ACIT, ALWAR vs. VIJAY SOLVEX LIMITED, ALWAR

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR Jh fot; iky jko] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k BEFORE: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 292/JP/2014 fu/kZkj.k o"kZ@Assessment Year : 2008-09 cuke A.C.I.T., M/s Vijay Solvex Limited, Vs. Circle-2, Bhagwati Sadan, S.D. Marg, Alwar. Alwar-301001 LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACV 6864 A vihykFkhZ@Appellant izR;FkhZ@Respondent izR;k{ksi.k@C.O. No. 12/JP/2014 (Arising out of vk;dj vihy la-@ITA No. 292/JP/2014) fu/kZkj.k o"kZ@Assessment Year 2008-09 cuke M/s Vijay Solvex Limited, A.C.I.T., Bhagwati Sadan, S.D. Marg, Vs. Circle-2, Alwar-301001. Alwar. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACV 6864 A izR;k{ksid@Objector izR;FkhZ@Respondent jktLo dh vksj ls@ Revenue by : Mrs. Roshanta Meena (JCIT) fu/kZkfjrh dh vksj ls@ Assessee by : Shri P.C. Parwal (CA). lquokbZ dh rkjh[k@ Date of Hearing: 20/08/2018 mn?kks"k.kk dh rkjh[k@Date of Pronouncement : 24/08/2018 vkns'k@ ORDER PER: VIJAY PAL RAO, J.M.: The appeal by the revenue and cross objection by the assessee are directed against the order dated 16/01/2014 of ld. CIT(A)-II, Jaipur for the A.Y. 2008-09.

2 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited

revenue has raised following grounds of appeal:

“1. That the CIT(A)-II, Jaipur has erred in law as well as on the facts and circumstances of the case in deleting the addition of Rs. 1,14,47,501/- made by the A.O. on account of TPO adjustment.

The appellant craves leave to add, amend or alter the grounds of appeal on or before the date the appeal is finally heard for disposal.”

TP adjustment made by the A.O./TPO was deleted by the ld. CIT(A).

3 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited

During the year under consideration, the assessee has entered into

various international transactions which are reproduced as under:

Description of transaction AE Method Applied F.Y. 2007-08 1. Purchase of bakery Data Foods Sri RPM Rs. 2,98,59,394/- shortening for trading Lanka 2. Sale of Ceramic (Crockery) Data Profit Split Rs. 3,75,74,192/- Items Housewares UK 3. Interest received @ 9& Data CUP GBP 5970 (Rs. p.a. on GBP 66,335` Housewares UK 4,75,258/-)

Since there are international transactions entered into by the assessee,

therefore, the Assessing Officer made reference U/s 92CA of the Income

Tax Act, 1961 (in short the Act) to the TPO. During the course of

proceedings before the TPO, it was noted that the assessee has

benchmarked its international transactions of purchase and sale by

adopting Resale Price Method (RPM) for purchases of bakery shortening

from AE and profit/split method for sale of ceramic to different AE as

most appropriate method. As regards the interest received from AE on

loan, the assessee benchmarked the same by applying CUP as most

appropriate method. The TPO rejected the TP analysis of the assessee

and carried out fresh search by considering the TNMM as most

appropriate method in respect of the purchases of bakery shortening. As

regards the sales of ceramic, the TPO noted that since the assessee’s

profit margin is 17.26% accordingly the said transaction was accepted by

the TPO at arm’s length. However, the TPO made a separate addition on

account of notional interest for the credit allowed by the assessee for

realization of sale proceeds from AE. Thus, there are three adjustments

4 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited

made by the TPO regarding (i) international transaction of purchases (ii)

notional interest on account of credit allowed to the AE for realization of

sale proceedings & (iii) the adjustments in respect of loan given to the AE

by applying arm’s’ length interest @ 17.26%. Hence the TPO proposed a

total adjustment of Rs. 1,14,47,501/- U/s 92CA of the Act. The Assessing

Officer in passing the assessment order has made the addition as

proposed by the TPO.

the ld. CIT(A) and got relief in respect of TP adjustment.

considered the relevant material on record. We will discuss each issue of

TP adjustment separately as under:

(i) The adjustment in respect of international transaction for

purchase of bakery shortening: The TPO rejected the Resale Price Method

as most appropriate method and adopted TNMM as most appropriate

method and carried out a fresh search. The TPO has selected 10

comparables with mean margin of 4.75% as under:

Annual (ending March 2008) Rs. in crores Company name Op. Income Op. Cost Op. Profit OPM on sales (%) Bhaskar Exxoils Ltd. 586.92 556.61 30.31 5.16 Foods, Fats & Fertilizers Ltd. 456.94 421.6 35.34 7.84 Gokul Refoils & Solvent Ltd. 2053.22 1933.06 120.16 5.85 KS Oils Ltd. 2045.05 1834.25 210.8 10.31 Kanpur Edibles Pvt. Ltd. 682.74 678.66 4.08 0.6 National Protein & Solvent Ltd. 137.73 134.52 3.21 2.33

5 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited

Raj Agro Mills Ltd. 116.95 113.27 3.68 3.15 Sharda Solvent Ltd. 564.89 549.4 15.49 2.74 Shiv Agrevo Ltd. 150.46 143.47 6.99 4.65 Synco Industries Ltd. 35.09 33.38 1.71 4.87

Mean of 10 4.75%

The TPO also recomputed the operating margin of the assessee in respect

of the purchase made from Sri Lanka based AE and arrived to the

operating margin as loss of Rs. 15,38,636/-. Hence, the TPO made an

adjustment of Rs. 41,51,014/- on this account.

5.1 The assessee challenged this action of the Assessing Officer before

the ld. CIT(A) and contended that the operating margin computed by the

TPO is incorrect as the TPO has considered the turnover of the assessee

only proportionate to the purchases made during the year and excluded

the opening stock whereas the export expenses have been considered in

toto without proportionate allocation on the purchases made during the

year. Further the assessee has also challenged the comparability of the

companies/entities selected by the TPO as not doing business in the same

commodity. The ld. CIT(A) has accepted the assessee’s contention

regarding the most appropriate method as RPM instead of TNMM adopted

by the TPO and consequently deleted the adjustment/addition made by

the TPO/AO. We find that the TPO while computing the operating margin

of the assessee as considered the total import expenses of Rs.

51,10,877/- whereas the assessee has raised a specific objection on this

issue and given details of the proportionate import expenses in respect of

6 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited the purchases made during the year at Rs. 21,74,720/-. The ld AR of the

assessee has pointed out that the export expenses were incurred in

respect of the custom duty paid by the assessee at the time of goods

released from the port and the opening stock which was lying at the port

was also got released during the year under consideration. Therefore, the

import expenses incurred during the year under consideration pertains to

the purchases made during the year as well as the opening stock of

866.16 MT which got released from the port during the year whereas the

purchases made from the AE during the year is 642.93 MT. Thus, the ld

AR has submitted that the assessee has worked out the proportionate

import expenses only in respect of the purchases made during the year as

the TPO has calculated the operating margin only in respect of the

purchases made during the year.

5.2 On the other hand, the ld DR has relied upon the order of the TPO

and submitted that the assessee has not maintained the segmental details

but the entire turnover was shown as sales from the purchases made

from AE as well as non AE transactions of purchases, therefore, the TPO

undertaken the exercise for working out the operating margin of the

assessee only in respect of the purchases made from the AE.

5.3 Having considered the rival submissions as well as the relevant

material on record we note that the TPO has calculated operating margin

of the assessee at loss of Rs. 15,38,636/- as against the mean margin of

7 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited comparables selected by the TPO at 4.75%. This computation of

assessee’s margin was arrived by the TPO by taking the proportionate

turnover related to the purchases made during the year from AE whereas

the TPO has considered the import expenses in total instead of

apportionment of the same between the opening stock and the purchases

made during the year. Though, the assessee claimed that the import

expenses have been incurred towards the custom duty paid on the

purchases made during the year as well as the opening stock which was

lying at the port/custom house and got released during the year under

consideration, however, this fact is subject to verification. If the claim of

the assessee is accepted that the import expenses to the extent of Rs.

21,74,720/- are attributable to the purchases made during the year then

the operating margin of the assessee on the purchases from AE comes to

1.64%. By considering this operating margin with the arm’s’ length

price/mean margin at 4.75%, we find that the price of the international

transaction of purchases of bakery shortening is within the tolerance

range of + 5% provided in second proviso to Section 92CA. Accordingly

subject to the verification of the fact that the import expenses are

incurred for both purchases made during the year as well as for opening

stock shown by the assessee if the claim of the assessee is found to be

true, then no adjustment is called for as the ALP determined by the TPO

8 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited

@ 4.75% is within the tolerance range of + 5% of the assessee’s

operating margin.

5.4 An identical issue was considered by this Tribunal in assessee’s own

case for the A.Y. 2007-08 vide order dated 03/4/2018 in ITA No.

377/JP/2012 and C.O. 45/JP/2012 in para 3.1 to 4 as under:

3.1 We have heard the ld. D/R as well as the ld. A/R and considered the relevant material on record. The ld. D/R has submitted that the assessee has applied Resale Price Method (RPM) as most appropriate method whereas it is not the case of the assessee being a distributor or agent. The Resale Price Method is not applicable in the case of the assessee and, therefore, the AO is justified in applying the TNMM method as most appropriate for determination of arm's length price. He has further contended that the assessee has not brought on record any comparable entities as against the comparable cases selected by the TPO. He has relied upon the orders of the TPO/AO.

3.2 On the other hand, the ld. A/R of the assessee has submitted that since assessee is doing the trading in the bakery shortening without any value addition and, therefore, the Resale Price Method would be the most appropriate method for determination of arm's length price. He has further contended that the assessee has also brought on record the comparable price of the same product as the AE of the assessee has sold the same product to the unrelated parties at a higher rate and, therefore, when there is a comparable uncontrolled price then no adjustment is called for in the case of the assessee. He has further submitted that even otherwise the arm's length price determined by the TPO by taking the Mean margin at 4.07% is within the range of (+)(-) 5% of the assessee's margin and accordingly in view of the second proviso to section 92C(2) no adjustment can be made on account of international transaction price of bakery shortening.

9 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited

trading of bakery shortening is at 1.63% whereas the TPO while determining the arm's length price by applying the TNMM as most appropriate method and OP/Total Cost (TC) as PLI has arrived at Mean margin of 4.07%. Therefore, the price of international transaction undertaken by the assessee is within the tolerance range of (+)(-) 5% of the arm's length price determined by the TPO. Accordingly, as per the second proviso to section 92C(2) the price of international transaction in respect of purchase of bakery shortening will be determined at arm's length price and consequently no adjustment is called for on this account. Hence in view of the fact that the price of international transaction is within the tolerance range as provided under the second proviso to section 92C(2), we do not go into the issue of most appropriate method applied by the assessee as well as by the TPO. Accordingly, we do not find any reason to interfere with the order of ld. CIT (A) qua this issue.

Hence, subject to the verification of the import expenses, we do not find

any reason to interfere with the order of the ld. CIT(A) qua this issue.

Since we found that even as per the TNMM method applied by the TPO,

the assessee’s international transactions would be at arm’s length.

5.5 The second adjustment on account of notional interest on the

receivables from AE. We have heard the ld DR as well as the ld. AR of the

assessee and considered the relevant material on record. We find that the

assessee has not charged any interest from AE as well as from non AE in

respect of sales realization and allowed credit period to both the parties.

The TPO noted that the credit period allowed by the assessee to the AE is

abnormal in comparison to the non AE from the transactions and

therefore, there is a substantial delay in realization of trade debts from

10 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited AE. The TPO, accordingly, took the arm’s length interest @ 17.26% and

made adjustments by computing the credit period after allowing a normal

period of 60 days. At the outset, we note that the allowing credit to the

AE on realization of trade debts is not an independent transaction as per

the existing provisions of Section 92B of the Act and at the most the same

will be part of international transaction of sales made to the AE. The

Assessing Officer found the international transaction of sales to the AE at

arm’s length, therefore, there is no dispute that the main transaction was

found to be at arm’s length and only the notional interest on the

realization of trade debts was taken as a separate transaction by the TPO

for making a separate adjustment for delay in realization. Thus, once the

TPO has considered the TNMM as most appropriate method then the

delay in realization of debt and consequential interest income which was

not received or recovered by the assessee from AE could have been

factored in computing the operating margin of the assessee in respect of

the international transaction of sale made to the AE instead of considering

the notional interest for delay in realization of debts as a separate

international transaction. We further note that the arm’s length interest in

respect of realization from AE based at UK shall be LIBOR instead of

PLR/Profit margin taken by the TPO. Since the realization is from the AE

and in the foreign currency, therefore, the LIBOR would be the

appropriate comparable arm’s length rate. Hence, by considering all these

11 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited

facts and circumstances when the assessee’s operating margin from the

international transaction of the sale is more than 17% which was found to

be at arm’s length then even if the interest on delayed realization of trade

debts from AE is given into effect it will not bring the international

transaction from the category of arm’s length to short price charged from

the AE as the assessee would get the benefit of second proviso of Section

92CA of the Act and in any case the LIBOR rates is not exceeding 2 to 3%

and further only friction of the total sale is considered as delayed

realization of trade debts. Accordingly, in the facts and circumstances, we

do not find any justification in making separate addition on this account.

Hence, we do not find any merit in the grounds raised by the revenue.

5.6 The third adjustment made on account of interest on loan advanced

to the UK based AE. We have heard the ld. DR as well as the ld AR of the

assessee and considered the relevant material on record. At the outset,

we note that this issue was considered by this Tribunal in assessee’s own

case for the A.Y. 2007-08 vide order dated 03/4/2018 in para 6 as under:

“6. We have heard the Id. D/R as well as the Id. A/R and considered the relevant material on record. There is no dispute that the assessee has advanced a loan in foreign currency to its AE and charged interest @ 10%. We find that the issue of charging interest from AE in respect of the money advanced in foreign currency, the arm's length interest is to be considered by taking the LIBOR instead of PLR. The Id. CIT (A) has considered this issue in para 4.1 as under:-

12 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited " 4.1 I have duly considered the submissions of the appellant. The appellant had advanced the loan to associate enterprise (AE) namely M/s Data Houseware (P) Limited UK @ 10%. However the TPO had erroneously held that it was advanced at the rate of 8%. The provisions of section 92 of the Income-Tax Act which dealt with the computation of income from international transaction having regard to the arm's length price had no applicability in the case in view of the provisions of section 92(3) of the Income-Tax Act since the determination of arm's length price in the appellant's case and computation of income thereof had the effect of reducing the income chargeable to tax. The relevant provision of the statute had laid down the boundaries for determining the arm's length price under comparable uncontrolled price (CUP) method. The power to determine the arm's length price under comparable uncontrolled price (CUP) method was not unabridged. The TPO had referred to the decision of Income-Tax Appellate Tribunal, Bench-Delhi in the case of Perot Systems TSI (India) Limited Vs DCIT (37 SOT 358) HAT, (Delhi) however it was clearly distinguishable as the charging of interest for intra ground loans had been upheld in the said case, whereas, this was not the issue here. The assessee had not disputed the charging of interest on intra-group loans. In the cited case, the loan was advanced interest free to associate enterprise (AE), whereas in the present case, the appellant company (tested case) had charged the interest on the loan advanced to associate enterprise (AE). The argument of the TPO in the cited case was that one of the AEs was situated in a tax haven and non charging of the interest by the assessee from the AEs, had resulted in higher income in the hands of the AEs and the income of the assessee in India had reduced by the corresponding amount. Thus it had brought down the overall tax incidence of the group by shifting profit from Indian jurisdiction to Bermuda which was a tax haven country with Zero rate of tax on corporate profit whereas the appellant's associate enterprise (AE) M/s Date Houseware (P) Ltd., U.K. was based in UK, which was not a tax heaven country, therefore the facts of the relied upon case materially differed from the case in hand. The TPO had stated that since the tested party was a tax payer, the prevalent interest that could have earned by the tax payer by advancing a loan to an unrelated party in India with the same weak financial health as that of the AE would have resulted in arm's length interest. The transaction in the present case was between the assessee located in the two nations, i.e. it was an international transaction whereas while proposing to apply the arm's length price @ 14% the TPO had considered the domestic transactions. So the interest rate that would have been charged in similar circumstances or the interest rate that the tax payer could have got by lending such money to private persons in India or interest rate the company could have got from independent third part in India by lending such surplus money under comparable circumstances i.e. without any security and margin money was under comparable

13 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited

circumstances i.e. without any security and margin money was considered by the TPO. It was held by TPO that rate of interest of 14% would be the arm's length price and it was accordingly applied. However the above basis and ground were against the explicit provisions of Rule 3 of the Income Tax rules. The transaction involved in the case was an international transaction whereas the TPO had referred to the circumstances of domestic transaction, therefore the same could not be applied under the given circumstances. The assessee company had lent the money to associate enterprise (AE) which was located in UK, therefore the rate of interest obtained in the UK had to be considered for the purpose of comparing the rate on comparable uncontrolled price (CUP) method basis since the rate of interest prevailing in the UK market governed the situation and was in conformity with Rule 2 and 3 of the Income Tax Rules. The application of LIBOR rate of interest was upheld by Hon'ble Delhi Tribunal in the case of Perot Systems TSI (India) Limited Vs. DCIT (37 SOT 358). The LIBOR rate during the relevant period was 4.31% to 5.77 % in the FY 2006-07. The TPO in this case had applied the monthly LIBOR (London International Bank Official Rate) downloaded from the British Bankers Association website. During the financial year 2001-02 LIBOR for US dollar loan was 2.39%. On that LIBOR, the Assessing Officer added average basis point charged by other companies and for this purpose he took rate for 5 companies. The arithmetic mean came to 1.64%. Accordingly, Assessing Officer computed the arm's length rate to be LIBOR + 1.64% using CUP method. However the application of the LIBOR rates in the case of loans and advances to associate enterprise (AE) located outside the geographical boundaries of India was upheld by judicial authorities. The LIBOR rate during the relevant period ranged from 5.20% to 5.44% and after adding thereto 1.64% average basis point as upheld by Income-Tax Appellate Tribunal, Bench-Delhi, the effective arm's length rate of interest worked out to 6.84% to 7.08% as against that the appellant company had charged the interest @ 10%. In the present case, the rate of interest on the borrowing from SBBJ was 8.75% at the relevant point of time i.e. at the time of giving of loan, as against that the appellant had charged the rate of interest @ 10% on the amount lent the associate enterprise (AE) much higher than the comparable uncontrolled price (CUP) rate. The rate of interest charged from the associate enterprise (AE) was mentioned erroneously as 9%, whereas it was 10%, which was verifiable from the credit note sent by the M/S Data Houseware P Ltd. U.K. associate enterprise (AE) dated 31.03.2007. Further the associate enterprise (AE) had utilized the loan in its stock and debtors, which was apparent from the balance sheet of the associate enterprise (AE). The assessee had not incurred any brokerage or processing fees in advancing loan to the associate enterprise (AE).The appellant company had not given any loan or advances to Data Foods (P) Limited., Sri Lanka during the financial year 2006-07. Accordingly the adjustment made on account of loan given to

14 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited M/S Data Houseware (P) Ltd., U.K. was not justified. Further the appellant was a secured creditor as it had sold goods to the concerned AE also. The position of the appellant company was that of a unpaid seller since the AE owed to it an amount comprising of loan as well as amount for goods purchased. Therefore the TPO had erroneously held that the position of the appellant was that of a unsecured creditor/loanee. I accordingly direct the AO to delete the addition of Rs 2,55,929/-made on account of adjustments made by the TPO. This ground of appeal is allowed." Thus it is clear that the Id. CIT (A) has followed the decision of this Tribunal on this issue and accordingly we do not find any error or illegality in the order of Id. CIT (A) qua this issue.

The ld. CIT(A) has deleted the adjustment made by the TPO/AO by

following the decision of this Tribunal, accordingly, in view of the decision

of this Tribunal in assessee’s own case, we do not find any error/illegality

in the impugned order of the ld. CIT(A). Hence, this ground of revenue’s

appeal stands dismissed.

by the A.O. of Rs. 10.00 lacs was deleted by the ld. CIT(A). We have

heard the ld DR as well as the ld AR of the assessee and considered the

relevant material on record. The Assessing Officer noted that the

assessee’s G.P. rate for the year under consideration is 9.37% as against

10.54% in the preceding assessment year, accordingly, the Assessing

Officer proposed to reject the book results of the assessee. After rejection

of book results, the Assessing Officer made an ad hoc addition of Rs.

10.00 lacs. The ld. CIT(A) deleted the ad hoc trade addition made by the

Assessing Officer by following the decision of this Tribunal in assessee’s

15 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited own case for the A.Y. 2006-07. We find that the trading addition made by

the Assessing Officer is not based on any reasonable basis and further

when the G.P. declared by the assessee for the year under consideration

is 9.37% in comparison to 10.54% for the immediate preceding year,

which is not at significant variance, then without having a proper basis or

at least the average of past history of G.P. declared by the assessee, the

ad hoc addition made by the Assessing Officer is not justified. Thus, it is

clear that the ld. CIT(A) has followed the order of this Tribunal in

assessee’s own case for the A.Y. 2006-07, which has been upheld by the

Hon’ble Jurisdictional High Court vide judgment dated 04/8/2017 in D.B.

Income Tax Appeal No. 169/2012 in para 3 as under:

“3. Issue No. 1 & 2 are covered by the decision of this court in ITA No. 371/2011 (CIT, Alwar Vs. M/s Vijay Solvex Ltd.) decided on 03/8/2017, therefore the same are answered in favour of the assessee.”

Accordingly, we do not find any merit or substance in this ground of

revenue’s appeal. Hence, ground No. 2 of the appeal is dismissed.

the Assessing Officer U/s 14A read with Rule 8D of the Income Tax Rules,

1962 (in short the Rules). The Assessing Officer noted that the assessee

has received dividend income of Rs. 1,44,731/- whereas the assessee has

not made any disallowance U/s 14A of the Act. Accordingly the Assessing

Officer proposed to make the disallowance U/s 14A read with Rule 8D of

16 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited the Rules. The Assessing Officer accordingly, made disallowance on

account of indirect interest expenditure as well as indirect administrative

expenditure total amounting to Rs. 29,49,629/-.

Assessing Officer by following the order for the A.Y. 2007-08.

considered the relevant material on record. The ld DR has submitted that

for the year under consideration, Rule 8D is applicable whereas for the

earlier assessment year, the disallowance U/s 14A was not governed by

Rule 8D of the Rules. Hence, the earlier orders of this Tribunal are not

applicable for the year under consideration.

9.1 On the other hand, the ld AR of the assessee has submitted that

the entire investment was made in the earlier years and therefore, once it

was found that no interest bearing funds were used for making the

investment in the shares then no disallowance is called for on account of

interest expenditure. He has further submitted that during the year under

consideration, there is reduction in the investment made in the earlier

years and hence even otherwise there is no increase in the investment

and when no disallowance was in the earlier year as deleted by the ld.

CIT(A) as well as this Tribunal, which has been upheld by the Hon'ble

High Court then there cannot be any disallowance on account of interest

expenses. Further the assessee has not incurred any other expenditure

17 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited

for earning the dividend income then in absence of the Assessing Officer

identifying specifying expenditure, no disallowance can be made U/s 14A

of the Act.

9.2 Having considered the rival submissions as well as the relevant

material on record, we note that for the A.Y. 2007-08,this Tribunal has

considered and decided an identical issue in para 25 as under:

“25. We have heard the Id. D/R as well as the Id. A/R and considered the relevant material on record. There is no dispute that rule 8D is not applicable for the year under consideration as it is applicable for the assessment year 2008-09 as held by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT 328 ITR 81 (Bombay) as well as by Hon'ble Supreme Court in the case of CIT vs. Walfort Share & Stock Brokers Pvt. Ltd. 326 ITR 001 (SC). Further, the ld. A/R has submitted that the disallowance made by the AO for the assessment year 2006-07 as well as for the assessment year 2010-11 has been deleted by this Tribunal which has been confirmed by the Hon'ble Jurisdictional High Court. The Id. A/R has also referred to the details of availability of assessee's own interest free funds for investment and further contended that the profit of the assessee during the year is more than the investment made during the year and, therefore, no disallowance is called for on account of interest expenditure under section 14A. Having considered the rival submissions as well as the relevant material on record, we note that the Id. CIT (A) has considered this issue in para 6.1 and 6.2 as under :-

“6.1 I have duly considered the submissions of the appellant. The appellant has filed a statement showing the annual increase in the interest free funds and investment in the shares, income thereof both were taxable and non-taxable and a statement showing the annual increase in the interest bearing funds in the form of secured and unsecured loans and working capital limits and their investment in the current assets to

18 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited

evidence the fact that the investment in the shares had come from the non-interest bearing funds on year to year basis from FY 1998-99 to FY 2006-07. In FY 2000-01, the appellant company had made investments of Rs 179.1 lakhs in shares out of opening reserve and surplus of Rs 2143.29 lakhs and interest free funds of Rs 143.33 lakhs. In FY 2003-04, the appellant company had made investments of Rs 412.02 lakhs in shares out of opening reserve and surplus of Rs 3281.59 lakhs and interest free funds of Rs 423.01 lakhs. In FY 2005-06, the appellant company had made investments of Rs 218.47 lakhs in shares out of opening reserve and surplus of Rs 3979.39 lakhs and interest free funds of Rs 245.3 lakhs. Similarly in FY 2006-07, the appellant company had made investments of Rs 268.24 lakhs in shares out of opening reserve and surplus of Rs 4213.43 lakhs and interest free funds of Rs 688.76 lakhs. On the other hand, the unsecured loans and working capital loans stood invested in the stock and current debtors.

6.2 It was held by Hon'ble Supreme Court in the case of CIT Vs Walfort Shares & Stock Brokers Pvt. Ltd (326 ITR 1) that for attracting section 14A, there has to be a proximate cause for disallowance which is its relationship with the tax exempt income. The Hon'ble Punjab & Haryana High Court in the case of CU Vs Hero Cycles Ltd (323 ITR 518) held that merely because the assessee had incurred interest expenditure on borrowed funds, it would not ipso facto invite the disallowance U/s 14A unless there was evidence to show that such interest bearing funds had been invested in shares which had generated dividend income. Hence disallowance U/s 14A was not sustainable. In the present case, the interest expenses were incurred on working capital limits and term loans taken from SBBJ against hypothecation of stock, debtors and plant and machinery. The total working capital loan and unsecured loans outstanding as on 31.03.2007 were of Rs 5266.48 lakhs as against that the investment in stock and debtors was at Rs 10299.84 lakhs. Thus the entire loan was utilized for the purpose of business. The investments were made in shares in the earlier years out of reserve & surplus and out of interest free funds. The appellant was having share capital of Rs 320.19 lakhs & reserve and surplus of Rs 4902.19 lakhs whereas the investment in shares was at Rs 1097.34 lakhs. Thus interest free funds of Rs 5222.38 lakhs available with the appellant company were much more than the investment of Rs 1097.34 lakhs in the shares. Under these circumstances, the AO was not justified in making the impugned disallowance U/s 14A of the IT Act. I therefore direct the AO to delete the addition of Rs 27,53,062/-U/s 14A of the I T Act. This ground of appeal is allowed."

Thus the Id. CIT (A) has considered the availability of interest free funds of assessee being share capital, reserve and surplus which is much more

19 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited than the investment in the shares. Further, when rule 8D is not applicable for the year under consideration, the disallowance on account of administrative expenses has to be made on some reasonable basis. Accordingly, in view of the above facts and circumstances of the case, when the assessee is having its own sufficient funds then no disallowance is called for on account of interest expenditure. As regards the disallowance on account of administrative expenses, we are of the view that 10% of the dividend income will be a reasonable and proper estimate for disallowance of expenditure on account of common indirect administrative expenses for earning the exempt income under section 14A. Hence this ground of the revenue's appeal is partly allowed.

Thus, it is clear that as far as the availability of interest free funds for

investment in shares, the Tribunal has accepted the fact that the assessee

was having its own sufficient fund and no disallowance is called for U/s

14A on account of interest expenditure. As regards the disallowance on

account of administrative expenses, 10% of dividend income was

considered as reasonable and proper estimate for allocation of the

expenditure on account of any indirect administrative expenses for

earning the exempt income. There is no dispute that during the year

under consideration, the investment in shares has reduced from 5.33

crores to 3.79 crores. Therefore, as far as the interest expenditure to be

disallowed U/s 14A read with Rule 8D is concerned when it was already

found that the assessee was having sufficient funds of its own and further

there is reduction in the investment during the year then no disallowance

is called for on account of interest expenditure. As regards the

20 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited

disallowance on account of indirect administrative expenses, we find that

for the year under consideration, Rule 8D is applicable. However, the

expenditure allocable for earning exempt income cannot be more that the

exempt income earned during the year under consideration. Accordingly,

we restrict the disallowance made U/s 14A of the Act to the extent of the

dividend income of Rs. 1,44,730/-. Hence, this ground of revenue’s appeal

is partly allowed.

of the assessee raised a common issue regarding disallowance of

miscellaneous expenditure of Rs. 3,70,339/- made by the Assessing

Officer, which was restricted by the ld. CIT(A) to Rs. 56,397/-.

considered the relevant material on record. At the outset, we note that an

identical issue was considered by this Tribunal in assessee’s own case for

the A.Y. 2007-08 in para 7.2 to 8 as under:

“7.2 We have heard the Id. D/R as well as the Id. A/R and considered the relevant material on record. The Id. D/R has submitted that the AO has clearly made out the case that the assessee has not fully vouched the expenses and supported by self made vouchers and, therefore, the AO was justified in making the disallowance of 10% of the expenses. He has relied upon the order of the AO.

7.3 On the other hand, the A/R of the assessee has submitted that when the assessee has duly explained the nature of expenses which have been

21 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited

incurred fully and for the purposes of the business of the assessee, then sustaining the disallowance to the extent of 10% of the expenses incurred in cash is not justified.

"5.1 I have duly considered the submissions of the appellant. During the course of appellate proceedings, the counsel of appellant has brought to my attention that misc. expenses included payments of Rs 20,93,568/- made for tea, refreshments, cold drinks and sweets to employees and customers and FBT had been paid on the portion relating to employees. It is evident that the AO was under erroneous belief that the entire amount had been incurred on the customers. Moreover it also included licence and inspection fees of Rs 2,28,680/-, subscription fees of Rs. 1,32,110/-, electricity charges of Rs. 92,190/-, annual listing fees of Rs 14,590/- and books and periodicals. Further these expenses were fully vouched and the AO had not cited any specific instance where the expenditure was unvouched. On going through the ledger account, it is seen that out of total expenses of Rs 25,03,119/-, an amount of Rs 7,41,322/- had been paid in cash and remaining amount of Rs. 17,61,797/- had been paid through account payee cheques. In view of the above facts, the disallowance of Rs 2,50,312/- made by the AO was on the higher side. It is an undisputed fact that small time vendors do not issue proper bills/memos and in such cases, the payments are made through internal vouchers. The appellant cannot be penalized so heavily for such a failure. Considering the facts of the present case, I am of the opinion that disallowance to the extent of 10% out of expenses of Rs 7,41,322/- incurred in cash, would meet the ends of justice. I therefore direct the AO to restrict the addition on this account to Rs 74,132/- instead of Rs 2,50,312/- made by her This ground of appeal is partly allowed."

It is clear that out of expenditure of Rs. 25,03,119/-, the assessee has paid FBT in respect of the expenditure incurred for tea, refreshments, cold drinks, sweets to the employees and customers total amounting to Rs. 20,93,568/-. Further, the remaining expenditure was incurred on account of licence and inspection fees, subscription fee, electricity charges, annual listing fees, books & periodicals. Therefore, though the assessee has incurred the expenditure in cash to the extent of Rs.

22 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited 7,41,322/-, however, majority of the said amount of Rs. 7,41,322/- has been incurred for tea, refreshments, cold drinks and sweets to the employees and customers. So far as the expenditure incurred towards fringe benefits to employees, the assessee has already paid the FBT and accordingly by considering this fact, we restrict the disallowance of the expenditure incurred in cash to 5% instead of 10% sustained by Id. CIT (A). In the result, ground no. 2 of the revenue's appeal is dismissed and ground no. 2 of the Cross Objection is partly allowed.”

Thus, the Tribunal for the A.Y. 2007-08 has restricted the disallowance of

Misc. expenses incurred in cash to 5%. For the year under consideration,

the ld. CIT(A) has restricted the disallowance only in respect of cash

expenses to 10%. Following the earlier order of this Tribunal we restrict

the disallowance made by the ld. CIT(A) to 5% and consequently ground

No. 1 of the C.O. is partly allowed the ground No. 4 of the revenue’s

appeal stands dismissed.

made by the Assessing Officer on account of printing and stationary

expenses, which was restricted by the ld. CIT(A) to 10%.

considered the relevant material on record. At the outset, we note that an

identical issue was considered by this Tribunal in assessee’s own case for

the A.Y. 2007-08 in para 9.2 as under:

23 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited

“9.2 We have heard the Id. D/R as well as the Id. A/R and considered the relevant material on record. The Id. CIT (A) has dealt with this issue in para 5.2 as under :-

"5.2 On going through the ledger account of printing and stationery expenses, it is seen that out of total expenses of Rs 8,99,252/-, a meager amount of Rs 34,670/- only was paid in cash. The majority of the expenditure was settled through account payee cheques. It was not the case of the AO that the expenses were unreasonable or excessive looking to the turnover of the appellant company. The appellant had maintained complete bills/supporting for the printing & stationery expenses of Rs 8,99,252/-. The expenditure was incurred out of business expediency and the AO had failed to point out any discrepancy in the vouchers maintained by the appellant. The disallowance had been made in a routine manner and was therefore not sustainable. I therefore direct the AO to delete the addition of Rs 1,00,000/- on account of printing & stationery expenses made by her. This ground of appeal is allowed."

The Id. CIT (A) has deleted the disallowance by considering the fact that the assessee has maintained complete bills/supporting vouchers for the expenditure incurred on account of printing and stationary. Further, the expenditure was incurred out of business expediency and in the absence of any discrepancy in the vouchers maintained by the assessee, the disallowance is uncalled for. We do not find any error or illegality in the order of Id. CIT (A) in deleting the disallowance made by the A.O.

In view of the earlier order of this Tribunal, we do not find any error or

illegality in the order of the ld. CIT(A) qua this issue. Hence, this ground

of revenue’s appeal stands dismissed.

made by the Assessing Officer on account of packaging expenses. We

have heard the ld DR as well as the ld AR of the assessee and considered

the relevant material on record. We note that an identical issue was

24 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited

considered by this Tribunal in assessee’s own case for the A.Y. 2007-08 in

para 19 as under:

“19. We have heard Id. D/R as well as the Id. A/R and considered the relevant material on record. The Id. CIT (A) has considered this issue in para 5.7 as under:-

"5.7 The AO had also disallowed an amount of Rs 50,00,000/- out of packing material expenses on the ground that the appellant company did not maintain the quantitative details of packing material. However it was an undisputed fact that the appellant had maintained records for quantitative details of packing material. Further the percentage of packing material expenses vis-a-vis turnover was at 4.32% in the year under reference. The same was lower in comparison to 4.96% in AY 2006-07 and 4.37% in AY 2005-06. I further find that similar addition on account of disallowance out of packing material expenses for AY 2005-06 had been deleted by my predecessor and Hon'ble Jaipur Tribunal in order ITA No 599/JP/2011 dated 25.02.2011. The AO has not pointed out any material discrepancy in the records maintained by the appellant before making such a huge addition of Rs 50,00,000/-. No inquiries of any sort were made from the suppliers of packaging material. The appellant had made the payments through banking channels and complete bills/supporting were available. It was held by Honourable Mumbai Tribunal in the case of Arthur & Anderson & Co. Vs Addl. CIT (2010-TIOL-416-ITAT) that the very concept of token disallowance was bad in law, because such a disallowance was inherently based on surmises and conjectures and devoid of a legally sustainable foundation. It was a case where one accepted all the contentions but not the consequences flowing from accepting the same. This could not meet approval. No particular information had been called for by the AO nor had the AO pointed out any deficiency in the details furnished by the assessee. The AO had not given any justifiable reasons for making adhoc disallowances without sound basis or reason. This could not be permitted. The CIT(A) had also not judiciously dealt with the matter. No disallowance could be made just for the sake of disallowance. In view of the lack of proper appreciation of the facts and lack of investigation and proper reasoning, the disallowance was deleted. In the present case also, it is clear that the AO had made the impugned disallowance on conjectures and surmises. The addition made by the AO has no legs to stand and same is accordingly deleted. This ground of appeal is allowed."

Thus the Id. CIT (A) has taken note of the fact that the expenditure for the year under consideration is at 4.32% of the turnover in comparison to

25 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited 4.96% for the assessment year 2006-07 and 4.37% for the assessment year 2005-06. Further, the addition made by the AO in this respect for the assessment year 2005-06 was deleted by the Tribunal in assessee's own case. The factual details given by Id. CIT (A) have not been controverted before us. Accordingly, we do not find any error or illegality in the order of Id. CIT (A) qua this issue.”

In view of the earlier order of this Tribunal, we do not find any error or

illegality in the order of the ld. CIT(A) qua this issue. Hence, this ground

of revenue’s appeal stands dismissed.

grounds have been raised.

“01. That ld. CIT(A) has erred on the facts and circumstances of the case in sustaining a disallowance of Rs. 56397.00 out of Misc. exp. 02. That the ld. CIT(A) has erred on the facts and circumstances of the case in sustaining the disallowance of Rs. 8250.00 on account of donation. 03. That the assessee reserves its rights to add, alter, amend and modify all or any of the cross objection before or at the time of hearing of appeal.”

4 of the revenue’s appeal and accordingly partly allowed.

account of donation. At the time of hearing, the ld AR of the assessee has

submitted at bar that the assessee does not press ground No. 2 of the

C.O. and the same may be dismissed as not pressed.

26 ITA No. 292/JP/2014 & CO 12/JP/2014 ACIT Vs. M/s Vijay Solvex Limited 18. The ld DR has not raised any objection if the ground No. 2 of the C.O. is not pressed. Accordingly, ground No. 2 of the C.O. is dismissed being not pressed.

Order pronounced in the open court on 24/08/2018.

Sd/- Sd/- ¼foØe flag ;kno½ ¼fot; iky jko½ (VIKRAM SINGH YADAV) (VIJAY PAL RAO) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member Tk;iqj@Jaipur fnukad@Dated:- 24th August, 2018 *Ranjan आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant- The A.C.I.T., Circle-2, Alwar. 2. izR;FkhZ@ The Respondent- M/s Vijay Solvex Limited, Alwar. 3. vk;dj vk;qDr@ CIT 4. vk;dj vk;qDr@ CIT(A) 5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण]जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 6. xkMZ QkbZy@ Guard File (ITA No. 292/JP/2014 & C.O. 12/JP/2014) vkns'kkuqlkj@ By order,

सहायक पंजीकार@Aेेज. त्महपेजतंत