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Income Tax Appellate Tribunal, DELHI BENCH: “I-2”, NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI O.P. KANT
PER O.P. KANT, A.M.: This appeal by the assessee is directed against final assessment order dated 23/09/2017 passed by the Additional Commissioner of Income-tax, Special Range-7, New Delhi [in S.A. No.972/Del/2018 short ‘the Assessing Officer’] for assessment year 2013-14, pursuant to direction dated 26/06/2017 issued by the learned Dispute Resolution Panel (DRP). The assessee has also filed application for stay of demand raised. The grounds raised by the assessee in the appeal are reproduced as under:
That the learned Addl. Commissioner of Income Tax, Special Range- 7, New Delhi has erred both in law and on facts in determining total income of the appellant company at Rs. 56,88,81,670/- as against declared income of Rs. 55,39,47,800/- in an order of assessment dated 23.9.2017 under section 143(3)/92CA(3)144C(13) of the Act.
2. That the learned TPO/DRP/AO has erred both in law and on facts in making an addition of Rs. 10,80,479/- on account of difference in rate of interest charged by the appellant and the rate of interest adopted by the learned Dispute Resolution Panel (”DRP”) arbitrarily @ 7.74% in respect of loan advanced by the appellant company to its subsidiary namely American Completion Tools, a non resident under section 92CA of the Act. 2.1 That the learned TPO/DRP/AO has failed to appreciate that no adjustment has been made for assessment years 2007-08 to 2010- 11 in respect of interest charged on loan advanced to ACT, further adjustment made in Assessment years 2011-12 and 2012-13 stood deleted by order dated 9.9.2016 and 31.3.2017 by the learned Commissioner of Income .Tax (Appeals), and thus no adjustment was warranted even in the instant assessment year. 2.2 That the learned TPO/DRP/AO has failed to appreciate that the appellant was justified in using the interest rate charged by CITI bank on loan availed by ACT as a comparable under CUP method for the international transaction and to establish the same is at arm’s length from an Indian transfer pricing perspective. 2.4 That furthermore even the adoption of interest rate of 7.74% as the most reasonable and appropriate rate is neither based on correct appreciation of facts and nor provision of law. 3. That the learned TPO/DRP/AO has also erred both in law and on facts in making an adjustment of Rs. 1,35,21,926/- by erroneously holding delayed receivables as a separate international transaction u/s 92B read with section 92F of the Act and Rule 10B of the Income Tax Rules’ 1962 S.A. No.972/Del/2018 3.1 That the learned TPO/DRP/AO has failed to appreciate that once difference in impact of working capital of assessee viz-a-viz comparable has already been gathered in pricing/profitable of assessee, no further adjustment was warranted and the same is contrary to decision of Hon’ble Delhi Bench of Tribunal in the case of M/s Bechtel India (P) Ltd. in affirmed by the judgment of Hon’ble High Court of Delhi in the case of Pr. CIT v. M/s Bechtel India (P) Ltd. in ITA No. 379/2016 and reaffirmed by the Apex Court in the case of Pr. CIT v. M/s Bachtel India Ltd dated 21.7.2017. 3.2 That the learned TPO/DRP/AO has also failed to appreciate that once AO has accepted the margin of assessee at 32.14% which was higher than average margin of comparables of 22.12% no further adjustment was permissible. 3.3 That the learned TPO/DRP has also failed to appreciate that adjustment made is contrary to judgment of Hon’ble Delhi High Court in the case of Pr. CIT v. Kusum Health Care (P) Ltd. in ITA No. 765/2016 dated 25.4.2017 3.4 That the learned TPO/DRP/AO has failed to appreciate that since no interest was charged by third party vendors on delayed payment and therefore no adjustment is warranted. 3.5 That once no adjustment has been made in preceding assessment years on identical facts and circumstances of the appellant company, that the learned TPO/DRP/AO have failed to appreciate that in absence of any change in facts and circumstances in the year under consideration, no adjustment were warranted in the instant year on the principle of consistency. 3.6 That furthermore even the adoption of interest rate of 4.57% as the most reasonable and appropriate rate is neither based on correct appreciation of facts and nor provision of law. 3.7 Without prejudice to the above, the learned TPO ought to have confined the adjustment to the period falling within the instant year and therefore the adjustment made is otherwise excessive.
4. That the learned AO/DRP has erred both in law and on facts in making a disallowance of a sum of Rs. 3,31,460/- by incorrectly invoking section 14A of the Act read with Rule 8D of the Income Tax Rules’ 1962. 4.1 That the learned AO/DRP has failed to appreciate that in absence of satisfaction of statutory preconditions provided in section 14A(1) of the Act, no disallowance could be validly made by mechanically applying Rule 8D of the Income Tax Rules’ 1962.
It is therefore prayed that, adjustments and disallowance made to the total income of the appellant company be deleted and appeal of the appellant company be allowed.
Briefly stated facts of the case are that the assessee company was engaged in the business of manufacturing and sale of oilfield equipment for oil and gas industry. For the year, under consideration, the assessee filed return of income on 31/10/2013 declaring total income of Rs.55,39,47,800/-. The case was selected for scrutiny and notice under section 143(2) of the Income-Tax Act, 1961 (in short ‘the Act’) was issued and complied with. The case was then transferred to the present Assessing Officer, who again issued notices under section 143(2) and 142(1) of the Act dated 24/08/2016. From the transfer pricing study filed by the assessee, the Assessing Officer observed following international transactions carried out by the assessee with Associated Enterprise (AE), namely, M/s American Completion Tools, i.e., a subsidiary of the assessee:
Nature of Transaction Amount (Rs.) Sale of material 80,41,01,594 Purchase of material 6,31,40,264 Interest received on loan 26,52,961 Conversion of loan into 5,33,61,000 Equity shares Repayment of loan 1,19,32,985 2.1 The Assessing Officer referred the matter of determination of the Arm’s Length Price (ALP) of the International Transaction to the Ld. Transfer Pricing Officer (TPO). After considering the transfer pricing study of the assessee and submission on the S.A. No.972/Del/2018 issues raised, the Ld. TPO rejected the benchmarking done by the assessee for the interest on loan advanced to the AE and applied Weighted Average Cost of Capital (WACC) to determine the arm’s length price following his own order for assessment year 2012-13. The Ld. TPO also observed that, the assessee did not charge interest on receivables from the AE. The Ld. TPO examined the invoices raised during the year and outstanding at the year-end from its AE and treated the delayed payment received on such invoices as unsecured loan advanced to the AE, for the period of the delay in respect of the payment beyond the industry standard period and also in respect of invoices raised in earlier years which remains unpaid, on a daily basis of six-month LIBOR rate along with 400 basis point as the most appropriate comparable uncontrolled price (CUP) for calculation of transfer pricing adjustment. The Ld. TPO also allowed set off for the amount paid beyond 30 days while calculating interest payable on receivables and thereby making an adjustment of Rs.1,35,21,926/-on account of outstanding receivables. In this manner, the Ld. TPO computed the transfer pricing adjustment as under:
S.No. Name of international ALP determined ALP Adjustment transaction by taxpayer determined by u/s (INR) the TPO (INR) 92CA(INR) 1 Interest on loan advanced 26,52,961 64,00,871 37,47,910 to AE 2 Receivables ---- 1,35,21,926 1,35,21,926 1,72,69,836 2.2 The Assessing Officer also proposed disallowance for a sum of Rs.3,31,460/- under section 14A of the Act. The Ld. Assessing S.A. No.972/Del/2018 Officer issued a draft assessment order dated 29/12/2016 incorporating the proposed additions of the transfer pricing adjustment and disallowance under section 14A of the Act. 2.3 Aggrieved, the assessee preferred objections before the Ld. DRP and the Ld. DRP issued directions in their order dated 26.6.2017 under section 144C(5) of the Act. Pursuant to the direction of the ld. DRP, final order was passed under section 144C(13) dated 23.9.2017, wherein TP adjustments were upheld at amount aggregating to Rs.1,46,02,405/- as against adjustments made by Ld. TPO of Rs.1,72,69,836/-. The relief granted was in respect of adjustments made to interest on loan to AE, wherein the Ld. DRP directed to apply interest rate of 7.74% as against the rate applied by Ld. TPO of 13.27% and as a result, adjustment was reduced from Rs. 37,47,910/- to Rs. 10,80,479/- . The assessee, therefore, being aggrieved has preferred the instant appeal.
The Ground Nos. 2 to 2.4 are regarding addition of Rs. 10,80,479/- on account of difference in rate of interest charged by the assessee and the rate of interest adopted by the Ld. DRP in respect of loan advanced by the assessee company to its AE i.e. subsidiary, namely, American Completion Tools. 3.1 The facts in brief qua the issue in dispute are that the assessee company had advanced a loan of US dollar 5,00,000/- to its AE, namely, M/s American Completion Tools (ACT) vide agreement dated 10/12/2007, and charged interest on loan at the rate of 5.5%. The details of loan(s) advanced by the assessee and, which continued during the year under consideration, are as under:
Sr. Date Amount of Loan Interest No. of days Interest Amount No. (USD) Rate (INR) i) 01.04.2012 10,50,000 5.5% 152 12,97,220 ii) 20.9.2012 5,00,000 5.5% 192 7,80,283 iii) 5.10.2012 4,00,000 5.5% 177 5,75,458 Total 19,50,000 26,52,961 3.2 Before the learned TPO, the assessee contended that loan to AE was provided at sole discretion and on the basis of requirement of the AE from time to time and no personal guarantee or collaterals for the purpose of the said loan was obtained as the assessee itself was holding ownership over the AE. It was submitted that balance of loan and advances to the AE at the close of the year was of Rs.5,11,98,961/-and at the beginning of the year was of Rs.6,46,59,053/-. Further, it was submitted that the assessee earned interest income of Rs.26,52,961/- on the aforesaid loan. The assessee benchmarked the transaction of the interest on the aforesaid loan using Comparable Uncontrolled Price (CUP). The assessee used loan taken by the AE from “CITI bank” during the year as comparable transaction, where interest charged was at the rate of LIBOR plus 2%, i.e., 2.23 percentile. Thus, it was claimed that the interest rate as per CUP being lower than the rate of 5.5% charged by the assessee company, the transaction between the assessee and AE was at arm’s length. 3.3 The Ld. TPO following his own order for assessment year 2012-13, determined the interest rate of 13.27% and rejected the comparable used by the assessee in view of the observations as under:
S.A. No.972/Del/2018 (i) The loan offered by the Citibank to AE was on the basis of the real property and substantially all the company’s assets being offered as security, whereas no security/guarantee was offered by the AE to the assessee and hence, above two transactions cannot be held as a valid uncontrolled comparable transactions. (ii) The loan offered by CITI bank was priced with the base rate of LIBOR but the appellant had arbitrarily fixed the rate of interest @ 5.5%, thus, for correct analysis of conversion of LIBOR rate into INR rate, through currency swap should have been performed.
3.4 The Ld. DRP upheld the adjustment but restricted the rate of interest to 7.74% as against 13.27% by holding that 6 months LIBOR for the period as 4.72%, therefore, the average rate should have been adopted at 7.74%. 3.5 Before us, the learned Counsel for the assessee filed Paper Book containing pages 1 to 30 and submitted that identical issue was involved in the preceding assessment years and such addition stood deleted in assessment years 2011-12 and 2012-13 by the CIT(A). The Ld. counsel referred to copy of order of the Ld. CIT(A) for assessment year 2012-13, available on pages 25-30 of the Paper Book. He also submitted that no adjustment was made in preceding assessment years, namely, assessment years 2008- 09 to 2010-11. It was also submitted that the learned TPO had mechanically borrowed the addition from the order of assessment for Assessment year 2012-13, which stood deleted by the learned CIT(A). It was submitted that in AY 2012-13, the learned CIT(A)
S.A. No.972/Del/2018 had accepted the internal CUP adopted by the appellant as a valid comparable therefore on the said basis alone the addition is untenable. 3.6 The ld. DR, on the other hand, relied on the order of the TPO and DRP. 3.7 We have heard the rival submission and perused the relevant material on record. In the TP documentation for the instant year, the appellant had submitted that the transaction was at Arm’s Length Price on the basis that the AE’s bank interest rate was LIBOR+2% on loan raised from “CITI bank” and since average rate of one month LIBOR for the year was 0.23, therefore, average rate charged by CITI bank is 2.23%, which is less than the interest charged @ 5.5% by assessee for loan advanced to AE, and therefore the transaction is at ALP by applying the CUP method. The TPO/DRP in the impugned order have merely borrowed from the order for assessment year 2012- 13 and not rejected the aforesaid analysis done by the appellant in any manner. On the contrary, the learned CIT(A) in the order for Assessment year 2012-13 had held as under:
“The assessee had entered into a loan agreement dated 10.12.2007 with Act. The terms of the agreement mentioned that the borrower shall pay interest on all amounts disbursed and outstanding under the loan agreement at simple rate of 5.50% per annum. The borrower shall repay the principal of each disbursement after a period of 3 years. The borrower may from time to time prepay all or a minimum principal amount of USD 25000. The assessee earned Rs. 29,34,855/- as interest on loan during the year. The assessee applied CUP method for comparing the international transaction; whereas the TPO accepted the method but has applied rate of interest of 13/27% on the loan advanced to determine the arms length price. The appellant company would like to submit that the interest rate of 13.27% determined by the TPO as the most reasonable and appropriate rate is not based on a valid S.A. No.972/Del/2018 comparable. ACT is paying interest rate at the rate of Libor+2% on loan taken by it from Citi bank. The average rate of one month LIBOR for the year was 0.23 and to which a spread of 2% is added so average rate charged by Citi bank is 2.23% whereas interest charged by Parveen to ACT for loan given by it is 5.5%. From the above, the transactin can be considered to be at arm’s length from an Indian transfer pricing perspective. Having regard to the above, the contention of the appellant is that the loan given by the appellant to its subsidiary AE was in foreign currency i.e. US Dollars therefore LIBOR rate should be considered instead of the cost for funds utilized by the lender. In this regard, the appellant would like to place reliance on the judgment of the Hon’ble Jurisdictional High Court in the case of Cotton Naturals (I) Pvt. Ltd. reported in 276 CTR 445 (Del) wherein Court held that, it is the currency in which the loan is to be repaid which determine the rate of interest and hence the rate calculated by the learned TPO should not be considered for determining the interest rate. Under such circumstances, basis adopted by TPO on account of transfer pricing adjustment towards interest not realized from its AE on debts arising during the course of business s not tenable. Also further analyzing the history of loan given to Act the appellant submits that loan has been advanced to Act since AY 2007-08; and every year appellant has been paying the interest as per the agreed rate of interest. It is submitted that for AYs 2007-08 to 2010-11 no adjustment were made in respect of interest charged on loan advanced to ACT, further for AY 2011-12 adjustment of Rs. 37,08,440/- was made which too was deleted by the learned CIT(Appeals) vide order dated 09.09.2016 allowing full relief to the appellant on the same issues as covered in this ground. Thus, applying the rule of consistency, disallowance made is untenable. It is submitted that, once in all the five immediately preceding AYs namely AYs 2007-08 to 2011-12 addition made is deleted then both logically and legally interest on loan is allowable even in the year under consideration.”
3.8 Before us, the Ld. DR has not controverted the fact that Assessing Officer himself has accepted the arm’s length price of the transactions offered by the assessee in assessment year 2008- 09 and assessment year 2010-11. Further, the Ld. DR has not controverted the fact that issue in dispute has been decided against the department by the Ld. CIT(A) and no further appeal has been filed by the Department on this issue. In view of the facts and circumstances being identical to earlier years, which S.A. No.972/Del/2018 has been excepted by the Department, the rule of the consistency shall apply , as upheld by the Hon’ble Supreme Court in the case of RADHASOAMI SATSANG vs. COMMISSIONER OF INCOME TAX (1992) 193 ITR 0321 as under:
“9. We are aware of the fact that, strictly speaking, res judicata does not apply to IT proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.
3.9 Having regard to the foregoing, the adjustment so made of Rs.10,80,479/- is held to be erroneous and, therefore, directed to be deleted. The grounds No. 2 to 2.4 raised by the assessee are, therefore, allowed.
The ground Nos. 3 to 3.7 relate to adjustment of Rs. 1,35,21,926/- by holding receivables as a separate international transaction u/s 92B read with section 92F of the Act and Rule 10B of the Income Tax Rules, 1962 4.1 The assessee was engaged in sale and purchase of material to and from its subsidiary, namely, ACT. For the instant year sales were of Rs. 80,41,01,594/- to AE and purchases were of Rs. 6,31,40,264/- from AE. The Ld. TPO held that the transaction of receivables was a separate international transaction liable to be benchmarked in view of provisions of section 92CA(2A) introduced by Finance Act, 2011 and retrospective amendment 92CA(2B) introduced by Finance Act, 2012. He applied six S.A. No.972/Del/2018 months LIBOR rate plus 400 basis points to benchmark the international transactions and he thereby made an adjustment of Rs.1,35,21,926/- on account of receivables with AE. The Ld. DRP upheld the adjustment and rejected the claim made by the assessee. 4.2 Before us, the learned Counsel submitted that the AO has accepted the benchmarking done by the appellant on purchase and sale with AE since margin of assessee was 32.14% as compared to average margin of comparables of 22.12%. He submitted that if the working capital adjustment is allowed then too the revised margin would be 31.13% and, therefore, no transfer pricing adjustment is warranted. It was also submitted that no transfer pricing adjustment had been made in preceding assessment year on identical facts and circumstances of the assessee company. Support was drawn from the judgment of Apex Court in the case of CIT v. Excel Industries Ltd. 358 ITR 295. Apart from the above, it was also submitted that appellant has been granted certificate of Star Export House by the Office of Joint Director of Foreign Trade, Ministry of Commerce and Industry and, therefore, it is eligible for credit period of 360 days in terms of master circular on Export of Goods and Services issued by Reserve Bank of India. In such circumstances, it was contended that no adjustment was warranted. Reliance was placed on the following propositions:
A. Receivables is not an international transactions i) 55 SOT 566 (Mum.) Evonik Degussa India(P) Ltd. Vs. Asstt. Commissioner of Income Tax S.A. No.972/Del/2018 ii) for A.Y. 2004-05, Nimbus Communications Ltd. iii) ITA No. 1478/Del/2015, M/s. Bechtel India (P) Ltd., B. No interest charged by third party vendors on delayed payment and therefore, no adjustment. i) ITA No.1478/Del/2015, M/s. Bechtel India (P) Ltd. ii) 170 TTJ 411 (Del.) Kusum Healthcare (P) Ltd. Vs. Asstt. Commissioner of Income Tax, iii) ITA No. 765/2016, dated 25.04.2017 (Del.), Pr. CIT Vs. Kusum Health Care. C. Once difference impact of working capital of assessee viz-a- viz comparable has already been gathered in pricing/profitable of assessee, no further adjustment. i) ITA No. 1478/Del/2015, M/s. Bechtel India (P) Ltd. D. Once no interest charge of both on AEs and non AEs no adjustment warranted i) ITA No.5872/M/2009, Indo American Jewellery Ltd., affirmed by Hon’ble Bombay High Court in the case of CIT Vs. Indo Americal Jewellery Ltd., in ITA No.1053/2012 ii) 388 ITR 510 (Bom.) CIT Vs. Goldstar Jewellery Design (P) Ltd. iii) 345 ITR 241 (Del.) CIT Vs. EKL Appliances Ltd. S.A. No.972/Del/2018 4.3 The ld. DR, on the other hand, relied on the order of the TPO and DRP and submitted that delay of period of receivables in case of third-parties should be compared with the delay of the period with the AE. 4.4 We have heard the rival submission and perused the relevant material on record. In the instant case, operating margin earned by the assessee on sales to AE was 32.14% (OP/OC) as against comparables margin of 22.12%. The Delhi Bench in the case of Kusum Healthcare (P) Ltd. vs. ACIT in ITA No. 6184/D/14 has held as under:
“Further, the principle of aggregation is a well-established rule in the transfer pricing analysis. This principle seeks to combine all functionally similar transactions wherein arm's length price can be determined for a number of transactions taken together. The said principle is enshrined in the transfer pricing regulation itself and has also been advocated by the OECD Guidelines.
In this regard, reliance is placed upon the recent ruling of Hon'ble Delhi High Court in case of Sony Ericsson Mobile Communication India (P.) Ltd. (supra) and several other connected matters (supra) in respect of aggregation of closely linked transactions. The relevant portion of the judgment is reproduced below :- "In case the tested party is engaged in single line of business, there is no bar or prohibition from applying the TNM Method on entity level basis. The focus of this method is on net profit amount in proportion to the appropriate base or the PLI. In fact, when transactions are inter-connected, combined consideration may be the most reliable means of determining the arm's length price. There are often situations where closely linked and connected transactions cannot be evaluated adequately on separate basis..." "Where the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparables S.A. No.972/Del/2018 and determine or accept the transfer price and still segregate AMP expenses as an international transaction. "
From the above analysis, it is clear that assessee had earned significantly higher margin than the comparable companies (which have been accepted by the TPO) which more than compensates for the credit period extended to the AEs. Thus, the approach by the assessee of aggregating the international transactions pertaining to sale of goods to AE and receivables arising from such transactions which is undoubtedly inextricable connected is in accordance with established TP principles as well as ratio laid down by the Hon'ble jurisdictional High Court in the case of Sony Ericsson Mobile Communication India (P.) Ltd. (supra).”
4.5 The aforesaid decision was upheld by the Hon’ble Delhi High Court in the case of Pr. CIT vs. Kusum Health Care (P) Ltd. in and, it was 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 Assessee 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 ITA 765/2016 Page 5 of 5 time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way.
The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-à-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction. This was clearly impermissible in law as explained by this Court in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi).”
S.A. No.972/Del/2018 4.6 On the facts of the case of the appellant, it is not in dispute and as pointed out by the assessee by way of same tabulation at page 2 of Paper Book that in respect of identical transactions both in the preceding years and succeeding assessment year, there have been no adjustments made in respect of receivables outstanding with AE. The chart is tabulated hereunder:
Sr. AY Sales to AE Purchase Receivables Adjustment Assessment No. from AE if any u/s 1 2008-09 1,26,76,316 2,13,023 1,26,76,316 - 143(3) 2 2009-10 3,74,27,212 2,05,95,531 30,13,763 - 143(3) 3 2010-11 96,06,712 1,33,89,627 1,17,06,526 - 143(3) 4 2011-12 12,21,97,304 3,16,77,631 6,52,46,031 - 143(3) 5 2012-13 37,45,10,590 2,36,63,435 22,07,47,140 - 143(3) 6 2013-14 80,41,01,594 6,31,40,264 34,59,87,571 1,35,21,926 143(3) 7 2014-15 76,87,00,561 6,17,74,581 51,80,10,821 - 143(3) 8 2015-16 87,58,72,669 5,83,92,243 79,66,37,077 - 143(3) 9 2016-17 36,89,76,867 6,22,36,565 57,12,04,420 - 143(3) 10 2017-18 23,16,13,915 6,30,56,432 64,24,42,808 - 143(3)
4.7 It is noted that during the instant year, the aggregate sales of the assessee were of Rs. 228.79 crores out of which, Rs.80.41 crores were to AE. The assessee had been directed to place on record the chart tabulating the average period of realization of sales made to AE and non-AE. It is noted that average realization period is of 46 days in the case of domestic sales to non-AE and 34 to 62 days to non-AE in case of export sales as against period of 89 days to AE. Moreover, it is also not in dispute that the assessee has not charged interest on the delay in realization on sales made to non-AEs; yet authorities below have made an adjustment in the case of the appellant in respect of receivables outstanding beyond 30 days in respect of sales to AE in the S.A. No.972/Del/2018 instant year. In such circumstances, in our opinion, the adjustment made by the TPO in the instant year alone without any analysis of the pattern of sales realization both in the preceding and succeeding assessment years is not in accordance with the dicta laid out by Jurisdictional High Court in the case of Pr. CIT vs. Kusum Health Care (P) Ltd. (supra) particularly when the transaction of sales otherwise have been found at arm’s length and the appellant has pointed out that even if the adjustment was to be accepted as it is and then too revised margin would be 31.13% as against margin of the comparables of 32.1%. Once the margins adjusted after working capital adjustment of the tested party is more than the such margins of the comparables, then the issue of interest on overdue receivables stands subsumed under the working capital adjustment and no separate adjustment may be required as held by the Tribunal in the case of Kusum Healthcare Private Limited (supra). Moreover , there is a delay on receipt of the payment from third parties also varying from 34 days to 73 days and no interest has been charged from those third parties by the assessee, thus even on this ground no adjustment is required. Therefore, in view of foregoing, the authorities below were not justified to make addition on account of receivables and accordingly, adjustment so made is directed to be deleted. Grounds No. 3 to 3.7 raised by the appellant are allowed.
The Ground No. 4 is regarding disallowance of a sum of Rs. 3,31,460/- by incorrectly invoking section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 S.A. No.972/Del/2018 5.1 Having considered the rival submissions and perused the relevant material on record, we find that the assessee has earned dividend income of Rs.1,50,000/- on shares of Indian Bank and claimed this income as exempt however no expenditure has been disallowed against the said exempt income. The Assessing Officer invoked Rule 8D of the Income-tax Rules and computed disallowance of Rs. 3,31,460/-. The Hon'ble Delhi High Court in case of Joint Investment Pvt. Ltd. vs. CIT 372 ITR 694 held that by no stretch of imagination under section 14A or Rule 8D be interpreted so as to mean the entire tax exempt income is to be disallowed and has held as under:
9. In the present case, the AO has not firstly disclosed why the appellant/assessee’s claim for attributing Rs.2,97,440/- as a disallowance under Section 14A had to be rejected. Taikisha says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee’s claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO - an aspect which is completely unnoticed by the CIT (A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is `48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., `52,56,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. 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 the tax exempt income . This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.”
5.2 Thus, considering the fact of the present case and the submission made by ld. AR of the assessee, we direct the AO to restrict the disallowance to the extent of exempt income earned by assessee during the Financial Year. In the result, ground of appeal raised by assessee is partly allowed.
S.A. No.972/Del/2018 6. In the result, the appeal of the assessee is partly allowed. 7. As regards the stay application filed in this appeal, since the appeal has been decided on merits, the stay application has become infuctuous, the same is dismissed as such.
Order pronounced in the open court on 29th March, 2019.