected the comparison. 15. The Ld. AR for the assessee submitted that where there is a complete uniformity of act of the assessee in not charging interest from both AE and Non-AE debtors for delay in realization of export proceeds, the AO was not justified in making addition of notional interest to assessee's ALP on aforesaid ground in course of transfer pricing adjustments. The Ld. AR further submitted that the AO has taken one or two solitary instance of delay over and above normal period allowed to non-AEs to compare the period of delay in relation to export receivables without considering the submissions made by the assessee that weighted avera....
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....t receivables. 18. The next issue that came up for our consideration from ground no.3 is disallowance of expenditure incurred in relation to exempt income. The facts with regard to the impugned dispute are that during the year under consideration, the assessee has earned exempt income being dividend of Rs. 3,62,07,763/-, which was claimed exempt u/s 10(34) of the Act. The assessee has also made Suo-moto disallowance of Rs. 50,02,065/- towards expenditure incurred in relation to exempt income. The AO has determined disallowances contemplated u/s 14A by applying the principles provided under Rule-8D(2) and determined total disallowance of Rs. 94,27,894/- which includes direct expenditure attributable to earning exempt income of Rs. 3,07,453/- proportionate interest attributable to the exempt income as per the formula prescribed under Rule-8D(2)(ii) at Rs. 16,76,007/- and amount of Rs. 74,44,433/- in respect of other expenses under Rule-8D(2)(iii) of the Rules. Further, after reducing suo-moto disallowance already made by the assessee, he made further additions of Rs. 44,25,829/-. On appeal before the Ld. CIT(A), the Ld. CIT(A) allowed partial relief in respect of disallowance of i....
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....o argue that there is no clear cut satisfaction from the AO before invoking provisions of Rules8D(2) which is mandatorily required to be recorded before computing disallowance by applying prescribed procedure under Rules-8D(2). We find that an identical issue has been considered by the co-ordinate Bench in assessee's own case for AY 2008-09 and 2009-10, where under identical facts and circumstances, the Tribunal deleted additions made by the AO towards further disallowances over and above suo-moto disallowances made by the assessee towards expenditure incurred in relation to exempt income on the ground that before invoking provisions of rule-8D, the AO required to record satisfaction having regard to the books of accounts of the assessee that suo-moto disallowance computed by the assessee is incorrect. The relevant findings of the Tribunal are as under:- 11. We have heard the rival contentions and perused the orders of the authorities below and the case law relied on. The Assessing Officer while completing the assessment noticed that assessee has received dividend income in both these assessment years and also suo motu disallowed expenditure against the exempt income. The ....
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....ee-company has not borrowed any money for investment in shares of other company for earning dividend income. 13. Assessee further contended that since it had incurred certain DEMAT charges/expenses, those expenses may directly attributable to exempt income. Thus, the company has disallowed Rs. 10,45,5677and Rs. 55,62,9707- u/s.!4A of the Act in the computation of income for the assessment year 2008-09 and 2009-10 respectively, and therefore, the disallowance may be restricted to this count. However, the Assessing Officer not appreciating the submission of the assessee invoking the provisions of Rule 8D disallowed Rs. 1,76,10,0697- and Rs. 2,76,59,8247-. On a perusal of the assessment order, we find that the Assessing Officer has simply stated that since assessee has not disclosed any interest expenses for earning dividend income in its return of income, he is satisfied that the claim of the assessee with regard to the expenses incurred for earning dividend income is incorrect, therefore, the provisions of Section 14A read with Rule 8D are invoked. On a perusal of the assessment order, we find that the so called satisfaction recorded by the Assessing Officer having regard t....
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....ring upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the asses- see in respect of such expenditure. Sub-section (3) is nothing but an offshoot of subsection (2) of section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of section 14A of the said Act. It is only if the Ass....