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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: HON’BLE SHRI MAHAVIR SINGH & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member)
Aforesaid appeal by assessee for Assessment Year (AY) 2011-12 arises out of final assessment order dated 28-01-2016 passed by Ld. Assessing Officer (AO) u/s 143(3) r.w.s. 144C(5) r.w.s 92CA(3) pursuant to the directions dated 23.12.2015 of Ld. Dispute Resolution Panel-2, Bangalore (DRP) u/s 144C(5) of the Act. Since the assessee carried out certain international transactions with its Associated Enterprises (AE), the same were subject matter of determination of Arm’s Length Price (ALP) before Ld. Transfer Pricing Officer-3, Chennai (TPO) vide order u/s 92CA(3) dated 30-12-2014. Incorporating the proposed adjustment, a draft assessment order was passed by Ld. AO on 31-03-2015 which was subjected to assessee’s objections before Ld. DRP. Subsequently, Ld. TPO following directions of Ld. DRP, redetermined ALP pursuant to which final assessment was passed which is in further challenge before us. The grounds raised
by the assessee read as under: -
1. The order of the A0/DRP is contrary to law, facts and circumstances of the case.
2. Transfer Pricing Adjustment 2.1 The AO/DRP erred in confirming the adjustment of Rs.10,93,91,827/- to the Arms Length Price. 2.2 The AO/DRP erred in not appreciating that the Fertilizer Market Bulletins (FMB) contain only the range of prices of goods quoted for specific period. 2.3 The AO/DRP erred in not considering the fact that while computing the downward price adjustment for the imported raw materials, the TPO has adopted different bases to arrive at the Arms Length Price. 2.4 The AO/DRP ought to have appreciated that while computing the rate adjustments between the invoice rate and the FMB price on the order date, the higher end price should be adopted uniformly for Anhydrous Ammonia, Rock Phosphate and Sulphur Crude to arrive at the correct adjustment to the Arms Length Price. 2.5 The AO/DRP ought to have appreciated that the appellant is facing financial difficulties and does not have any working capital arrangement with its bankers to fund its day-to-day operations. 2.6 The AO/DRP ought to have appreciated that in order to avail the uninterrupted supply of raw material to its continuous process fertilizer plant, the appellant has undertaken to get the supplies from its associated enterprise on extended credit to keep the production process going. Therefore, the price charged by the associated enterprises is marginally higher to take care of the administrative overheads incurred by them.
3. Disallowance u/s 14A 3.1 The AO / DRP erred in confirming the disallowance of Rs.13,01,35,571/- as expenditure incurred in relation to the income which does not form part of the total income under Section 14A of the Income Tax Act, 1961 by applying Rule 8D. 3.2 The AO / DRP ought to have appreciated that the appellant had earned a dividend income of Rs.3,23,96, 073 /- and had disallowed an amount of Rs.17,67,713/- as expenditure to earn the exempt income.
3.3 The AO has not expressed his satisfaction as to why the expenditure disallowed by the appellant does not represent the expenditure actually incurred by the appellant to earn the exempt income. 3.4 The A0 / DRP ought to have appreciated the fact that there is no nexus between dividend income and interest expenditure. 3.5 The A0 / DRP failed to appreciate that as per Rule 8D(2) (ii), only the amount of expenditure by way of interest which is not directly attributable to any particular income or receipt alone should be considered while working out the disallowance. In the present case, the interest expenditure is directly attributable for earning its business income and hence disallowance u/s. 14A r.w.rule 8D is unwarranted. 3.6 The AO/ DRP failed to appreciate that as per Rule 8D(2) (i1), only the average value of investment, income from which does not or shall not form part of the total income, should be taken into consideration for the computation. Investments from which no dividend income was received should not be considered for the purposes for computing the disallowance. 3.7 The A0 / DRP ought to have appreciated that the investments in the domestic companies from which the dividend income of Rs. 3,23,96,073/- was earned, has reduced from Rs. 64.66 crores to Rs. 27.62 crores and that there was no fresh investment during the year. 3.8 The AO/DRP ought to have appreciated that in any case, the disallowance made u/s 14A r.w.Rule 8D cannot exceed the exempted income earned.
Disallowance of payment of funded interest converted into loan (FITL) amounting to Rs. 47,26,89,986/- 4.1 The AO/DRP erred in confirming the disallowance of Rs.47,26,89,986/- being the Funded Interest converted as Loan (FITL) on the ground of non submission of a certificate for the payment from the lenders. 4.2 The AO / DRP ought to have appreciated that the said deduction was allowed by the assessing officer at the time of scrutiny assessment proceedings, based on the evidence of payment submitted to him. 4.3 The AO / DRP ought to have considered the Boards clarification issued vide Circular No. 07/2006, dt 07.07.2006 and allowed the deduction based on bank payment advices already furnished by the assessee at the time of scrutiny assessment treating them as evidences of actual payment.
The Appellant craves leave to file additional grounds at the time of hearing.
As is evident, three issues fall for our consideration – (i) Transfer Pricing Adjustments on import and export transactions; (ii) Disallowance u/s 14A; (iii) Disallowance of interest converted into loans u/s 43B.
4 - 2. The Ld. AR advanced arguments and drew attention to various documentary evidences which are placed on record. The Ld. CIT- DR vehemently controverted the arguments of Ld. AR. Having heard rival submissions and after perusal of case records, the impugned issues are adjudicated as under. The assessee being resident corporate assessee is stated to be one of the major urea producing company.
Transfer Pricing Adjustment 3.1 The assessee imported as well as exported raw material and goods from its Associated Enterprise (AE) i.e., Wilson International Trading Pte. Ltd., Singapore. The import includes three chemicals i.e., Anhydrous Ammonia, Rock Phosphate and Sulphur Crude. The transactions were aggregated and benchmarked using Transactional Net Margin Method (TNMM). However, the assessee provided benchmarking under Comparable Uncontrolled Method (CUP) method also and comparison was made with rates quoted in Fertilizer Market Bulletin (FMB) which provide weekly price data of various products and stated to be an acceptable standard. The rates given in the FMB were CFR rates while the import made by the assessee were on CIF rates. The difference was of marine insurance, an additional cost for the assessee, for which an adjustment of 0.10% was granted. The assessee sought credit period adjustment on the ground that AE granted credit period of 120 days as against normal credit period of 30 to 60 days and therefore, the same was to be factored in. The same was also considered by Ld. TPO.
5 - 3.2 After making comparison on transaction-by-transaction, instances were noted wherein the assessee paid excess price as compared to the lower end of the published prices as per FMB bulletin. Applying the principle of ‘Buy Low and Sell High’, Ld. TPO worked out downward adjustment of Rs.888.88 Lacs in the import transactions. The assessee made export of phosphoric Acid. Applying the same principle, Ld. TPO proposed upward adjustment of Rs.226.52 Lacs. In other words, Ld. TPO proposed aggregate Transfer Pricing adjustment of Rs.1115.41 Lacs. The assessee objected to the adjustment, inter-alia, on the ground that there was no published record as to how much quantity was shipped and at what prices. However, the same could not find favor with Ld. TPO. 3.3 Before Ld. DRP, the assessee sought admission of additional evidences which were in the form of agreements with its AEs. The Ld. DRP chose not to admit the same on the ground that these documents were always available with the assessee but the assessee chose not to produce the same before Ld. TPO. The explanation that the person in charge left the taxation department and new incumbent was not fully conversant with the matter, was not convincing. 3.4 Finally, Ld. DRP directed Ld. TPO to adopt the middle value of the price band in FMB price list to iron out the various factors like insurances, extended credit facility etc. The directions of Ld. DRP reduced the TP additions to Rs.1093.91 Lacs which were incorporated in the final assessment order. Aggrieved, the assessee is in further appeal before us.
6 - Our findings and Adjudication 4. We find the dispute to be in a very narrow range. The import and export transactions have been benchmarked on transaction-to- transaction basis on the basis of rates published in FMB bulletin. The price quoted therein gives a broad price range and accordingly, the middle price has been accepted while working out TP adjustments. Another fact is that the published prices do not provide any information about quantities shipped at those rates. It could also be seen that the assessee sought examination of additional evidences which were not admitted by Ld. DRP. A plea has been raised by Ld. AR to admit these evidences since the same is stated to have material bearing on the determination of ALP. Considering all these facts and prima-facie concurring with the submissions so made, we direct Ld. TPO / AO to admit these additional evidences and rework the TP adjustments after re-examination of the same. The Ld. AR has pleaded for grant of safe harbor / tolerance range which may also be considered by Ld. TPO in accordance with law. The assessee is directed to provide requisite information and evidences in support of its case. The corresponding grounds stand allowed for statistical purposes.
5. Disallowance u/s 14A 5.1 The assessee earned exempt dividend income of Rs.323.96 Lacs and offered suo moto disallowance of Rs.17.67 Lacs u/s 14A. The Ld. AO, applying Rule 8D, computed aggregate disallowance of Rs.1551.73 Lacs which was direct expenses disallowance u/r 8D(2)(i) for Rs.17.67 Lacs, interest disallowance u/r 8D(2)(ii) for 7 - Rs.1040.82 Lacs and indirect expenses disallowance u/r 8D(2)(iii) for Rs.493.23 Lacs. 5.2 The Ld. DRP substantially endorsed the view of Ld. AO except to the extent of issuing directions that investment made in foreign companies was to be excluded since the same would not give rise to exempt income in the hands of the assessee. Considering the same, Ld. AO recomputed disallowance u/r 8D at Rs.1301.35 Lacs which was direct expenses disallowance u/r 8D(2)(i) for Rs.17.67 Lacs, interest disallowance u/r 8D(2)(ii) for Rs.870.94 Lacs and indirect expenses disallowance u/r 8D(2)(iii) for Rs.412.73 Lacs. Aggrieved, the assessee is in further appeal before us. Our findings and Adjudication 6. The limited submissions of Ld. AR are that own funds far exceed the investments made by the assessee and therefore, a presumption would arise that the investments were funded out of own funds. Further, majority of the investments are old investments for which interest disallowance is not justified. Lastly, it is the submission of Ld. AR that only exempt yielding investments are to be considered while working out the disallowance. We find that both the pleas are duly supported by binding judicial precedents. Therefore, we direct Ld. AO to examine whether the own funds exceed the investments made by the assessee and the investments are old investments only. If so, interest disallowance would not be justified. Further, while working out the disallowance, only exempt income yielding investments are to be considered by Ld. AO. We order so. This ground stand allowed for statistical purposes.
Disallowance of interest converted into loans 8 - In the computation of income, the assessee reduced sum of Rs.4726.89 Lacs being funded interest converted as Loan (FITL) on payment basis u/s 43B. In earlier assessment orders for AY 2003- 04, 2004-05 & 2005-06, Ld. AO disallowed FITL for Rs.122.43 Crores as per Explanation 3(c) and 3(d) of Sec.43B on the ground that the interest was converted into loan only and not actually paid. During AY 2010-11, an amount of Rs.89.23 Crores was disallowed for want of certificate from lending bank. Out of above disallowance, the assessee claimed deduction of Rs.47.26 Crores in this year based on actual payment. The assessee submitted that it had taken loans from banks & financial institutions. A certain portion of interest payable was converted into loans which were disallowed in AYs 2003-04 to 2005-06. Out of this disallowance, Rs.89.23 Crores was claimed allowable interest in AY 2010-11. The loan was repaid without segregating the interest portion. The Ld. AO held that there could be innumerable variations in repayment arrangement / schedules entered into by the lender and borrowers. It may, therefore be not possible to visualize all kinds of arrangement which may be entered into by lenders and borrowers in this regard. The fundamental principle would remain that once an amount has been determined as interest payable to banks of financial institutions, any subsequent change of nomenclatures of interest would not affect its allowability and deduction in terms of Sec.43B. Accordingly, the claim was denied for want of payment certificate from lender bank. The Ld. DRP confirmed the stand of Ld. AO against which the assessee is in further appeal before us.
9 - Our findings and Adjudication 8. From the facts, it emerges that outstanding interest on loan has been disallowed in earlier years u/s 43B since the same was converted into loans and there was no actual payment. The assesses has subsequently settled the loans and make a claim for deduction of interest on the ground that the same has actually been paid. However, as rightly noted by lower authorities, the assessee is not in possession of necessary evidences to support the same and not able to provide even the basic working of bifurcation of interest and principal component. No such evidences or computations have been placed before us. We also concur with the observations of Ld. AO that there could be innumerable variations in repayment arrangement / schedules entered into by the lender and borrowers. It may, therefore be not possible to visualize all kinds of arrangement which may be entered into by lenders and borrowers in this regard. The fundamental principle would remain that once an amount has been determined as interest payable to banks of financial institutions, any subsequent change of nomenclatures of interest would not affect its allowability and deduction in terms of Sec.43B. Therefore, by confirming this disallowance, we dismiss the grounds raised by the assessee, in this regard. Conclusion
9. The appeal stands partly allowed for statistical purposes. Order pronounced on 08th February, 2023. Sd/- Sd/- (MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL) उपा23 /VICE PRESIDENT लेखा सद; / ACCOUNTANT MEMBER चे*ई / Chennai; िदनांक / Dated : 08-02-2023 EDN/- 10 - आदेश की Wितिलिप अ8ेिषत/Copy of the Order forwarded to : 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु�/CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF