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Facts
The appeals by the Revenue concerned Assessment Years 2012-13 and 2013-14, involving identical issues related to transfer pricing adjustments on account of delayed realization of export receivables. The Assessing Officer/TPO made additions, which were partly allowed by the CIT(A).
Held
The Tribunal noted that the issue of charging interest on delayed realization of export receivables had been decided in favor of the assessee in its own cases for earlier years. The CIT(A) had followed these decisions. While the Revenue argued for differences in facts, the Tribunal found that the consistent policy of not charging interest on receivables from AEs and non-AEs was a key factor. For AY 2013-14, the Tribunal restored the issue to the AO/TPO for denovo adjudication, clarifying that if the assessee establishes a consistent policy, no addition shall be made. For AY 2012-13, a similar approach of restoration was adopted.
Key Issues
Whether interest should be charged on delayed realization of export receivables from Associate Enterprises (AEs) when the assessee has a consistent policy of not charging interest on similar delays from both AEs and non-AEs. Whether disallowance under Section 14A can exceed the exempt income earned.
Sections Cited
143(3), 144C(3), 92B, 92CA(3), 14A, 80D(2)(iii)
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Income Tax Appellate Tribunal, “H” BENCH, MUMBAI
order : 27.10.2025 O R D E R [ Per Rahul Chaudhary, Judicial Member: 1. These are two appeals preferred by the Revenue pertaining to Assessment Years 2012-2013 and 2013-2014. Since the appeals involved identical issues arising from common factual matrix the same were heard together and are, therefore, being disposed off by way of a common order.
ITA No.2281/Mum/2025 [Assessment Year 2013-2014] 2. First we would take up appeal preferred by the Revenue for the Assessment Year 2013-2014 against the Order, dated 02/01/2025, Assessment Year 2012-2013 & 2013-2014 passed by the Commissioner of Income Tax (Appeals) – 58, Mumbai [hereinafter referred to as the ‘CIT(A)’], whereby the Ld. CIT(A) had partly allowed the appeal of the Assessee against the Assessment Order, dated 15/02/2017, passed under Section 143(3)(ii) read with Section 144C(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).
2.1. The Revenue has raised following grounds of appeal in [Assessment Year 2013-2014] :
1. Whether on the facts and circumstances and in law the Ld. CIT(A) is right in deleting the ALP adjustment on account of delayed realization of export receivables from AEs relying on the decision of the Hon’ble ITAT in assessee’s own case for A.Y.2009-10 which is not accepted by the department? 2. Whether on the facts and circumstances and in law the Ld. CIT(A) is right in not realizing the fact that there was no uniformity in the credit period allowed to AEs and non AEs for payment of their dues, as in the case of AEs the weighted average days of sales realization was 108 days while in the case of non AEs, the weighted average days of sales realization was 63 days? 3. Whether on the facts and circumstance of the case and in law, the Ld. CIT(A), is right in not appreciating the fact that explanation to Sec 92B, inserted by the Finance Act, 2012, with retrospective effect from 01.04.2002, explains that international transaction includes deferred payment or receivables arising during the course of business as an international transaction to the benchmarked for computation of Arm’s Length Price?
4. Whether on the facts and circumstance of the case and in law, the Ld. CIT(A), is right in relying on the decision of the Hon’ble ITAT was relied on Hon’ble ITAT Coordinate Bench in Gitanjali Exports case which held that Explanation to section 92B was prospectively applicable for AY 2013-14 onwards, when the AY under consideration is AY 2013-14? 5. Whether on the facts and circumstance of the case and in law, the Ld. CIT(A), was justified restricting the addition of Rs.1,46,736/- made by Assessing Officer Assessment Year 2012-2013 & 2013-2014 u/s.14A r.w.s. 80D(2)(iii) to Rs.1,04,863/-, without appreciating the facts that there is no evidence furnished by the assessee to prove that the borrowed funds on which interest is paid by it, are directly attributed to earning of taxable income only?”
3. The brief fact of the case shows that the Assessee, a private limited company engaged into the business of manufacturing, import and export of diamonds, filed its return of income for the Assessment Year 2013-2014 on 23/11/2013 declaring income of INR.43,08,33,110/-. The case of the Assessee was selected for regular scrutiny. During the assessment proceedings the Assessing Officer noted that the Assessee had entered into international transaction with Associate Enterprises (AE) and therefore, reference was made to the Transfer Pricing Officer (TPO) for determination of Arms’ Length Price (ALP). The TPO noted that the Assessee was not charging interest on receivable outstanding from AE. The Ld. TPO directed the Assessee to file weighted average realization period of Accounts Receivables from AE and non-AE during the relevant previous year. In response, the Assessee furnished relevant details stating that the weighted average days of sales realization from AEs and non-AEs stood at 108 days and 63 days, respectively. Therefore, the TPO issued show-cause notice to the Assessee requiring the Assessee to explain why interest should not be charged on delayed realization of export receivables from AEs. Vide letter dated 26/08/2016, the Assessee submitted that (a) there was uniformity of act on the part of the Assessee in not charging interest from AEs as well as non-AEs for delay in realization of export proceeds (b) only interest on actual delays to be charged, (c) the Assessee should be granted the benefit of set-off of notional interest on premature payments by AEs and for delay payments to AEs for imports, and (d) interest rate, in any, be charged at 3 months LIBOR rate of 0.3829. However, the TPO was not convenience, and passed order under Section 92CA(3) of the Act making an upward transfer pricing adjustment of INR.5,67,81,371/- in respect of interest on delayed Assessment Year 2012-2013 & 2013-2014 realization of the export receivables from AE beyond the period of 63 days. The Assessing Officer incorporated the aforesaid transfer pricing adjustment in the Draft Assessment Order, dated 26/12/2016, passed under Section 143(3)(ii) r.w.s. 144C (1) of the Act. Vide, letter dated 27/01/2017, the Assessee opted not to file objections before the Dispute Resolution Panel and therefore, the Assessing Officer passed the Final Assessment Order, dated 15/02/2017, under Section 143(3)(ii) r.w.s. 144C (3) of the Act and made transfer pricing addition of INR.5,67,81,371/- for the Assessment Year 2013-14.
Being aggrieved, the Assessee preferred appeal before the Ld. CIT(A) against the Final Assessment Order, dated 15/02/2017, which was disposed off as partly allowed vide impugned order dated 02/01/2025, passed under Section 250 of the Act. The Ld. CIT(A) deleted the transfer pricing additions by following the decision of the Tribunal in Assessee’s own case for the Assessment Year 2009-2010 03/08/2020] and 2010-2011 [ITA No.79/Mum/2015, dated [ITA No.5710/Mum/2016, dated 14/12/2022].
5. Being aggrieved, the Revenue has preferred the present appeal before the Tribunal on the grounds reproduced at Paragraph 2 above.
6. During the course of hearing the Learned Departmental Representative submitted that the CIT(A) had erred granting relief to the Assessee by placing reliance upon the decision of the Tribunal in the case of the Assessee for the Assessment Year 2009-2010 [ITA and 2010-2011 No.79/Mum/2015, dated 03/08/2020] [ITA 14/12/2022] without appreciating the No.5710/Mum/2016, dated difference in the facts. It was submitted that for the Assessment Year 2013-2014, the delay in realization of receivables from the AEs was more than the Non-AEs as per the details furnished by the Assessee. The transfer pricing adjustment was made in only for the number of days delay in realizing receivables in excess of the weighted average Assessment Year 2012-2013 & 2013-2014 number of days taken by the Assessee to realize receivables from non-AEs. Reliance was placed in this regard was placed on the order, dated 31/08/2016, passed by the TPO under Section 92CA (3) of the Act.
7. The submissions advanced by the Learned Departmental Representative were opposed by Learned Authorized Representative for the Assessee. Placing reliance upon the decision of the Tribunal in the case of the Assessee for the Assessment Year 2009-2010 [ITA No.79/Mum/2015, dated 03/08/2020] and 2010-2011 [ITA No.5710/Mum/2016, dated 14/12/2022], the Learned Authorized Representative for the Assessee submitted that issue raised in present appeal stood decided in favour of the Assessee by the aforesaid two decisions of the Tribunal in the case of the Assessee. It was submitted that there was no infirmity in the order passed by the Ld. CIT(A) since the Ld. CIT(A) had followed the decisions of the Tribunal in the case of the Assessee. It was vehemently submitted that the Assessee was not charging any interest on delayed realization of receivables from Non-AEs and therefore, the Learned Authorized Representative for the Assessee submitted that the Assessee has consistently not charged interest on sales receivables, whether from AEs and Non-AEs, over multiple years. To substantiate this, the Learned Authorized Representative for the Assessee referred to the findings of the Ld. CIT(A), which confirm this practice. Additionally, the Learned Authorized Representative for the Assessee highlighted that in several instances, non-AEs took over 200 days to settle sales outstanding which is much more than the average time taken by the AEs, yet the Assessee did not charge interest, demonstrating a uniform policy of not levying interest on overdue receivables, irrespective of the nature of the enterprise.
We have heard both the sides and have perused the material on record. Assessment Year 2012-2013 & 2013-2014 9. We find that the Ld. CIT(A) had deleted the Transfer Pricing additions by observing as under:
6.1.4 Facts of the case and submission of the assessee have been examined. On the issue of whether delay in export realization is international transaction, the issue has been settled against the assessee by ITAT in its own case for earlier year. In the case of the assessee for A.Y. 2009-10 and for A.Y. 2010-11 the TPO had made transfer pricing adjustment on similar issue of charging of interest on account of delay in export realization from the AE and the matter was travelled till ITAT. The ITAT Mumbai vide its order dated 03.10.2019 (ITA No.968/Mum/2016) had restored the matter to the file of DRP to examine factual aspect and reconciliation. Accordingly, the DRP has passed order on 06.01.2020 and has deleted the transfer pricing adjustment made by the TPO for A.Y.2011-12. The relevant portion of directions of the DRP is reproduced as under: “The assessee's submission and facts of the case have been carefully considered. It is seen that the appellant does not charge interest on outstanding receivables both from AEs and Non AEs. Also the assessee does not pay interest on outstanding payables to both AEs and Non AEs. This is the business practice of the assessee and it is also seen that the delay in payment is more from Non AEs than AEs, 246 days in case of Non AEs as against 190 days in case of AEs. Accordingly, in view of the judgements of Hon'ble Bombay High Court referred to supra, no addition of notional interest can be made in this case. The TPO is accordingly directed to delete the addition.
Since, identical facts are involved in this year also, transfer pricing adjustment on account of notional interest made by the TPO relating to delayed in export realization has been deleted. Accordingly, these grounds of the appeal are Partly Allowed.”
On perusal of the above, it is clear that the Ld. CIT(A) had placed reliance upon the decision of the Tribunal in the case of the Assessee for the Assessment Year 2009-2010 [ITA No.79/Mum/2015, dated 03/08/2020], 2010-2011 [ITA No.5710/Mum/2016, dated 14/12/2022] Assessment Year 2012-2013 & 2013-2014 and 2011-2012 [ITA No.968/Mum/2016, dated 03/10/2019].
11. We have perused the order, dated 03/08/2020, passed by the Tribunal in pertains to Assessment Year 2009- 2010, we find that the Tribunal had returned the following factual findings:
“14. We have noted that explanation to Sec.92B of the Act has been inserted vide Finance Act, 2012 and held as prospective by Coordinate Bench in Asstt. CIT v. Gitanjali Exports Corpn. Ltd. [2017] 81 taxmann.com 452 (Mum). Further, we have noted that there is average delay in receivable from AE of 39 days and in case of none AEs 44 days. There is no dispute that the assessee is not charging interest from none AE on such export receivable. Co-ordinate Bench of Tribunal in Gitanjali Exports Corpn. Ltd. (supra) also held that where no interest is charged from Non-AEs. i.e. independent transactions, as well, there cannot be any occasion to make an ALP adjustment, for notional interest, on delay in realisation of trade debts from AEs.
Considering the aforesaid facts and in view of the law as referred above, when the assessee is adopting the uniform policy for none charging interest on export receivables from AE and none AE and moreover the transaction with regard to sale of cut and polished diamonds has been accepted by the TPO at ALP, no notional interest was warranted. In the result Grounds No.1 to 5 of the appeals are allowed.” (Emphasis Supplied) On perusal of above, it is clear that for the Assessment Year 2009- 2010 the delay in realization of receivables from AE was 39 days and from Non-AE’s was 44 days. Therefore, delay in realizing receivables from AE’s was less than the delay in realizing delay in receivables from non-AE’s.
Similarly, on perusal of order passed by the Tribunal for the Assessment Year 2010-2011 [ITA No.5710/Mum/2016, dated 14/12/2022], we find that the Tribunal as recorded as under:
“03. During the course of assessment proceedings, it was found Assessment Year 2012-2013 & 2013-2014 that for A.Y. 2009-10 adjustment of ₹1.51 crores was made on account of delayed realization of export proceeds beyond invoice credit period from its Associated Enterprises. Therefore, show cause notice was issued to the assessee on the issue. The assessee submitted that there is industry practices of not charging interest on delayed payments, outstanding receivable is also not a separate international transaction and further the fact of trade credit is already included in the sale price. Further no interest was charged on account of global financial crisis.
4. The learned Transfer Pricing Officer rejected the contentions. He found that credit period given to Associated Enterprises and non-Associated Enterprises is 150 days, further 30 days credit is granted on account of industry practice and therefore, total credit period of 180 days is claimed by the assessee. Same is not supported by any evidence. The learned Transfer Pricing Officer held that other arguments of the assessee are vague and unsubstantiated. Accordingly, he computed the interest on delayed realization of export proceeds considering the interest at the rate of 5.69% and proposed the adjustment of ₹24,27,405/- to the international transaction. Thus, Order under Section 92CA (3) of the Act was passed on 30th September, 2013. 05. xx 06. The assessee preferred the appeal before the learned CIT (A). The learned CIT (A) on the issue of outstanding receivable holding that it is a separate international transaction. The learned CIT (A) held that the learned Assessing Officer is correct in charging interest on outstanding receivable from Associated Enterprises. He further held that for A.Y. 2009-10, the learned CIT (A) has confirmed identical addition. On the issue of disallowance of interest of ₹5,79,000/-, he further rejected the contention of the assessee raised before the learned Assessing Officer of interest free funds availability and confirmed the disallowance. Therefore, the assessee is aggrieved and is in appeal before us.
The learned Authorized Representative submitted that the learned CIT (A) has relied upon the decision of the learned CIT (A) in A.Y. 2009-10. The order of the learned CIT (A) was challenged by the assessee before the Tribunal in which was decided on 3rd August, 2020, wherein the identical addition was deleted vide paragraph no. 14 and 15 of that order. His argument was that non-charging Assessment Year 2012-2013 & 2013-2014 of interest is trade practice, and no interest is charged on outstanding of independent third party and therefore, same was deleted in A.Y. 2009-10. He submitted that the decision of the co-ordinate Bench requires to be followed.
8. Even independently, he submitted that there is internal CUP available as the credit period of non-Associated Enterprises and Associated Enterprises is also similar. He referred to paper book page no. 347 to 368 and submitted that the credit period to the Associated Enterprises and non-Associated Enterprises is same. Therefore, outstanding receivable, despite being an international transaction, no interest is required to be charged. As according to CUP method there is no difference between the Associated Enterprises transaction credit days and non Associated Enterprises credit period. 09. xx xx 010. The learned Departmental Representative vehemently supported the orders of the lower authorities. On the issue of outstanding receivable he submitted that if assessee would like to take benefit of CUP method then assessee has to show the similar credit period allowed to the non Associated Enterprises on the similar time period. He further stated that in certain cases the credit period allowed to the non Associated Enterprises is only 10 days where the credit period allowed to the Associated Enterprises is 180 days. Therefore, the internal CUP available on the face of the records clearly suggests that adjustment is proper. He submitted that assessee has failed to prove that evidence about the industry practices of non-charging interest. On the issue of interest disallowance, he supported the order of the learned Assessing Officer and learned CIT (A).
We have carefully considered the rival contentions and perused the orders of the lower authorities. The fact suggests that the learned Assessing Officer/ Transfer Pricing Officer has considered the export receivable from its associated enterprises as international transaction separate from export. We do not find fault with above approach of the learned Assessing Officer confirmed by the learned CIT (A). Moment export proceeds remain outstanding beyond agreed credit period; it becomes a transaction of loan or financing to the Associated Enterprises. This is different from the transaction of export. Thus there is an international transaction of overdue outstanding of export receivable from AE which is separate from international transaction of export of goods. Assessment Year 2012-2013 & 2013-2014 012. As it is a separate transaction it needs to be benchmarked on the facts of the case, we find that the export dues are outstanding for similar period from non Associated independently. If the assessee has kept the export proceedings outstanding for similar period from a non associated enterprises and did not charge interest thereon, and has also not charged interest on similar period overdue period on overdue outstanding of AEs, then there is a comparable instances available to state that Arms’ length price of international transaction of overdue export proceeds of AE is at Arm’s length. In the present case on the bills/invoices itself assessee has mentioned the credit period on export receivable of AE and Non-AE. In case of independent third parties on similar transaction with similar credit period of similar goods no interest is charged. This fact is proved by the assessee for this year by producing the bills of AE as well as Non-AEs. Therefore, We find that non-charging of interest on advances being overdue export proceeds from Associated Enterprises as a comparable internal CUP as for similar time on similar conditions, for almost similar period no interest is charged from Non Associated Enterprises. In view of this, we find that Arms Length Price of overdue Export proceeds and receivable from Associated Enterprises is ₹ Nil.
We also hasten to add that assessee has failed to show any evidence that there exists a trade practice of not charging interest on overdue advances of export proceeds. Even common sense defies such an argument. Assessee has also failed to show any evidence that due to recession the interest was not charged. Evidence were not laid down that there was recession in the business of the assessee in this year or when there was boom, assessee was charging interest on such advances.
In view of this, we reverse the orders of the lower authorities; direct the learned Transfer Pricing Officer/ Assessing Officer to delete the above adjustment. Accordingly, ground no.1 of the appeal is allowed.” (Emphasis Supplied) From the above, it is clear that the Tribunal has observed that the Assessee has failed to bring on record to establish that there existed trade practice of not charging interest on export receivables in the Assessment Year 2012-2013 & 2013-2014 relevant industry. However, the Tribunal has recorded that Assessee was able to prove, by brining on record invoices raised by AEs and Non-AEs, that no interest was being charged by the Assessee from Non-AEs is respect of similar transaction with similar credit period of similar goods.
13. Further, we note that vide order, dated 03/10/2019, passed by the Tribunal in the case of the Assessee for the Assessment Year 2011- 2012 [ITA No.968/Mum/2016, dated 03/10/2019], identical issue was remanded back to the Dispute Resolution Panel with observing as under:
“4. Upon perusal of para-4 of order u/s 92CA (3) dated 31/12/2014 passed by Ld. Transfer Pricing Officer, it transpires that the assessee had submitted as under: - As a matter of business policy, the assessee neither charges any interest to its AEs and non-AE debtors nor pays any such interest to its AE and non-AE creditors. The said submissions were reiterated by the assessee before learned DRP also which is evident from assessee’s submissions as extracted in the directions of Ld. DRP on page no.-10 of the directions dated M/s. S. Vinodkumar Diamonds Pvt. Ltd. Assessment Year :2011-12 3 14/12/2015. It was also submitted that maximum delay from AE was 190 days in comparison to maximum delay of 246 days in case of non-AE customers and no interest has been charged in either of the case. We find that although Ld. DRP, at para 5.2 considered this aspect, however, failed to consider the ratio of cited judicial precedent rendered by Hon’ble Bombay High Court which was cited by the assessee in its submissions.
Therefore, after due consideration, the bench formed an opinion that the matter was to be restored back to the file of Ld. DRP to examine this factual aspect and re-consider the assessee’s submissions in the light of binding judicial precedents as cited in preceding paragraph-2.
The other grounds have neither been argued nor been delved into by us and therefore, the same are left open.” The Ld. CIT(A) has referred to order passed by the Dispute Resolution Panel in the set aside proceedings and has reproduced the relevant extract of the said order which reads as under:
The assessee's submission and facts of the case have been carefully considered. It is seen that the appellant does not charge interest Assessment Year 2012-2013 & 2013-2014 on outstanding receivables both from AEs and Non-AEs. Also the assessee does not pay interest on outstanding payables to both AEs and Non AEs. This is the business practice of the assessee and it is also seen that the delay in payment is more from Non-AEs than AEs, 246 days in case of Non-AEs as against 190 days in case of AEs. Accordingly, in view of the judgements of Hon'ble Bombay High Court referred to supra, no addition of notional interest can be made in this case. The TPO is accordingly directed to delete the addition.
On perusal of above it emerges that the DRP has returned a finding that for the Assessment Year 2011-2012 (a) the Assessee was not charging interest on outstanding receivables from both AEs and Non- AEs, and (b) the delay in realizing receivables from Non-AEs was more than the delay in realizing receivables from AEs.
14. Thus, on perusal of the decisions of the Tribunal for the Assessment Year 2009-2010, 2010-2011 and 2011-2012, it becomes clear that the decision of the Tribunal was based upon factual findings pertaining to the respective assessment year.
15. It is admitted position that the invoices pertaining to the Assessment Year 2013-2014 clearly provide for credit period. The Assessee has furnished statement giving details of the credit period as per invoices pertaining to the relevant previous year. Thus, the invoices do provide for a credit period. At the same time we also note that for the Assessment Year 2009-2010, the Tribunal had noted that the TPO had accepted the purchase/sales made by the Assessee to its AEs to be at arms length. Same is the position for the Assessment Year 2013-2014. For the Assessment Year 2011-2012, the DRP has returned a finding that the Assessee has been consistently following policy of not charging interest on delayed realization of receivables. However, from the material on record it cannot be ascertained whether the Assessee has been consistently following the policy of not charging interest from AEs and non-AEs for delayed realization of receivables. For the Assessment Year 2010-2011, the Tribunal has [in paragraph 12 of the Order dated 14/12/2022 passed in had taken note of all the aforesaid facts and Assessment Year 2012-2013 & 2013-2014 had concluded that for similar credit period provided to the non-AEs the Assessee was not charging any interest and taking that as a benchmark, the Tribunal concluded that the ALP of interest on receivables was ‘Nil’. The relevant extract of the decisions of the Tribunal reads as under:
“012. As it is a separate transaction it needs to be benchmarked on the facts of the case, …………….In the present case on the bills/invoices itself assessee has mentioned the credit period on export receivable of AE and Non-AE. In case of independent third parties on similar transaction with similar credit period of similar goods no interest is charged. This fact is proved by the assessee for this year by producing the bills of AE as well as Non-AEs. Therefore, We find that non-charging of interest on advances being overdue export proceeds from Associated Enterprises as a comparable internal CUP as for similar time on similar conditions, for almost similar period no interest is charged from Non Associated Enterprises. In view of this, we find that Arms Length Price of overdue Export proceeds and receivable from Associated Enterprises is ₹ Nil.” (Emphasis Supplied) 16. The DRP has given a finding for the Assessment Year 2011-2012, that the Assessee was following policy of not charging interest on delayed receivables from AEs and non-AEs. For the Assessment Year 2013-2014, the Assessee had taken similar stand before the TPO. However, the order passed by the TPO does not deal with the same in detail and the material on record is not sufficient to arrive at conclusion in this regard. Accordingly, we deem it appropriate and in the interest of justice to set aside the Transfer Pricing Addition of Rs. INR.5,67,81,371/- and restore the issue back to the file of TPO/Assessing Officer for denovo adjudication of this issue as per the decision of the Tribunal in the case of the Assessee for the Assessment Year 2010-2011 [ITA No.5710/Mum/2016, dated 14/12/2022]. It is clarified that in case the Assessee is able to establish that for the Assessment Year 2013-2014, the Assessee was following a consistent policy of not charging interest from AEs and non-AEs, no transfer pricing addition shall be made in view of the Assessment Year 2012-2013 & 2013-2014 decision of the Tribunal in the case of the Assessee for the Assessment Year 2009-2010 [ITA No.79/Mum/2015, Dated 03/08/2020]. Since was have remanded the issue back to the file of Assessing Officer/TPO, Assessee would be at liberty to raise all the rights and contentions. The Assessing Officer/TPO is directed grant to the Assessee a reasonable opportunity of being heard before passing the order. Accordingly, Ground No.1 & 2 raised by the Revenue is treated as allowed for statistical purpose. Since we have restore the issue back to the file of Assessing Officer with the aforesaid directions, Ground No. 3 & 4 raised by the Revenue are dismissed as having been rendered infructuous.
Ground No. 5 raised by the Revenue pertains to disallowance under Section 14A of the Act. The Revenue is aggrieved by the fact that the disallowance of INR.1,46,736/- made by the Assessing Officer has been restricted by the CIT(A) to INR.1,04,863/- being the amount of exempt income earned by the Assessee during the relevant previous year.
We have heard the rival submissions and have perused the material on record.
The relevant extract of the decisions of the Ld. CIT(A) on this issue reads as under:
“6.4.1 During the course of assessment proceedings, the assessee had submitted before A.O. that the disallowance u/s.14A of the Act was liable to be restricted to the extent of the exempt dividend income of Rs.1,04,863/- that was earned by it during the year under consideration but the A.O. not done accepted the same and kept the disallowance amount same as offered by assessee in its return of income. To sum up, the assessee by raising the aforesaid claim had sought the scaling down of the disallowance u/s.14A of the Act upto the amount of the exempt dividend income that was earned during the year, despite the fact that a higher amount was voluntarily offered as a disallowance under the aforesaid statutory provision in its Assessment Year 2012-2013 & 2013-2014 return of income for the year under consideration.
6.4.2 It is noted that disallowance u/s.14A of the Act has been restricted to the extent of dividend income earned during the financial year in appellant’s own case for the A.Y.2009-10 in vide order dated 03.08.2020, the Hon'ble ITAT, Mumbai Bench, vide its judgement in the Appellant's own case in S.Vinodkumar Diamonds Pvt. Ltd. v. DCIT (supra) held that when the Appellant had sufficient reserves and surplus to finance the investments then the disallowance u/s 14A of the Act is not warranted under the provisions of Rule 8D2(ii) of the Income-tax Rules, 1962 ('the Rules'). The relevant extract of the judgement is reproduced below for ready reference: "31. We have considered the rival submissions of both the parties and deliberated various case law relied upon by the assessee. We have noted that during the year under consideration the assessee has earned exempt income of Rs. 1.62 lakhs only. The AO disallowed interest expenses under Rule 8D(ii) of Rs. 3(113,853/. We have perused the profit and loss account of the assessee copy of which is available in the paper book filed by the assessee. We have noted that the assessee's reserves and surpluses as on 31.03.2007 is Rs. 93.24 Crore and share capital of Rs. 9.8 Crore. The total investment as per schedule 6 of profit and loss account is only Rs. 4.98 Crore. Moreover, most of the investments were made in past. Considering the decision of Jurisdictional High Court in HDFC Bank (supra) and Reliance Utility (supra) no disallowance under Rule 8D(ii) is warranted in case the reserve and surplus of the assessee are in far excess to the investment made by the assessee. Considering the decision of Jurisdictional High Court and the fact that the assessee has surplus reserve available with it at the end of financial year, when the investments were made foreign exempt income and therefore no disallowance under Rule 8D(ii) is warranted.
The Delhi High Court in the case of Joint Investments (P.) Ltd, v. [IT [2015] 372 1TR 694/233 Taxman 117/59 taxmann.com 295 held that the window for disallowance is indicated in section 14A and is only to the extent of disallowing expenditure incurred by the assessee in relation to tax exempt income. This Assessment Year 2012-2013 & 2013-2014 proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.
Further, considering the fact that disallowance u/s 14A of the Act cannot exceed the exempt income in view of the decision of Bombay High Court in PCIT Vs. HSBC Invest Direct (India) Ltd (supra), we direct the AO to restrict the disallowance u/s 14A of the Act at Rs. 1.62 lakhs only. In the result this ground of appeal is also partly allowed." 6.4.3 In the backdrop of aforesaid deliberations, I am of the considered view that as the disallowance u/s.14A of the Act on the basis of the settled position of law cannot exceed the amount of the exempt income, therefore, without prejudice to the fact that the assessee had voluntarily offered the disallowance under the aforesaid statutory provision at a higher amount in its return of income, the consequential relief to the assessee by restricting the disallowance u/s.14A of the Act upto the extent of its exempt income of Rs.1,04,863/- as the issue is covered in appellant’s own case for A.Y.2009-10 vide order in ITA No.79/Mum/2015 vide order dated 03.08.2020. Accordingly, I direct the A.O to restrict the disallowance u/s.14A of the Act upto the extent of the exempt dividend income of the assessee of Rs.1,04,863/-. Therefore, this ground of the appeal is hereby treated as allowed.” On perusal of the above it emerged that the Ld. CIT(A) had restricted the disallowance to the quantum of exempt income by following the decision Tribunal in Assessee’s own case for the A.Y.2009-2010 [ITA No.79/Mum/2015, dated 03/08/2020] which has in turn referred to judgment of the jurisdictional High Court in the case of CIT v. HSBC Invest Direct (India) Ltd. (2020) 421 ITR 125 (Bom.) (HC). On perusal of the aforesaid judgment, we find that the Hon’ble Bombay High Court had dismissed the appeal preferred by the Revenue holding that the disallowance of expenditure incurred to earn the exempt income made under Section 14A of the Act could not exceed the exempt income earned. In the present case the CIT(A) has, in effect, followed the aforesaid judgment of the jurisdictional High Court. Therefore, we do not find any infirmity in the order passed by Assessment Year 2012-2013 & 2013-2014 the CIT(A) restricting the disallowance under Section 14A of the Act to quantum of exempt income. Accordingly, Ground No. 5 raised by the Revenue is dismissed.
20. In result the Ground No.3 to 5 raised by the Revenue are dismissed while Ground No. 1 and 2 raised by the Revenue are allowed for statistical purpose.
21. In result, the the appeal preferred by the Revenue is partly allowed.
22. We would next take up appeal preferred by the Revenue for the Assessment Year 2012-2013 against the Order, dated 02/01/2025, passed by the Commissioner of Income Tax (Appeals) – 58, Mumbai [hereinafter referred to as the ‘CIT(A)’], whereby the Ld. CIT(A) had partly allowed the appeal of the Assessee against the Assessment Order, dated 07/04/2016, passed under Section 143(3)(ii) read with Section 144C(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).
2.2. The Revenue has raised following grounds of appeal in Year 2012-2013] :
1. Whether on the facts and circumstances and in law the Ld. CIT(A) is right in deleting the ALP adjustment on account of delayed realization of export receivables from AEs relying on the decision of the Hon’ble ITAT in assessee’s own case for A.Y.2009-10 which is not accepted by the department? 2. Whether on the facts and circumstances and in law the Ld. CIT(A) is right in not realizing the fact that there was no uniformity in the credit period allowed to AEs and non AEs for payment of their dues, as in the case of AEs the weighted average days of sales realization was 106 days while in the case of non AEs, the weighted average days of sales realization was 75 days? Assessment Year 2012-2013 & 2013-2014 3. Whether on the facts and circumstance of the case and in law, the Ld. CIT(A), is right in not appreciating the fact that explanation to Sec 92B, inserted by the Finance Act, 2012, with retrospective effect from 01.04.2002, explains that international transaction includes deferred payment or receivables arising during the course of business as an international transaction to the benchmarked for computation of Arm’s Length Price?
4. Whether on the facts and circumstance of the case and in law, the Ld. CIT(A), is right in relying on the decision of the Hon’ble ITAT was relied on Hon’ble ITAT Coordinate Bench in Gitanjali Exports case which held that Explanation to section 92B was prospectively applicable for AY 2012-13 onwards, when the AY under consideration is AY 2012-13?”
During the course of hearing both the sides had agreed that our finding/adjudication on the grounds raised in appeal for the Assessment Year 2013-2014 shall apply mutatis mutandis to grounds raised in appeal for the Assessment Year 2012-2013. Thus, keeping in view identical facts and circumstances, and adopting the reasoning given while adjudicating [Assessment Year 2013-14] hereinabove, we proceed to adjudicate the ground raised in the present appeal. Accordingly, we deem it appropriate and in the interest of justice to set aside the Transfer Pricing Addition of Rs. INR.4,18,73,978/- and restore the issue back to the file of TPO/Assessing Officer for denovo adjudication of this issue as per the decision of the Tribunal in the case of the Assessee for the Assessment Year 2010-2011 [ITA No.5710/Mum/2016, dated 14/12/2022]. It is clarified that in case the Assessee is able to establish that for the Assessment Year 2012-2013, the Assessee was following a consistent policy of not charging interest from AEs and non-AEs, no transfer pricing addition shall be made in view of the decision of the Tribunal in the case of the Assessee for the Assessment Year 2009-2010 [ITA No.79/Mum/2015, Dated 03/08/2020]. Since was have remanded the issue back to the file of Assessing Officer/TPO, Assessee would be at liberty to raise all the Assessment Year 2012-2013 & 2013-2014 rights and contentions. The Assessing Officer/TPO is directed grant to the Assessee a reasonable opportunity of being heard before passing the order. Accordingly, Ground No.1 & 2 raised by the Revenue are treated as allowed for statistical purpose. Since we have restore the issue back to the file of Assessing Officer with the aforesaid directions, Ground No. 3 & 4 raised by the Revenue are dismissed as having been rendered infructuous.
In result, the the appeal preferred by the Revenue is partly allowed.
In conclusion, the both the appeals preferred by the Revenue is in [Assessment Year 2013-2014] and Year 2012-2013] are partly allowed.