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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI AMIT SHUKLA & SHRI GAGAN GOYAL&
O R D E R PER GAGAN GOYAL, A.M: These appeals by assessee are directed against the order of Ld. CIT (A)-55, Mumbai dated 27.01.2023 u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’) for A.Y. 2015-16 and 2016-17 respectively. The assessee has raised the following grounds of appeal in AY 2015-16:-
1. On the facts and in the circumstances of the case and in law, the learned C.I.T. (A) erred in upholding the action of the learned A.O. in disallowing an amount of Rs.23,27,286/- as Addition/Disallowance as per Transfer Pricing Adjustment of interest paid u/s. 40A(2)(b).
2. On the facts and in the circumstances of the case and in law, the learned A.O. erred in charging interest of Rs. 6, 17,580/- u/s. 234B of the act.
3. On the facts and in the circumstances of the case and in law, the learned A.O. erred in charging interest of Rs.1, 23,766/- u/s. 234C of the act.
The appellant craves leave to add, alter, amend and/or delete any or all of the grounds of appeal.
2. The brief facts of the case are that assessee company filed its return of income on 31.11.2015 declaring total income at Rs. 80,11,450/-. Case of the assessee was selected for Limited Scrutiny under CASS. Assessee Company is engaged in the business of manufacturing recycled agglomerates, granules and garbage bags of virgin HDPE/LLDPE/PP. As assessee has entered into specified domestic transactions with its AE amounting to Rs. 31.04 Crores, case was referred to Transfer Pricing Officer to compute the Arm’s Length Price u/s. 92CA (1) of the Act. The transfer Pricing Officer vide his order u/s. 92CA (3) Dated: 30.10.2018 has made an upward adjustment to the Arm’s Length Price by Rs. 23,27,286/- on account of interest paid to AE @ 18% relying on CUP method. Assessment was completed by adding Rs. 23, 27,286/- u/s. 143(3) r.w.s. 144C (3) of the Act.
3. Assessee being aggrieved with this order of AO preferred an appeal before the Ld. CIT (A), who in turn confirmed the action of AO. Assessee being further aggrieved preferred this present appeal before us. We have gone through the order of AO along with TPO, order of Ld. CIT (A) and submissions of the assessee. For proper appreciation of the matter, we are reproducing herein below the relevant extracts of section 40A (2)(a) of the Act which is relevant here:
“[Expenses or payments not deductible in certain circumstances. 40A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head "Profits and gains of business or profession". (2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the [Assessing] Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction : [Provided that [for an assessment year commencing on or before the 1st day of April, 2016] no disallowance, on account of any expenditure being excessive or unreasonable having regard to the fair market value, shall be made in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at arm's length price as defined in clause (ii) of section 92F.]”
[Meaning of specified domestic transaction. 92BA. For the purposes of this section and sections 92, 92C, 92D and 92E, "specified domestic transaction" in case of an assessee means any of the following transactions, not being an international transaction, namely:— (i) [***] (ii) any transaction referred to in section 80A; (iii) any transfer of goods or services referred to in sub-section (8) of section 80-IA; (iv) any business transacted between the assessee and other person as referred to in sub- section (10) of section 80-IA; (v) any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable; or [(va) any business transacted between the persons referred to in sub-section (6) of section 115BAB;] Following clause (vb) shall be inserted after clause (va) of section 92BA by the Finance Act, 2023, w.e.f. 1-4-2024: (vb) any business transacted between the assessee and other person as referred to in sub- section (4) of section 115BAE; (vi) any other transaction as may be prescribed, and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of [twenty] crore rupees.] Section - 92F, Income-tax Act, 1961 - FA, 2023 Definitions of certain terms relevant to computation of arm's length price, etc. 92F. In sections 92, 92A, 92B, 92C, 92D and 92E, unless the context otherwise requires, — (i) "accountant" shall have the same meaning as in the Explanation below sub-section (2) of section 288; (ii) "arm's length price" means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions; (iii) "enterprise" means a person (including a permanent establishment of such person) who is, or has been, or is proposed to be, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights, or the provision of services of any kind, [or in carrying out any work in pursuance of a contract,] or in investment, or providing loan or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, whether such activity or business is carried on, directly or through one or more of its units or divisions or subsidiaries, or whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or places; [(iiia) "Permanent establishment", referred to in clause (iii), includes a fixed place of business through which the business of the enterprise is wholly or partly carried on;] [(iv) "Specified date" means the date one month prior to the due date for furnishing the return of income under sub-section (1) of section 139 for the relevant assessment year;] (v) "transaction" includes an arrangement, understanding or action in concert, — (A) whether or not such arrangement, understanding or action is formal or in writing; or (B) Whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding.]
We have gone through the relevant provisions of section 40A (2) (a) with its proviso and section 92BA r.w.s. 92F (ii) of the Act. Provisions are in complete harmony and talks about fairness of transaction. As per provisions of clause (a) of section 40A (2) of the Income Tax Act, 1961, if the assessee incurs any expenditure for which payment has been made is to be made to the related party and such expenditure is excessive as compare to the fair market value of the transactions, then such excessive part of particular expenditure will be not allowed as expense. But the Assessing Officer need to justify that such expenditure is excessive or unreasonable having regard to:
(i) The fair market value of the goods, services or facilities for which the payment is made; or (ii) for the legitimate needs of business or profession of the assessee; or (iii) The benefit derived by or accruing to the assessee from such expenditure
Simply by comparing Bank’s PLR rate vis-à-vis rate of interest paid to an AE, will not serve the purpose of statute. When assessee is dealing with a private party, may be an AE that is too when there is no question about genuineness of the transaction and its use in business of the assessee, then comparison has to be made taking a benchmark of interest being charged by private players, without any security and collateral etc. In this case it is also worthwhile to be mentioned that AE is also under the maximum rate chargeable to tax, so at least in this case no diversion of income can be think of. Further, we find that AO forget referring the provisions of section 92C of the Act as under:
“Computation of arm's length price. 92C. (1) The arm's length price in relation to an international transaction [or specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely:— (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board.
(2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed: [Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm's length price so determined and price at which the international transaction [or specified domestic transaction] has actually been undertaken does not exceed [such percentage [not exceeding three per cent] of the latter, as may be notified by the Central Government in the Official Gazette in this behalf], the price at which the international transaction [or specified domestic transaction] has actually been undertaken shall be deemed to be the arm's length price :] Provided also that where more than one price is determined by the most appropriate method, the arm's length price in relation to an international transaction or specified domestic transaction undertaken on or after the 1st day of April, 2014, shall be computed in such manner as may be prescribed and accordingly the first and second proviso shall not apply.] Explanation. —For the removal of doubts, it is hereby clarified that the provisions of the second proviso shall also be applicable to all assessment or reassessment proceedings pending before an Assessing Officer as on the 1st day of October, 2009.] (2A) Where the first proviso to sub-section (2) as it stood before its amendment by the Finance (No. 2) Act, 2009 (33 of 2009), is applicable in respect of an international transaction for an assessment year and the variation between the arithmetical mean referred to in the said proviso and the price at which such transaction has actually been undertaken exceeds five per cent of the arithmetical mean, then, the assessee shall not be entitled to exercise the option as referred to in the said proviso.] (2B) Nothing contained in sub-section (2A) shall empower the Assessing Officer either to assess or reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154 for any assessment year the proceedings of which have been completed before the 1st day of October, 2009.] (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that— (a) the price charged or paid in an international transaction [or specified domestic transaction] has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction [or specified domestic transaction] have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm's length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction [or specified domestic transaction] in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him: Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the arm's length price should not be so determined on the basis of material or information or document in the possession of the Assessing Officer. (4) Where an arm's length price is determined by the Assessing Officer under sub-section (3), the Assessing Officer may compute the total income of the assessee having regard to the arm's length price so determined: Provided that no deduction under section 10A [or section 10AA] or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section: Provided further that where the total income of an associated enterprise is computed under this sub-section on determination of the arm's length price paid to another associated enterprise from which tax has been deducted [or was deductible] under the provisions of Chapter XVIIB, the income of the other associated enterprise shall not be recomputed by reason of such determination of arm's length price in the case of the first mentioned enterprise.
From the above mentioned in bold it is crystal clear that, where the difference is not more than 3% no adjustment can be done. In this case difference is 3.5%, hence adjustment even if is to be made can be maximum up to .50%, subject to our discussion on section 40A (2) (a) of the Act. In this situation considering various provisions of the Act reproduced above and failure of the AO/TPO to consider the case of the assessee in proper perspective, we allow the ground no. 1 raised by the assessee and direct the AO to delete the addition amounting to Rs. 23,27,286/-.
Ground Nos. 1 and 2 are consequential in nature and requires no separate adjudication. In the result, appeal of the assessee is allowed.
ITA No. 967/Mum/2023 for AY 2016-17
The assessee has raised the following grounds in this appeal are:-
On the facts and in the circumstances of the case and in law, the learned C.I.T. (A) erred in upholding the action of the learned A.O. in adding an amount of Rs. 25,10,360/- as 'TP Adjustment'.
On the facts and in the circumstances of the case and in law, the learned A.O. erred in disallowing an amount of Rs. 1, 83,981/- u/s. 14A of the act and the learned C.I.T. (A) erred in not dealing with the same.
3. On the facts and in the circumstances of the case and in law, the learned A.O. erred in charging interest of Rs. 1,25,470/- u/s. 234A of the act.
On the facts and in the circumstances of the case and in law, the learned A.O. erred in charging interest of Rs. 4, 51,769/- u/s. 234B of the act.
4. On the facts and in the circumstances of the case and in law, the learned A.O. erred in charging interest of Rs. 62, 079/- u/s. 234C of the act.
The appellant craves leave to add, alter, amend and/or delete any or all of the grounds of appeal.
Since we have already decided the similar grounds of appeal raised by the assessee in AY 2015-16 and the facts of this appeal are exactly similar, hence Ground no. 1, 3, 4 and 5 will fetch its result from appeal no. mentioned (supra) and are applicable mutatis mutandis.
10. Ground no. 2 is a separate ground and was note there in AY 2015-16; hence it requires our adjudication separately. Ground no. 2 pertains to disallowance u/s. 14A of the Act amounting to Rs. 1, 83,981/-. Assessee has shown non-current investments at Rs. 49, 95,000/- in the form of equity shares of M/s. San Poly Plast Exim Pvt. Ltd. It is observed that during the year under consideration, assessee has not earned any exempted income out of this investment. AO relied upon the CBDT vide circular no. 5 of 2014 dated 11/02/2014 has clarified that disallowance u/s. 14A will be attracted even if no exempt income is earned during the financial year. For the year under consideration, the judicial pronouncements in the case of PCIT vs. State Bank of Patiala 99 taxmann.com 286 (SC) and CIT vs. Chettinad Logistics Pvt. Ltd. 257 taxman 002 (SC) are relevant wherein the Hon’ble Apex Court held “that when no exempt income was earned, section 14A could not be invoked”.
10. Keeping in view the law laid down by the Hon’ble Supreme Court as mentioned (supra), we allow the ground raised by the assessee and AO is directed to delete the addition made u/s 14A of the Act. In the result the appeal of the assessee is allowed.