DCIT, CENTRAL CIRCLE-1 (3), CHENNAI vs. TRIMEX INDUSTRIES PRIVATE LIMITED, CHENNAI

The facts and circumstances are exactly identical in both the years and hence, by way of this common order these appeals are being disposed off.

Brief facts relating to assessment year 2012-13 in IT(TP)A No.77/CHNY/2022 are that the AO while framing assessment noticed that the assessee has received dividend income of Rs.32,78,79,872/- which includes dividend of Rs.32,78,44,905/- from the investment made by assessee in the shares of Trimex Sands Pvt. Ltd., a subsidiary company. The AO noted that the assessee has claimed interest expenditure in its P&L account amounting to Rs.16,63,71,259/-. He also noted that the investment in shares of Trimex Sands Pvt. Ltd., as on 31.03.2011 was at Rs.67,50,99,900/- and the same investment was in the financial

The CIT(A) simpliciter dismissed the ground of assessee despite the fact that the assessee before CIT(A) filed complete details of availability of funds but without going into the same, he observed that the AO has adopted the formula enacted by - 5 - IT(TP)A Nos.77 & 78/Chny/2022 & 1035 & 1120/Chny/2022 legislature under Rule 8D(2) and the formula prescribes that no such ground can be taken that the assessee has more interest free funds without one to one correlation. Hence, he dismissed the assessee’s ground. Aggrieved, now assessee is in appeal before the Tribunal.

We have heard rival contentions and gone through facts and circumstances of the case. We also noted that the assessee’s interest free funds as on 31.03.2012 at Rs.78.34 crores which is excess of investment made in the shares giving rise to exempt income i.e., dividend income of Rs.32.98 crores on the investment of Rs.76.29 crores. The assessee also filed details of working capital term limit of Rs.18,17,17,947/- which was available with the assessee and the same cannot be included while computing disallowance. The assessee has given revised working for making disallowance and added that only disallowance under Rule 8D(2)(ii) will be at Rs.51,29,547/- and under Rule 8D(2)(iii) at Rs.8,79,583/- , thereby total disallowance of expenditure should be restricted at Rs.60,09,130/- as against computed by the AO at Rs.5,14,38,221/-. When these revised working was provided to the Revenue, the ld.Senior DR could not controvert the above fact situation but only requested that matter can be referred back to the file of the AO for - 6 - IT(TP)A Nos.77 & 78/Chny/2022 & 1035 & 1120/Chny/2022 considering the availability of funds i.e, interest free funds available with the assessee on 31.03.2012. The relevant revised working is reproduced from the order of CIT(A) as under:- S.No. Particulars Amount i. Amount of expenditure directly attributable ii Amount calculated as per formula A*B*C Expenditure by way of interest not directly 8,25,37,238 attributable “A” Total Investments : As on 01.04.2011 17,59,16,568 As on 31.03.2012 17,59,16,566 Average Investments “B” 17,59,16,566 Total Assets : As on 01.04.2011 1,82,51,55,577 As on 31.03.2012 2,01,08,77,736 Average Assets “C” 2,83,05,94,445 A”(B/C) 51,29,547 iii One half percent of average investment 8,79,583 Total Expenditure disallowed u/s.14A 60,09,130

Similar are the facts in assessment year 2013-14 wherein the dividend income earned by assessee of Rs.11,21,57,467/-, which is claimed by assessee as exempt u/s.10(38) of the Act. The AO noted that there is a registered growth of Rs.23.78 crores in the share of fixed assets, current assets and in the balance sheet and increase in long term loans and advances at Rs.0.87 crores. According to AO, cumulatively the other assets mentioned above have also shown an increase of Rs.28.39 crores. Thereby argument of assessee regarding availability of interest free funds was rejected and computed disallowance under Rule 8D(2)(ii) i.e., interest disallowance at Rs.4,92,21,655/- and computed disallowance under - 7 - IT(TP)A Nos.77 & 78/Chny/2022 & 1035 & 1120/Chny/2022 Rule 8D(2)(iii) i.e., average value of investment at 0.5% at Rs.44,25,610/- and aggregate disallowance was made at Rs.5,36,47,265/-. The AO after giving rebate of already disallowed amount by the assessee of Rs.36,12,589/- restricted the balance addition at Rs.5,00,34,676/-.

Similarly in this year also, the assessee contended that own funds available with the assessee of Rs.114.93 crores was sufficient to meet the investment which stood at Rs.100.72 crores and this fact can be verified from the balance sheet for financial year 2012- 12 relevant to assessment year 2013-14. This fact was brought to the notice of the CIT(A) by assessee. But the CIT(A) rejected the claim of assessee and observed similar findings which is part of para 7.1.1 and for the sake of clarity, it is being reproduced as under:- The appellant relied on the decision of the ITAT Chennai in the case of EIH Associated Hotels Limited vs. Deputy Commissioner of Income Tax (Chennai Tribunal) and the decision of the Bombay ITAT in the case of Gareware Wall Ropes Ltd vs. Additional Commissioner of Income Tax ITA No.5408, 4597/Mum/2012. The AO did not accept the explanation of the appellant. He found that during the year current assets have registered growth of Rs.23.78 crores, fixed assets have registered growth Rs.3.74 crores and long term loans and advances has shown an increase of Rs.0.87 crores. Cumulatively, the other assets mentioned above have sh0wn an increase of Rs.28.39 crores. The increase in profits could also have gone into these assets. The assessee has not maintained separate accounts and this is a case of mixed borrowed funds and hence it cannot be said that the investments were made out of cash profit of the year. According to the AO,

After going through the facts in entirety, we noticed 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 of Rs.51,29,547/- 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

Briefly stated facts are that the AO on perusal of profit & loss account and balance sheet of the assessee noted that there was substantial increase in quantum of secured loans and unsecured loans during the relevant financial year 2008-09 relevant to assessment year 2009-10. The AO noted the details of total loans

The CIT(A) confirmed the action of the AO in disallowing the interest to the extent of amount advanced to its sister concern, Pradeep Shipping and donation made to Sri Sathya Sai Medical Trust by observing in para 6.3.3. to 6.3.5 as under:- “6.3.3 To consider the allowability of the interest on borrowed capital, it is necessary to find out the use of the borrowed funds and to see whether the borrowed funds were used for the purpose of business of the assessee. Considered in this angle, it can be easily inferred that the donation of Rs.5 Cr. to Sri Sathya Sai Medical Trust cannot be considered as made for the purpose of appellant's business. It is a donation made. The appellant has submitted that it was made out of interest free funds available. But for the - 12 - IT(TP)A Nos.77 & 78/Chny/2022 & 1035 & 1120/Chny/2022 donation, the appellant would have reduced its borrowing by Rs.5 cr. and avoided interest thereon. I therefore hold that the donation to Sri Sathya Sai Medical Trust was made out of borrowed funds only and the interest attributable to the said donation cannot be allowed as a deduction u/s 36(1)(i1) of the Act as capital employed in the business. I therefore sustain the addition of Rs.41,39,113/- made by the AO in this regard and dismiss the grounds raised.

The first issue in this appeal of Revenue is as regards to the order of CIT(A) deleting the addition made by AO/TPO towards adjustment on account of transfer pricing relating to barite-lumps. For this, Revenue has raised the following grounds:-

Brief facts are that the assessee is a private limited company produced minerals like Feldspar and also procures Barites, Bentonite, etc., from the mine owners, processes them to suite the requirement of the customers, transports them to the nearest port by rail and/or road, arranges export to overseas customers on FOB basis. The TPO noted that the assessee has adopted Internal cost plus method for the sale of barite lumps whereas for other items, the assessee has adopted CUP method as the most appropriate method to arrive at Arm’s length price. The TPO noted that the assessee has made sales to UAE and computed gross margin between AE and non-AE as tabulated below:- No. AE Non-AE 1 Sales 32,13,53,029 16,35,13,372 2 Material Cost 17,51,05,954 9,74,15,975 3 Direct Expenses 7,35,94,440 1,77,89,231 4 Gross Profit 1-(2+3) 7,26,53,635 4,83,08,166 5 Mark up on cost 29.21% 41.93% The TPO required the assessee to show-cause as to why the mark- up @ 41.93% why should not be taken up as markup on cost for the - 16 - IT(TP)A Nos.77 & 78/Chny/2022 & 1035 & 1120/Chny/2022 transaction with AE. The assessee vide reply dated 07.01.2013 and 17.01.2013 and during personal hearing on 10.01.2013 explained that the assessee is in the business of exports and invoices has been raised in US dollars. Hence the conversion rate at the particular time of export plays a major role in increasing or decreasing profit percentage and it has given the complete details of price realized from its export to AE, which was in the range of US $ 48.50 to 52 in the first four shipments whereas the conversion rate is in the range of Rs.39.80 to Rs.45.38. The assessee submitted the details of exports to AE as under:- Shipment date 18.04.2008 08.06.2008 08.06.2008 09.08.2008 Quantity exported Rate in USD 50 48.5 49 52 Rupee Conversion 39.8 42.92 42.29 45.38 Sale price in Rs after 1990 2081.62 2072.20 2359.76 conversion The assessee also explained that the sale with uncontrolled entity realized was at Rs.48.42, whereas none of the above 4 shipments to AE’s realized even close to the same and the maximum was Rs.45.38. It was contended that the reason for better mark up against the cost of third party is solely due to foreign currency realization but the TPO computed the ALP by adopting Rs.41.93% as gross margin by making a mark up on cost to the controlled

The 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. For this, he observed in para 5.3 as under:- “5.3 I have gone through of the case of the appellant on this issue aid considered the arguments of the AR. The TPO has ignored the submission of the appellant and not considered the increase in procurement price demonstrated by the appellant. Accordingly, the TPO has proceeded to compare the margins of AE with Non-AE, to whom there is only single export transaction made post increase in the price and so the single CUP chosen by the TPO is not appropriate one. The TPO has not taken into consideration the submissions made by the appellant demonstrating the effect of foreign exchange fluctuation on the rate charged for the sale transactions to the AE and Non-AE. The sale price to Non-AE at USD73 is not much significantly different from the sale price to the AE compared to the volume of transactions with AE. The arguments of the AR have much force which have not been rebutted by the TPO. In view of the above reasons, the adjustment of Rs.3, 16,27,440/- on account of transfer pricing made by the TPO is not sustainable and so the TP adjustment is deleted.”

We have heard rival contentions and gone through facts and circumstance of the case. 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.

The next issue in this appeal of Revenue is as regards to the order of CIT(A) deleting the disallowance of expenses made by AO by invoking the provisions of section 40(a)(ia) of the Act for non- deduction of TDS on compensatory charges. For this, Revenue has raised following ground No.3:-

Brief facts are that the AO on perusal of tax audit report noted that the assessee has paid a sum of Rs.24,44,193/- to Empire Mineral and Transport on account of plot rent. According to AO, the assessee has not deducted TDS on the above amount. Hence, he invoking the provisions of section 40(a)(ia) of the Act, made disallowance of Rs.26,44,193/- and added to the total income of the assessee. Aggrieved, assessee came in appeal before the CIT(A).

The CIT(A) has gone into the submissions of the assessee and noted that the facts recorded by AO are not correct as the assessee procures barite lumps from Andhra Pradesh Mineral Development Corporation (APMDC) for the purpose of its trading. The supplier initially agreed for interest free credit for a period of 90 days. Thereafter it has renegotiated the supplies for either cash or payment of interest for the credit period enjoyed by the assessee. The assessee has paid a sum of Rs.26,44,193/- as compensation charges for the credit period obtained by it. This amount was - 20 - IT(TP)A Nos.77 & 78/Chny/2022 & 1035 & 1120/Chny/2022 debited by the assessee under the interest. The assessee further stated that the payment made to APMDC is compensatory in nature but not interest as contemplated u/s.194A for the purpose of deduction of tax at source as held by AO. The assessee relied on the decision of Co-ordinate Bench of Ahmedabad Tribunal in the case of ITO vs. Parag Mahasukhalal Shah, [2011] 12 taxman.com 37 (Ahd-ITAT), wherein it was held that “When a payment is compensatory in nature and not related to any deposit/ debt/ loan then such a payment is out of ambits of provisions of section 194A. In this case, the assessee was allowed interest free credit for a period of 60 days. In case of overdue payment cost of Purchase was paddled with a liability to pay a Compensatory sum which was termed as interest.

Since we have already decided this issue for the assessment year 2009-10 in in preceding para 18, taking a consistent view we find no infirmity in the order of CIT(A)

In the result, the appeals filed by the assessee in & 78/CHNY/2022 are partly-allowed & ITA No.993/CHNY/2022 is allowed and both the appeals of the Revenue in ITA Nos.1035 & 1120/CHNY/2022 are dismissed.