LT FOODS LTD.,NEW DELHI vs. DCIT, NEW DELHI

PER N.K. BILLAIYA, ACCOUNTANT MEMBER:-

These two separate appeals by the assessee are preferred

against the order dated 17.10.2012 pertaining u/s 143(3) r.w.s

144C(13) of the Income-tax Act, 1961 [hereinafter referred to as 'The

Act'] for Assessment Years 2008-09 and 2009-10.

issues. Therefore, they are being disposed of by this common order

for the sake of convenience and brevity.

ITA No. 6221/DEL/2012.

“1. That reference to special audit under section 142(2A) is illegal and bad in law and the report submitted by the special auditor is illegal, bad in law and without jurisdiction.

On Transfer Pricing

4.1 That in view' of the facts and circumstances of the case and in law the AO /TPO has erred on facts and in law in making addition of R.s. 64,48,052/- (Rs.9,23.713/- + Rs. 32,86,303/- + 22,38.036/-) on account of adjustment in international transactions carried out with associate enterprises in view of order u/s 92CA(3) of the Transfer Pricing Officer I (3) and DRP has erred in not directing to deleting the said adjustment.

4.2 That the addition of Rs. 9,23.713/- on account of export of goods is illegal, bad in law, unjust and highly excessive.

4.3 That the addition of Rs. 32,86,303/- on account of arm’s length interest on loans to AE's is illegal, bad in law, unjust and highly excessive.

4.4 That the addition of Rs. 22,38.036/- on account or 1I11C1&OL receivables from AE’s is illegal, bad in law, unjust and highly excessive.

4.5 That without prejudice and in the alternative the AO/TPO and subsequently D.R.P. has erred in law and on facts in not allowing/directing the deduction / adjustment to the arm’s length price of 5% range as the assessee has the right to exercise this option u/s 92C.

4.6 That without prejudice the interest on loans to AE’s already charged in the books of accounts and in its return of income has not been considered by the A.O. / T.P.O. and the same has not been reduced while making the addition / adjustment.

Disallowance of Deduction U/s 80IB(11A)

5.1 That in the absence of any incriminating material found during the search the AO has erred on facts and in law and has exceeded his jurisdiction in making disallowance of deduction u/s 80IB(11 A).

5.2. That in view of the facts and circumstances of the case and in law the A.O. has erred in law and on facts in not following Ld. D.R.P. directions to verify the issue afresh.

Addition U/s 14A r/w Rule 8D

Addition on Account of Personal Expenses

7.1 That in view of the facts and circumstances of the case and in law the erred in law and on facts in taking wrong, figure of. addition under the head personal expenses.

Disallowance of Deduction of Bad Debts

8 That in view of the facts and circumstances of the case and in law the A.O./D.R.P has erred in not allowing the deduction of 17,82,951/- claimed as bad debts by the appellant while computing the income under the Income Tax Act, 1961.

Disallowance U/s 40a(ia) on Account of Non/Short Deduction of TDS

9.1 That the DRP has in view of the facts and circumstances of the case has erred in law and on facts in holding that identical issues has come up for their consideration in appellant’s case for A.Y. 2008-09.

9.2 That the addition of Rs. 7,26,890/- on account of short deduction of TDS is illegal, bad in law, unjust and highly excessive.

9.3 That the addition of Rs. 2,58,94,143/- on account of non deduction of TDS is illegal, bad in law, unjust and highly excessive.

case records carefully perused and with the assistance of the ld.

Counsel, we have considered the documentary evidences brought on

record in the form of Paper Book in light of Rule 18(6) of the ITAT

Rules, 1963.

he is not pressing ground No. s 1 to 7. Therefore, the same are

dismissed as not pressed.

separate adjudication. Ground No 8.2 relates to the addition of Rs.

23,857/– on account of export of goods.

the year under consideration, the assessee has exported rice to its

Associated Enterprise [AE] namely Kusha Inc. USA and NICE

International, aggregating to Rs. 2588.15 lakhs. For the purpose of

benchmarking the said transaction, the assessee has applied

CUP/TNMM method as the most appropriate method. For application

of CUP method, the average price per unit of international

transaction of export of various grades of rice was compared with

average price per unit of exports of same grade of rice to un-related

party in export and domestic market.

paper book and the same is as under:

on sale of rice to AE is higher/within range +/- 5% of the price

charged from un-related third parties. Therefore, transaction of

export of rice to AE was considered to be at arm’s length price by the

assessee.

transaction applying TNMM. For application of TNMM profit over sales

earned by the assessee from sales made to AE is computed with profit

over sales earned from sales made to unrelated third parties in export

and domestic market and the same is available at page 59 of the

paper book which can be summarized as under:

AE/ Non-AE Brands OP/ Sales AE - KUSHA (USA) ROYAL BRAND 16.88% OTHER BRAND 13.51% AE - NICE ALL BRAND 9.24% Average 16.08% NON-AE BASMATI (EXPORT) 10.76% NON-BASMATI (EXPORT) 4.44% DOMESTIC RICE (ALL BRANDS) 2.23% AVERAGE 6.26%

transaction was considered to be at arm’s length price by the

assessee.

the TPO required the assessee to provide comparison of price of goods

sold to its AE vis-a-vis sales made to unrelated third parties on daily

basis.

assessee, the TPO picked up three transactions wherein the price

charged by the assessee from the AE was lower than the price charged

in the sales made to non-AEs. We find that though the benefit of

range of +/- 5% was available to the assessee, but the same was

denied by the TPO who proceeded to make TP adjustment of

Rs.23,857/– as under:

Date Wei Uncont Count date fob Com Par ght rolled ry Valu pari fob Av. Av. Diffe ty party E (IN Rs.) son Val Rat E Rate rence UE (IN (IN IN (IN RS/ rs/ amou Rs.) MT) mt) NT NICE 08.03. 4 1552 3880 Palm JAMAIC 17.07. 16076 40191 5550 INT. 2007 14 3 Rose A 2007 4 1387 NICE 08.03. 8854 4427 DashMe SINGAP 278111 44497 -227 455 Int. 20017 1 0 sh ORE 2 08.08. 2007 62 3962 4750 NETHER 0303. 57352 47793 -286 17852 606 7 LANDS 2008 00 28.02. KHUS Van 2008 HA SILLEVEO CORP LDT Total 23857

effect of 5% allowance is not applicable in the CUP method where the

prices are compared on daily basis from transaction to transaction.

92C(2) by Finance Act No. 2 Act, 2009 with effect from 1.10.2009, the

action of the TPO is against the provisions of the amended section. In

our understanding of the law, prior to amendment made to section

92C of the Act, benefit of range of +/- 5% was available only where

the arm’s length price Is determined by considering the arithmetical

mean of a number of such uncontrolled prices. But post amendment,

second Proviso to section 92C reads as under:

“Provided further that if the variation between the ALP for determining the price at which international transaction or specified domestic transaction has actually been undertaken does not exceed such percentage of the latter as may be notified by the central government in official gazette in this behalf, the price at which international transaction or specified domestic transaction has actually been undertaken shall be deemed to be ALP.”

second proviso shall also be applicable to all assessments or

reassessment proceedings pending before the Assessing Officer as on

the first day of October 2009. The order of the TPO is dated

30.10.2011, which means that the amended second proviso was very

much applicable on the facts of the case.

range of 5% is required to be computed qua arithmetical mean of the

ALP determined by the TPO was changed to arm’s length range of 5%

required to be computed qua transaction price.

DDIT Vs. Development Bank of Singapore 155 TTJ 265 wherein the

coordinate bench has held that benefit of range of +/- 5% is available

not only to a situation where more than one price is determined as

ALP by the most appropriate method but also where only one price is

determined as ALP.

transaction of export of rice undertaken by the assessee with its AE

and the same is as under:

Party Date Uncontr date FOB Com Differ % OF FOB Av. Av. OLLED Value paris Ence in differ Val Rate Rate party (In on amoun ence UE (In (in RS.) T (IN RS/ RS/ RS.) MT) MT) 160764 401 -1387 5550 -3.58% 91 Nice 38803 Palm 08.03. 1552 17.07. int. 2007 14 Rose 2007 278111 444 -227 455 -0.51% 44270 97 Nice 08.03. 8854 08.08. DashMes Int. 20017 1 h 2007 3962 0303. 573520 477 -286 17852 -0.60% Van khus 606 47507 2 0 93 SILLEVEO HA 28.02. 008 ldt CORP 2008

export of rice undertaken by the assessee with its AE is within range

of +/- 5% of the ALP. It has been brought to our notice that in

subsequent assessment years, i.e. 2012–13, 2013–14 and 2014–15, the

TPO himself has accepted TNMM analysis undertaken by the assessee

in bench-marking such transaction of export of rice.

08.03.2019, has deleted the adjustment made by the TPO by

upholding the TNMM analysis. Bench-marking under TNMM done by the

assessee, mentioned elsewhere, shows that the impugned transaction

is at ALP and needs no adjustment. We, accordingly, direct the

Assessing Officer to delete the TP adjustment. Ground No. 8.2 is

allowed.

of arm’s length interest on loans to AEs.

loan amounting to US dollars 2.50 lakhs to its AE Sona Global Ltd at an

agreed rate of interest of 12% per annum and, accordingly, charged

interest. For the purpose of bench-marking this transaction, the

assessee applied CUP method and on the basis of bank sanction letter

issued by Oriental Bank of Commerce and ICICI Bank, held that since

the interest paid by the assessee to bank in India is lower than the

interest charged by the AE at 12% per annum, transaction was

reported to be ALP.

the assessee to furnish ledger accounts of all AEs. The same was

furnished by the assessee and from such ledger account, the TPO

picked up transactions of receivables outstanding against the routine

expenses incurred by the assessee on behalf of its AE and re-

characterized them as unsecured loan.

at 17.26% on the basis of information sought from Crisil Ltd under

section 133(6) of the Act which provided yield from BBB rated Bond at

14.39%.

assumed credit rating of AE to be D and formed a belief that the

arm’s length rate of interest charged by the assessee ought to be 20%

over yield of triple BBB rated bonds, i.e 120% of 14.39% and adopted

interest rate of 17.26% and made adjustment.

transaction of issue of loan to the AE is undertaken by the assessee in

foreign currency i.e US dollars. Therefore, the rate of interest on such

loan for the purpose of application of CUP should be considered to be

foreign currency lending by unrelated parties which is LIBOR rate of

interest.

High Court in the case of Cotton Naturals (I) Pvt Ltd ITA No.

233/2014.

and vehemently stated that since the loan was given by an Indian

company, SBI PLR should be adopted.

Delhi High Court in the case of Cotton Naturals [supra], while

discarding the application of PLR of SBI on foreign currency

denominate loan, observed as under:

“39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/ assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on

currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re- paid normally determines the rate of return on the money lent, i.e. the rate of interest……

Cylinder Limited ITA No. 7073/MUM/2012 for Assessment Year 2008-

09 has also held that rate to be used for undertaking an adjustment

should be LIBOR and not the average yield rates.

we find that the LIBOR rate of interest was 5.124% whereas the

interest charged by the assessee was 12% per annum. Therefore, we

are of the considered opinion that no TP adjustment is required on

this transaction. Ground No. 8.3 is allowed.

behalf of Nice International Inc and LT Overseas Inc. While imputing

interest rate of 17.26%, the TPO has also applied the same on the

receivables outstanding against routine expenses incurred by the

assessee on behalf of its AE.

employees/directors travelling abroad and also facilitated payment of

certain expenses on behalf of the AE. The said payment of expenses

by the assessee were for a very short period of time and were

adjusted against similar expenditure incurred by AE on behalf of the

assessee.

are done under normal business circumstances during regular course

of business and should not be considered as loan. Our view is fortified

by the OECD guidelines, wherein at para 1.648 has mentioned as

under:

“1.64 A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured."

It is not in disputed that shares have been allotted and share certificates have duly been issued, in respect of the aforesaid share application money on various dates in the succeeding year.

The allotment of shares, it would be appreciated, has happened within a reasonable period of time of 12 to 18 months, with approval of shareholders of the respective companies and satisfaction of necessary regulatory compliance. Considering that the bonafides of the said transaction is not in dispute and further considering that there were no extra ordinary / exceptional circumstances warranting re-characterization of share application money into loan, the action of the TPO in re- charactering the share application money, against which shares have been allotted in the subsequent year would amount to disregarding the legitimate act of increase in share capital by the companies. The TPO, in our respectful submission, therefore, clearly erred in treating the transaction of payment by way of share application money as loan and imputing notional interest thereon.”

Navigation Co. 56 ITR 52 has held that every indebtness cannot be

construed to have arisen out of loan transaction and interest is

involved only in relation to a debt created out of loan transaction.

assessee in regular course of if its business are considered as loan and

in light of ratio of laid down by the Hon’ble Supreme Court [supra]

read alongwith OECD guidelines [supra] we do not find any merit in

such adjustments and the same are directed to be deleted.

During the course of TP assessment proceedings, it was noticed from

the invoice-wise details of rice sold to AE that the assessee has

received sale consideration after some time lag, beyond the period

agreed to between the parties that is 25 days to 120 days. Such

details are at pages 24 to 30 of the TPO order.

unsecured loans advanced to the AE and imputed notional interest @

7.26% and, accordingly, proposed adjustment of Rs.28.57 lakhs which

was upheld by the DRP. However, the DRP directed the TPO to

consider the rate of interest at 12.72% being PLR of interest by SBI.

made at Rs. 21,05,962/–. Before us, the learned counsel placed strong

reliance on the decision of the Hon’ble jurisdictional High Court of

Delhi in the case of Kusum Healthcare Limited ITA No. 765/2016 and

also relied upon the decision in the case of Avenue Asia Advisors 398

ITR 120.

also been suitably factored in sale price as operating profit margin of

the assessee is much higher than operating margin of the comparable

companies.

is also in receipt of remittances against sale of rice from unrelated

3rd parties wherein also, on similar delay, no interest has been

charged by the assessee.

and read the relevant observation of the Assessing Officer/DRP.

Jurisdictional High Court of Delhi in the case of Kusum Healthcare Pvt

Ltd [Supra] has held as under:

“10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression “receivables'' does not mean that de hors the context every item of “receivables'' appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Appellant will have to be studied. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way.

Court, the contention of the assessee that no interest has been

charged from non-AEs on similar delay cannot be brushed aside

lightly. In fact, in the case of Aura OI SAS, delay was of 81 days and in

the case of Sabi Foods, delay was of 52 days and no interest was

charged by the assessee.

the assessee vis a vis comparable companies from where it can be

seen that the operating profit margin of the assessee is much higher

than that of the comparable companies.

the Hon’ble Jurisdictional High Court [supra[ and keeping in mind that

no interest was charged from receivables from non-AES, we are of the

considered view that this adjustment is unwarranted and,

accordingly, direct the Assessing Officer to delete the addition of Rs.

21,05,962/–. Ground No. 8.4 is, accordingly, allowed.

Act amounting to Rs.12,34,19,871/–.

in fact, is the fifth year of claim, which means that this claim was

allowed/ considered in the earlier Assessment Years.

Year 2004-05 which was allowed by the Assessing Officer. Thereafter,

in the reassessment proceedings, claim was reduced by the Assessing

Officer.

said assessments were completed u/s 153A of the Act. Assessment

orders for Assessment Years 2004-05 to 2006-07 were quashed by the

Tribunal as the same were based de hors any incriminating material.

decided on merits by this Tribunal in ITA No. 4046/DEL/2013 in the

case of L.T. Foods Ltd wherein, on identical facts, the Tribunal

allowed deduction claimed u/s 80IB(11A) of the Act. The relevant

findings read as under:

harvest food grain losses by creating infrastructure, therefor.

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furtherance of the above object of enhancing the food security by achieving the greater efficiency in the grain management system and minimizing the post-harvest food grain losses. If the unit of the assessee at Bahalgarh strives to achieve these objectives, it would certainly be entitled to the benefit of deduction under section 80IB(11A) of the Act. We are of the considered opinion that for this 27 purpose we will have to keep it in mind that the incentive is provided for the integrated business of handling, storage and transportation of food grains with this particular avowed object and, therefore, there shall not be any compartmentalization of these activities for the purpose of allowing the deduction.

activities are part of the treatment of paddy which is in essence dehusking the rice and treatment carried out by the assessee are part of the agricultural operations and both the rice and ask continue to remain food grain and continue to remain agricultural products.

bring efficiency in the grain management system and incurring significant expenditure to facilitate transportation of food grains by way of acquiring trucks, tractors and trolleys and has also hired trucks for the purposes of carrying food grains from the farmers and mandis to its storage blocks and thereafter to the markets, followed by upgradation and modernization of infrastructure for handling of food grains in order to bring greater efficiency in the storage and grain management system and minimize post- harvest food grain losses. Assessee also brought it to the notice of the learned Assessing Officer that the special auditors in the report at pages number is 30 and 31 part II volume 5 observed that the condition that the assessee should be engaged in the business of handling, storage and transportation of food grains was fulfilled.

human consumption by placing them in the markets, and more particularly, avoiding the losses in threshing and winnowing by better mechanical methods, following sanitation during drying, milling and after milling to avoid contamination of grains and protect from insects, rodents and birds, using proper technique of processing i.e. cleaning, parboiling and milling, adopting the grading practices to get more profit and to avoid the economic losses, and using efficient and good packaging for storage, as well as in transportation, by investing more than Rs.30 crores for setting up of the eligible unit and for this purpose advanced machinery with improved technology would coincide with the provision.

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that in order to be eligible to claim the benefits under section 80IB(11A) of the Act, whether the assessee is required to install all such facilities or such facilities at suit the convenience of the assessee while meeting the avowed object of 80IB(11A) of the Act would entitle the assessee to claim such benefit is the mute question.

significantly enhance the life of the food grain , reduces the loss of food grain and contributes to the preservation of food grains. If those activities do not answer the description of handling, we wonder what would be handling. The word has to be understood in its contextual sense and merely because the learned Assessing Officer does not agree with the assessee to include the milling of the paddy is covered by “handling”, it does not take away the other activities from the meaning of handling, so long as such activities keep nexus with the objective for which the benefit is intended. Whether or not the de-husking of paddy would form part of the handling, we shall deal with it a little later. In our opinion, the activities carried out by the assessee certainly form part of the expression “handling.”.

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the business of modern warehouses' which has not been done. In such circumstances, while reaching the conclusion that the assessee is entitled to deduction under section 80IB(11A) of the Act, the Tribunal made a reference to the case of L.T. Overseas (P.) Ltd for the assessment year 2004- 05 and 2005-06 in which case the deduction under section 80IB(11A) of the Act was allowed to the assessee who was conducting the activities which were identical to the activities conducted by the assessee in the case of Laxmi Energy (supra) and the assessee before us.

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are applicable to the activities of the assessee like clearing, steaming, soaking, drying, polishing and grinding it can also be not denied that de-husking the paddy would significantly enhance the life of the food grain, thereby reduces the loss of food grain and contributes to the preservation of food grains. In such an event, we are unable to understand how this particular process does not fit in the expression “handling”. For these reasons, we are of the considered opinion that the de-husking of the paddy to convert it into rice is also an integral part of reducing the post-harvest food grain loss.

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return a finding the fact was undertaken by the learned Assessing Officer before reaching the conclusion that more than 20% of the machinery at Bahalgarh unit had become old prior to 1/4/2001.

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number1 to 3 of Revenue’s appeal devoid of merits and reliable to be dismissed.”

followed by this Tribunal in the case of Group company M/s Daawat

Foods Ltd for Assessment Year 2009-10 in ITA No. 4042/DEL/2013 and

for Assessment Years 2011-12 to 2014-15 in ITA Nos. 5345 to

5348/DEL/2018.

the Revenue, respectfully following the decision of the co-ordinate

bench [supra], we direct the Assessing Officer to allow claim of

deduction u/s 80IB(11A) of the Act. Ground No. 9, alongwith sub

grounds is allowed.

the Rules.

the Assessing Officer that the assessee has received income of Rs.

69,40,799/- in respect of which exemption was claimed u/s 10 of the

Act. This exempt income comprises of:

i) Share of profit in partnership firm M/s Raghunath Agro Industries, Amritsar - Rs. 68,76,452/-

ii) Dividend income from investment in mutual funds - Rs. 64,347/-

Invoking the provisions of section 14A of the Act r.w.r 8D of the Rules,

the Assessing Officer disallowed Rs. 53,26,986/- after deducting suo

moto disallowance of Rs. 16,13,813/- by the assessee.

concerned, in Assessment Year 2007-08, this Tribunal in ITA No.

4164/DEL/2013 vide order dated 30.09.2020 has deleted the

disallowance. The relevant findings read as under:

“95. We have gone through the record, in the light of the submissions made on either side. It could be seen from the assessment order, vide paragraph number 11, there were made the report of the special auditor as the basis for the disallowance, special auditor worked out the total disallowance

under section 14A of the Act read with Rule 8D of the Rules at rupees, 41, 80, 208/-, but in view of the provisions of section 14A of the Act, he restricted the disallowance to the exempt income and determined the same at Rs.18,18,915/-. Nowhere in the order, assessing officer had considered the accounts of the assessee as to what could have been the expenditure, that has to be allocated for earning the exempt income.

of the Rules. Such an addition is, therefore, is directed to be deleted. Ground number 17 is accordingly allowed.”

delete the disallowance made u/s 14A of the Act qua the share of

profit from partnership firm amounting to Rs. 68,76,452/-.

is concerned, suo moto disallowance of Rs. 16,13,813/- by the

assessee should cover the same. Therefore, no further disallowance is

required. Ground No. 10 is, accordingly, allowed.

Assessing Officer without following the directions of the DRP.

been made to the tune of Rs. 11,86,947/- which comprises of the

following:

a) Foreign travelling of wives of the directors Rs. 5,73,775/-

b) Payment made to Sundari Apparels I. P. Ltd Rs. 50,000/-

c) Payment made to Shadi Online Pvt Ltd Rs. 1,25,000/-

d) Payment made for taxi bills Rs. 95,948/-

e) Payment made to Sycoriam Matrimonial Services Ltd Rs. 1,00,000/-

f) Payment made to Health Resort Rs. 1,79,584/-

disallowances/additions referred in (b) to (f) above. Therefore, the

same additions referred to in (b) to (f) are confirmed.

is concerned, we find that the DRP has made the following

observations:

“We have carefully considered the issue, the reasoning of the AO for making the disallowance and the submissions of the ARs. The expenditure on travel of the wives and the directors abroad when they have accompanied the directors in business towards is an allowable expenditure. The AO is directed to allow the expenditure on the travel of the wives of the directors when they have accompanied the directors on foreign visits after verification……..”

DRP. We, accordingly direct the Assessing Officer to follow the

directions of the DRP and decide the issue accordingly. The Assessing

Officer is further directed to consider the decision of this Tribunal in

assessee’s own case in ITA No. 4164/DEL/13 for AY 2007 – 08. Ground

No. 11 is partly allowed.

holding same as capital expenditure and not allowing deduction of Rs.

1,96,66,561/-

year under consideration, the assessee incurred expenditure

aggregating to Rs.2.87 crores in connection with identification of

opportunities outside India to explore the possibility of expansion of

distribution of network to boost the exports. Of the total expenditure

so incurred, an amount of Rs. 1,71,61,328/– was expenditure for

exploring business opportunities which was incurred prior to

acquisition of Kusha Inc. USA. The same was claimed as revenue

expenditure and the balance amount was capitalized and not claimed

as deduction.

that the same was capital in nature.

allowance given by the Assessing Officer/DRP is that the said

expenditure was incurred towards acquisition of the company Kusha

Inc. USA.

stated that the expenditure was incurred much prior to acquisition of

Kusha Inc and loss incurred in order to undertake market analysis

helps to increase export sales of the assessee in USA.

wanted to increase its foothold in USA by increasing its export sales

but it did not have its own distribution network in USA. The assessee

had availed professional services in the form of due diligence and

advisory from various consultants. The break up of the expenses is as

under:

Sl. No. Particulars Amount Remarks 1. Avendus Capital (P) Ltd. Rs.1,05,19,549 Finance advisory for identifying Target Company 2. Price WaterHouse Rs.12,29,106 Tax and regulatory advise prior to acquisition 3. The Chug Firm Rs.17,62,541 Legal and financial due diligence prior to acquisition 4. Trademark Rs.10,100 Trade mark registration expenses 5. Ernst & Young Rs.15,19,669 Brand valuation expenses 6. Lakshmi Kumaran & Sridharan Rs.19,20,364 Legal advisory on feasibility of acquisition 7. Safron Capital Advisory (P) Rs.2,00,000 Valuation reports Ltd. Revenue Expenditure Total Rs.1,71,61,328

below. A perusal of the aforementioned bifurcation of expenses shows

that the expenses have been incurred on due diligence and advisory

report conducted by the professional firms and on the basis of such

report/analysis the assessee identified the target company Kusha Inc

for acquisition to help expand export sales of the assessee in USA.

of Rs. 48,94,90,338/– to USA out of which substantial sales to the tune

of Rs. 28,56,81, 443/– was made to Kusha Inc.

company increased threefold as under:

Sl. No. F.Y Total Sales in USA Total; Sales to Kush Qty (MT) Amt(Rs.) Qty (MT) Amt (Rs.)

incurred by the assessee for the purpose of running business more

efficiently with a view to enhance profit in regular course of business.

It would be pertinent to mention here that the impugned expenditure

was not incurred by the assessee for acquisition of Kusha Inc. But, the

expenses were incurred prior to acquisition of the said company. We

find that expenditure of Rs. 1,15,36,451, incurred towards acquisition

of Kusha Inc has been capitalized by the assessee.

133 ITR 756 has held that commercial expediency and direct and

immediate benefit to trade are relevant factors. A sum of money

expanded, not of necessity and with a view to a direct and immediate

benefit to the trade, but voluntarily and on the ground of commercial

expediency and in order to indirectly to facilitate the carrying on of

the business, may yet be expended wholly and exclusively for the

purpose of trade.

as per the chart mentioned elsewhere, we are of the considered view

that the expenditure was incurred to increase profitability and

efficiency of the assessee‘s business overseas which was incurred in

the normal course of business. Keeping in mind that the expenditure

incurred for acquisition of Kusha Inc USA has been capitalized, the

Hon'ble Karnataka High Court in the case of United Breweries Ltd321

ITR 546, inter-alia, held as under:

“68. That leaves us with the other question, namely, as to whether the Tribunal was right in allowing the legal expenses of Rs. 15 lakhs incurred towards obtaining advice and by way of consultation fees paid to the auditors of the assessee-company as to the feasibility of acquiring a brewery unit in South Africa

memorandum of appeal in ITA No. 492 of 2001 in favour of the assessee and against the revenue” (emphasis supplied).

expenditure incurred on obtaining professional advice/consultancy

which is inherently nature in nature, is allowable, as business

deduction, even if such professional services have been obtained in

connection with acquisition of a capital asset.

Whitely Ltd 198 ITR 753 had the occasion to consider the following

facts:

“The assessee-company, carrying on the business of manufacture and sale of electrical insulating press boards, etc., was authorised under its articles and memorandum of association to carry on the business of promoting other companies In pursuance of that object, the assessee obtained on 14-8-1973 a licence from the Government of India for the establishment of a new' industrial undertaking for the manufacture of mica paper with the intention of transferring it to a new company to be called L. This new company L was incorporated on 28-6-1976. The import licence to import the requisite certain materials, which stood earlier in the assessee's name, was amended on 23-11-1977 to transfer it in the name of company L.

During the process of setting of the industrial undertaking, the assessee incurred expenditure totalling Rs. 24,83,743 on construction of building and purchase of machinery, etc. After the setting up of undertaking and incorporation of new company the assessee had to get approval from the Reserve Bank of India which was given in December 1977 before it could transfer the factory building and other assets to the new company. A certain number of shares of the new company were allotted to the asses- see in consideration of the transfer of these assets. During the years 1975-76 and 1976-77, interest on borrowings which were made for the purpose of these assets was allowed as business expenditure but a similar claim for deduction during the assessment years 1977-78 and 1978-79 was rejected by the 1TO on the ground that the borrowings were made to create assets which were diverted as the capital of new company L.

The Tribunal, however, allowed the claim of the assessee for deduction of interest on the borrowings.”

“The Appellate Tribunal was justified in concluding, from the facts and circumstances, that there was no trusteeship in respect of the setting up of the new company by the assessee, and that the expenditure incurred on the setting up of the

undertaking (or the unit) to manufacture mica paper was a expenditure incurred by the assessee as part of its existing busies operation. If, for any reason, the Government of India or any statutory authority refused to permit the new company to have the import licence or have the share allotted to the petitioner in lieu of the transfer of assets, these assets would have continued with the assessee as the business assets of the assessee. Therefore, the answer to the question referred to us has to be necessarily in the affirmative.

It is also clear that mica paper is a product consumable by the assessee or could be marked along with other articles produced by the assessee and mica paper belonged to the broad group of those other articles manufactured by the assessee. The test of interconnection between the two businesses is satisfied here.”

that the expenditure amounting to Rs. 1,71,61,328/– incurred on due

diligence and advisory reports prior to acquisition of Kusha Inc

deserves to be allowed as revenue expenditure. We, accordingly,

direct the Assessing Officer to allow the same.

ground 12.2.

with M/s Lucky House, Hyderabad and Lucky House Hyderabad started

using ‘Daawat’ trademark which resulted in dispute between the

assessee and the said party.

pursuance of negotiations undertaken, an MOU was signed with M/s

Lucky House and it was mutually agreed that Lucky House shall not

use the trademark and in pursuance of the said agreement, the

assessee made advance payment of Rs. 25,05,233/– in Assessment

Year 2006-07 and 2007–8.

to use the Daawat trademark and once again an understanding was

arrived wherein it was mutually agreed that advance of Rs.

25,05,233/– paid to M/s Lucky House would be treated as full and

final settlement of the dispute and, accordingly, the same was

debited to the Profit and Loss Account claimed as business deduction.

confirmed it.

pursuant to the understanding entered into with Lucky House, the

impugned amount was treated as full and final settlement of the

dispute and therefore, the same is an allowable expenditure under

section 37(1) of the act.

There is no dispute that the impugned amount was paid as final

settlement of the dispute which arose due to infringement of use of

trademark Daawat. In our considered opinion, any expenditure

incurred by the assessee to protect its trademark in the ordinary

course of business is to be allowed as revenue expenditure because it

was a commercial expediency on the part of the assessee to have

made the said payment to protect unlawful use of its trademark and

the same was incurred wholly and exclusively for the purpose of

business. We, accordingly, direct the Assessing Officer to allow

deduction of Rs. 25,05,233/–. Ground No. 12 along with sub-grounds

is allowed.

under section 40(a)(ia) of the Act.

during the course of assessment proceedings and on perusal of the

financial statements of the assessee, found that the assessee has

claimed expenditure of Rs. 2,97,02,201/– on which no tax was

deducted at source and further found that on Rs. 18,44,145/- there

was a short deduction of TDS.

evidence in support the impugned amount which were sought to be

disallowed under section 40(a)(ia) of the Act. Detailed breakup of the

expenditure is as per the following chart:

Nature of payment As per AO Remarks Sl. No. 1. Freight Reimbursement of freight Charges of 1,54,78,051 paddy paid by party on behalf of assessee – Amount paid is below taxable limit.

is concerned, the learned counsel, at the very outset stated that he

has nothing much to say. In respect of other expenditure, the learned

counsel stated that the reasons given in the chart are self

explanatory.

so far as freight and labour charges are concerned, the same are

reimbursements and in our considered view, there is no liability of

TDS on reimbursement of expenses.

book. We find that each payment is below the limit on which tax is

not required to be deducted at source.

and since the non-resident does not have any PE in India, its income is

not taxable in India and, therefore, there is no liability for TDS.

section 194C of the Act does not apply on such payment.

Assessment Year 2007–08 was deleted by the ld. CIT(A) and the

revenue did not prefer any further appeal.

Container Lines Ltd, which is a foreign shipping company to which

section 172 of the Act applies and, therefore, there was no liability to

deduct tax at source.

concerned, the assessee did not claim this as expenditure and,

therefore, there is no question of any disallowance.

used for fire extinguisher and since it is a purchase item there is no

liability for TDS.

7,65,850/- and bonus paid to farmer of Rs. 6,06,576/- are confirmed.

concerned, the same is set aside to the file of the AO. The assessee is

directed to furnish details and demonstrate that the recipients have

shown the income in their respective returns of income and the AO is

directed to verify the same and decide the issue afresh.

amounting to Rs. 4,59,658/– is also set aside to the file of the

Assessing Officer with similar directions. Rs. 84,758/– has been

claimed as casting error. There is no liability of TDS on such

accounting error. With the above observation Ground No. 13 with all

sub- grounds is partly allowed.

234A, 234B and 234D of the Act. Since there is no delay in filing of

returns, there cannot be any levy of interest for delay in filing of

returns. Advance tax has to be considered on the basis of returned

income and the Assessing Officer has to verify whether there was any

deferment of advance tax on the returned income and decide the

charging of interest afresh after affording reasonable and sufficient

opportunity of being heard to the assessee.

allowed.

ITA No. 6222/DEL/2012 [Assessment Year 2009-10]

“1. That the search conducted under Section 132 is illegal, bad in law and without jurisdiction and the assessment made U/s 153A is also bad in law and without jurisdiction.

5 That the special auditor has erred on facts and in law in scrutinizing and auditing those issues which are not part of the terms of reference and has exceeded his jurisdiction in making observations about those issues in the audit report submitted.

8.1 That in view of the facts and circumstances of the case and in law the A.O. / T.P.O. has erred on facts and in law in making addition of Rs. 26,77,884/- (Rs.23,857/- + Rs 5,48,065/- + 21,05,962/-) on account of adjustment in international transactions carried out with associate enterprises in view of order u/s 92CA(3) of the Transfer Pricing Officer I (3) and DRP has erred in not deleting the said

adjustment.

8.2 That the addition of Rs. 23,857/- on account of export of goods is illegal, bad in law, unjust and highly excessive.

8.3 That the addition of Rs. 5,48,065/- on account of arm’s length interest on loans to AE’s is illegal, bad in law, unjust and highly excessive.

8.4 That the addition of Rs. 21,05962/- on account of interest on account receivables from AE’s is illegal, bad in law, unjust and highly excessive.

8.5 That without prejudice and in the alternative the A.O. ' T. P. O. and subsequently D.R.P. has erred in law and on facts in not allowing/directing the deduction / adjustment to the arm’s length price of 5% range as the assessee has the right to exercise this option u/s 92C.

8.6 That without prejudice the interest on loans to AE’s already charged in the books of accounts has not been considered by the A.O. / T.P.O. and the same has not been reduced while making the addition / adjustment.

Disallowance of Deduction U/s 8016(11 A)

9.1 That in the absence of any incriminating material found during the search the A. O. has erred on facts and in law and has exceeded his jurisdiction in making addition / disallowance of deduction under section 80IB(11A).

9 2 That in view of the facts and circumstances of the case and in law the A.O. has erred in law and on facts in not following Ld. D.R.P. directions to verify the issue

afresh.

Addition U/s 14A r/w Rule 8D

Addition on account of personal expenses

11.1. That in view of the facts and circumstances of the case and in law the A.O. has erred in law and on facts in not following Ld. D.R.P. directions by not allowing the expenditure of Rs.

5,73,775 - on travel of the wives of the Directors.

Disallowance of Revenue Expenditure

12.1. That in view of the facts and circumstances of the case the AO/D.R.P. has erred in not appreciating that the expenditure incurred of Rs. 1,71,61,328/- for acquiring a subsidiary was in order to facilitate the business and was an allowable business expense as the same is in the nature of business expense.

12.2. That in view of the facts and circumstances of the case the AO /D.R.P. has erred in not appreciating that Rs. 25,05,323/- paid to lucky house was to protect the business interest of the appellant and for facilitating me business as the same is in the nature of revenue expense.

12.3. That in view of the facts and circumstances of the case the D.R.P. has erred in holding that Rs 25,05,323/- paid to lucky house was to eliminate the competition.

12.4 That without prejudice and in alternative the AO/D.R.P. has erred in not allowing depreciation on Rs. 1,96,66,651/- (Rs.

1,71.61,328/- + Rs. 25,05,323/) which is alleged to be expenditure of capital in nature.

Disallowance U/s 40a(ia) on Account of Non/Short Deduction of TPS

13.1 That the DRP has in view of the facts and circumstances of the case has erred in law and on facts in holding that TDS was deductible from payment of room rent to the hotels and covered by the definition of rent for the purpose of deduction of TDS.

13.2 That the addition of Rs. 2.92,02,201/- on account of non deduction of TDS is illegal, bad in law, unjust and highly excessive.

any material on record.

separate adjudication.

on account of adjustment in international transactions carried out

with AEs.

i) Rs. 9,23,713/- on account of export of goods;

ii) Rs. 32,86,303/- on account of arm’s length interest on

loan to AEs; and

iii) Rs. 22,38,036/- on account of interest receivables from

AEs.

year, the assessee has exported rice to its AEs Kusha Inc and Nice

International FZE aggregating to Rs. 17745.05 lakhs. The assessee has

claimed the said international transactions to be at arm’s length by

bench marking under both the methods i.e. CUP and TNMM as under:

AE/ Non-AE Brands OP/ Sales AE - Kusha (USA) Royal Brand 7.44% 7.39% OTHER BRAND AE - Nice ALL BRAND 20.05% Average 7.48% Non-AE All export 6.35% DOMESTIC RICE (ALL BRANDS) 7.72% Average 7.25%

Brands OP/Sales Operating profit margin of appellant 11.86% OPERATING PROFIT MARGIN OF COMPARABLE COMPANIES 9.85%

pari materia same as are considered in ITA No. 6221/DEL/2012 for

Assessment Year 2008-09. For our detailed discussion therein, Ground

No. 4 with sub-grounds is allowed and the Assessing Officer is directed

to delete the impugned addition aggregating to Rs. 64,48,052/-.

Act amounting to Rs. 2,15,30,363/-.

for Assessment Year 2008-09 qua Ground No. 9 with sub-grounds. For

our detailed discussion therein, the Assessing Officer is directed to

allow the claim of deduction u/s 80IB(11A) of the Act. Ground No. 5

with sub-grounds is allowed.

the Rules.

consideration, the assessee has received income aggregating to Rs.

4,60,06,679/- in respect of which exemption was claimed u/s 10 of

the Act. The said income comprises of :

i) Share of profit in partnership firm M/s Raghunath Agro Industries, Amritsar -Rs. 1,22,40,470/-

ii) Dividend income from shares of listed companies - Rs. 3,37,66,209/-

r.w.r. 8D. Disallowance has been computed by the assessee as under:

S. No. Particulars Amount - Direct expenditure 1 Rs.91,27,768 Interest expenditure incurred during the year attributed in the ratio of average value of investments resulting in exempt income to 2 average value of total assets [35,03,43,431 * 18,49,67,190/ 7,09,94,39,881] Rs.9,24,836 3 'A % of average value of investments [0.5% * 18,49,67,190] Total Rs.1,00,52,694

Assessing Officer who proceeded by computing the disallowance as

under:

S. No. Particulars Amount - Direct expenditure 1 Rs.2,51,21,682 Interest expenditure incurred during the year attributed in the ratio of average value of investments resulting in exempt income to 2 average value of total assets [43,55,97,066 * 40,94,37,717/ 7,09,94,39,881] Rs.20,47,189 3 A % of average value of investments [0.5% * 40,94,37,717] Total Rs.2,71,68,870 Less: Suo-motu disallowance made by appellant Rs.1,00,52,694 Disallowance u/s 14A Rs.1,71,16,266

DRP.

as exempt income being share of profit from Raghunath Agro

Industries is concerned, the same has been considered in earlier

Assessment Years also and no disallowance should be made in so far as

this exempt income is concerned.

counsel for the assessee that the Assessing Officer/DRP grossly erred

in attributing interest expenditure when the assessee has sufficient

own funds to make investment and placed strong reliance on the

decision of the Hon'ble Bombay High Court in the case of Reliance

Utilities & Power Ltd 313 ITR 340.

Assessing Officer.

authorities below. We have also perused the disallowance made by

the Assessing Officer mentioned elsewhere. In so far as exempt

income relating to share of profit from Raghuram Agro Industries is

concerned, the same was also considered by us in ITA No.

6221/DEL/2012 for Assessment Year 2008-09 vide Ground No. 10 of

that appeal. For our detailed discussion therein, no disallowance

needs to be made in so far as share of profit from partnership firm is

concerned.

assessee has sufficient own funds to make investment and, therefore,

the ratio laid down by the Hon'ble Bombay High Court in the case of

Reliance Utilities & Power Ltd [supra] squarely applies. Therefore,

attribution of interest expenditure of Rs. 2,51,2,682/- is uncalled for

and the same is directed to be deleted.

since the assessee has suo moto disallowed Rs. 1,00,52,694/-, further

disallowance is not necessary and the Assessing Officer is directed to

delete the disallowance of Rs. 20,47,187/-. Ground No. 6 is,

accordingly, allowed.

not pressed.

Act.

disallowed a sum of Rs. 2,58,94,143/- on account of non deduction of

TDS and Rs. 7,26,890/- on account of short deduction of TDS.

can be understood from the following chart:

Sl. Nature of As per AO Remarks No. payment Freight charges Reimbursement of freight Charges of paddy paid by 1 Rs.1,66,40,816 party on behalf of assessee - Amount either paid is paid on purchase below taxable limit. of Paddy & Rs.9,58,753 Only reimbursement of labour charges to Aarthiyas. TDS 2 Labour Charges provisions are not applicable

No expenditure is booked in our books, payment made on behalf of third party. Accordingly there is no liabilty 3 Steamer Freight Rs.31,95,770 to deduct tax at source and also the provisions of section 40(a)(ia) are not applicable in the case. 4 Commission Rs.42,153 TDS was duly deducted. Ledger a/c filed before AO/DRP Brokerage paid on behalf of suppliers. No expenditure for the same is booked in books of account. Accordingly there 5 Brokerage Rs.23,30,401 is no liabilty to deduct tax at source and also the provisions of section 40(a)(ia) are not applicable in the case. Overwriting TDS was duly deducted at the time of making provisions. 6 Rs.5,01,316 Commission Ledger a/c filed before AO/DRP Inland Haulage & Rail Freight charges paid on which no TDS is applicable 7 BL Charges Rs.4,80,326 U/S 194C. Amount Paid to agent of Foreign Shipping Co. - Section 8 Detention Charges Rs.4,66,656 172 applicable - 9 Job work Charges Rs.1,72,500 Other Expenses - Antenna installation, Annual report 10 Rs.5,61,165 - posting and handling charges, BAAN Support Fee, Courier Rs.75,254 - 11 Marriage event Rs.4,63,232 - 12 services Interest on security - 13 Rs.5,805 deposit Total Rs.2,58,94,147

was considered by us in ITA No. 6221/DEL/2012 for Assessment Year

2008-09 vide Ground No. 13 with sub grounds of that appeal. For our

detailed discussion therein, we follow the findings given therein.

the file of the Assessing Officer. The Assessing Officer is directed to

demonstrate that the recipients have show income in their respective

return of incomes and the Assessing Officer is directed to examine the

same and decide the issue afresh. Disallowance of Rs. 4,63,232/- on

marriage event services and interest on security deposit of Rs. 5,805/-

are sustained.

separate adjudication.

directed to decide the same keeping in mind that the interest on

delay in filing return of income is to be levied only when there is a

delay and interest on default of payment of advance tax is on the

basis of returned income.

and 6222/DEL/2012 are partly allowed.

The order is pronounced in the open court on 11.04.2022 in the

presence of both the rival representatives.

Sd/- Sd/- [YOGESH KUMAR U.S] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 11 April, 2022.

VL/

Copy to :

Asst. Registrar, ITAT, New Delhi

Date of dictation Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr.PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr.PS/PS Date on which the final order is uploaded on the 18.04.2022 website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order