RALLIS INDIA LIMITED ,MUMBAI vs. THE ASSTT. COMMISSIONER OF INCOME TAX CIRCLE 8(1)(1), MUMBAI

Without prejudice to ground nos. 5 & 6, the Appellant submits that disallowance of expenditure u/s. 14A be restricted to 2% of the dividend income earned by the Appellant, following appellate orders in the assessee's own case in earlier years.

Without prejudice to ground nos. 5 & 6, the Applicant submits that the disallowance is highly excessive and arbitrary.

Without prejudice to ground nos. 5, 6, 7 & 8, the appellant submits that no disallowance is called for u/s.14A read with Rule 8D in respect of those investments on which no dividend income has been received during the year.

Both lower authorities erred in including, in Book-Profit (u/s 115JB), the amount of disallowance made u/s 14A. The Applicant submits that the Assessing Officer be directed to delete the addition to Book-Profit in respect of disallowance u/s 14A.

Both lower authorities erred in disallowing the weighted deduction for revenue scientific expenditure by way of expenditure incurred for scientific research on approved in-house research and development facility u/s 35(2AB) of the Act, aggregating to Rs.21,58,10,103/-.

Both lower authorities erred in disallowing the weighted deduction u/s 35(2AB) of the Act, aggregating to Rs.48,00,835/-.

Both lower authorities erred in misreading and misinterpreting the provisions of section 35(2AB) of the Act.

The Assessing Officer erred in disallowing the Applicant's claim u/s 35(2AB) by holding that the non-submission of report in Form 3CL by the Department of Scientific Research, would disentitle the Applicant from its claim u/s 35(2AB).

Both lower authorities erred in disregarding the decision of the juri ictional High Court in the case of Astec Lifesciences Ltd v. CIT (WP No 1790 of 2022).

The Assessing Officer erred in restricting the claim of MAT credit to Rs.19.97 crores as against Rs.27.14 crores, claimed by the Appellant comраnу.

The Appellant company denies any liability of interest under sections 234A, 234B & 234C, which has been erroneously levied by the Assessing Officer.

The Assessing Officer erred in not granting credit for tax deducted at source to the tune of Rs.67,900/-.

The Assessing Officer erred in not granting credit for advance tax paid to the tune of Rs.3,77,21,258/-. The Appellant craves leave to add to, amend, alter, modify or withdraw any or all the grounds of appeal before or at the time of hearing, as they may be advised from time to time."

Ground Nos. 1 to 4 relates to the Transfer Pricing (TP) adjustments.

Representatives of both the sides were heard at length. Case records carefully perused and the relevant documentary evidence brought on record, duly considered in light of Rule 18(6) of the ITAT Rules, 1963. 5. Briefly stated the facts of the case are that the assessee is engaged in the business of manufacturing and selling of agrochemicals including pesticides and is a registered company under the India Companies Act. The assessee is a group entity of Tata Enterprise and is in the agriculture inputs industry. It has four production facilities of which two are located in Gujarat and two in Maharashtra.

A reference u/s 92CA(1) of the Act was made to DC/ACIT, TP 3(3)(1), Mumbai, for computation of ALP in relation to the international transactions. During the year the assessee has sold goods to its AE, Tata Chemicals International Pte Ltd. Singapore (TCIPL). These goods are sold on "Bill To Ship To Model” basis i.e., the billing is done to TCIPL and the goods are sold directly to third party i.e., Adama Agan Ltd. The international transactions relating to sale of goods was to the tune of Rs.1,77,65,21,572/- and the assessee adopted other method as the most appropriate method.

The peculiar facts are that from April to 29th August, the assessee sold directly to Adama Agan Ltd. (AAL), but post 29th August, the assessee sold goods through its AE i.e., TCIPL. When the goods were sold directly by the assessee, the credit period allowed to AAL was 150- 180 days for the pesticides Metribuzin (Metri) and Pendimenthalin (Pendi) whereas the credit period allowed to TCIPL is immediately on receipt of invoice or after 7-10 days of receipt of invoice. It was explained that due to the differed in credit period, Rallis India had to discount the bills from the banks and for which Rallis India had to pay the bill discounting charges. Justifying its sales through TCIPL, it was explained that considering the bill discounting charges, the cost of working capital etc., there is net benefit on sales to TCIPL. The assessee also furnished the entire party-wise calculation on the benefit of sales through TCIPL thereby justifying the transactions with respect to the sale of goods to AE. Consistent with the arm's length standard from the Indian transfer pricing perspective.

The contentions and submissions of the assessee did not find any favour with the TPO who was of the firm belief that if the assessee had sold the goods directly to AAL, it would have sold it at a value of Rs.1,83,13,86,163/- whereas, the assessee has sold the goods through its AE, TCIPL worth Rs.1,77,65,21,572/-. Thus, the difference of Rs.5,48,64,591/ - is revenue of AE, TCIPL and, therefore, the assessee has incurred a loss of Rs.5.48 Crores. The AO was of the opinion that the prices at which the AE, TCIPL had sold the goods to AAL, should be considered as ALP. This is the rate at which the assessee would have sold to third party under an uncontrolled scenario. The TPO, on the strength of this belief proposed adjustments as under:- Product Qty AE-TCIPL Export Value (U ) TCIPL-Adama Agan (ALP) Export Value (U ) value Value (U ) Difference in Proposed Prices-Adjustment Exchang e Rate as Value (In INR) on 31.03.20 20 Pendimethalin Powder 550KG 13,55,200 85,21,040 13,55,200 88,14,432 293,392 75.38 22,115,889 Metribuzin Tech 500 KG (Jumbo Bag) 560,000 15,830,720 560,000 16,288,200 457,480 75.38 34,484,842 Total Adjustment 5,66,00,731 7.1. 1. And, accordingly proposed upward adjustment of Rs.5,66,00,731/-.

The objections raised by the assessee were dismissed by the DRP and the final assessment order was framed accordingly.

Before us, the ld. Counsel for the assessee drew our attention to the working capital cost, explaining the savings done by the assessee in entering the impugned transactions through its AE, TCIPL. It is the say of the ld. Counsel that both the lower authorities have completely misread the statement furnished by the assessee. The ld. Counsel for the assessee, vehemently stated that both the TPO & DRP have completely ignored the risk factor as explained by the assessee. The ld. Counsel, reiterated that earlier when it was selling directly to AAL, the credit period ranged from 150 to 180 days thereby permitting the assessee to discount the bills at a cost. When the goods were sold through AE, TCIPL, the assessee received payments within 8 to 10 days as explained in the chart thereby showing that there was substantial savings in the interest minimizing the credit risk arising from non-payment of dues by customers. The TPO and the DRP also ignored the market risk as now the AE is responsible for carrying out all the sales and marketing related activities for the products. Thus, the assessee does not bear the market risks. The ld. Counsel for the assessee concluded by saying that the TP adjustment made by the AO is unwarranted and uncalled for in the peculiar facts and circumstances of the case.

Per contra, the ld. D/R strongly supported the findings of the ΤΡΟ.

We have given a thoughtful consideration to the orders of the authorities below. The undisputed fact is that the assessee was selling goods directly to AAL. The credit period was between 150-180 days and the assessee was bearing the cost of bill discounting, credit risk arising from non-payment of dues by customers and also market risk where the prices keep on fluctuating in the international market. Post 29th August, when the assessee started selling its goods through its AE, TCIPL, the actual days of credit were between 5-21 days with no credit risk and no market risk as both have been shifted to the AE, TCIPL.

We have given a thoughtful consideration to the working capital cost chart exhibited at page 136 of the paper book and undisputedly we find that the benefit in working capital cost is at Rs. 6,17,74,577/- whereas the difference in selling price is Rs.5,48,64,591/-. Net benefit being Rs.69,09,987/-.

The following observations of the DRP are misplaced against the facts of the case:- “But the same has to be demonstrated based on actual savings accruing to the assessee by juxtaposing the alleged loss due to direct sale (when the arrangement was not in place) and the so called profit accruing as a result of the arrangement. This requires the following details:- Actual duration taken for payment by AE in case of arrangement Interest loss in the case od direct billing with actual cash flow Interest bearing and non interest bearing funds available with the assessee Advances, loans advanced to the AE by assessee, if any 6.3. 5. These details have not been submitted by the assessee and hence the notional interest gain derived by the assessee cannot be taken as an acceptable adjustment as mandated by the Rule 10B(10(a)..." 9.2. 1. As mentioned hereinabove, as per the chart exhibited at page 136, the assessee has clearly demonstrated the benefit in saving of interest. From the chart, it can be seen that the actual difference of credit when the sales are made by AE to AAL, is much less than the credit period when sales were made by the assessee directly to AAL. Since all the apprehensions of the DRP has been explained in the chart exhibited at page 136, the impugned TP adjustment was uncalled for on the facts mentioned hereinabove. Therefore, we direct the AO/TPO to delete the impugned TP adjustment. Ground Nos. 1 to 4 are allowed.

Ground Nos. 5 to 9 relate to the addition on account of disallowance made u/s 14A r.w.r. 8D.

The assessee has challenged the impugned disallowance on the ground that the AO has nowhere recorded any satisfaction for making the impugned disallowance nor the AO has discussed anywhere the suo moto disallowance made by the assessee. It was explained that the only tax-free receipt is the dividend income for which no amount of expenditure has been incurred by the assessee towards earning of dividend income. It was explained that the dividend are directly credited to the assessee's bank account through ECS. It was further explained that by way of abundant caution, the assessee has suo moto disallowed Rs.18,61,000/- which represents 1/10th salary of the CFO, Treasury head and Manager Treasure.

Before us, the ld. Counsel for the assessee placed strong reliance on the decision of the Hon'ble Bombay High Court in the case of PCIT vs. Godrej & Boyce Mfg Co. Ltd. reported in (1029 of 2018) (Bom HC) and are by the Hon'ble Juri ictional High Court of Bombay and further relied upon the decision of the Hon'ble Supreme Court in the case of Per contra, the ld. D/R supported the findings of the AO.

We have carefully considered the orders of the authorities below. The undisputed fact is that the assessee has own interest free funds to the tune of Rs. 1409 Crores and has earned cash profits during the year under consideration to the tune of Rs.239.27 Crores. The interest free own funds are far more in excess of the investments and the cash flow statement already on record suggest that no borrowings have been invested in purchasing of investments. We further find that nowhere the AO has recorded his dis-satisfaction insofar as the suo moto disallowance of Rs. 18.61 Lakhs is concerned. The AO has simply stated that some expenses need to be disallowed for earning exempt income without pointing out why the suo moto disallowance made by the assessee is not sufficient for earning the exempt income. On identical set of facts, the Hon'ble High Court of Bombay in the case of Godrej & Boyce Mfg Co. Ltd. (supra), has held as under:- “11. In the present case, the assessee had earned an exempt income of Rs. 84,30,37,423/- from shares and mutual funds and submitted a computation of inadmissible expenditure u/s 14A amounting to Rs. 13,66,635/-. The assessee claimed that the disallowance made u/s14A was as per the books of account attributable to earning of exempt income! On a perusal of the assessment order we find that there is no discussion by the AO with regard to the computation of inadmissible expenditure made by the assessee forming part of the return of income. Further, the AO has not recorded any satisfaction that the working of inadmissible expenditure u/s14A is incorrect with regard to the books of account of the assessee. The provision u/s 14(2) does not empower the AO to apply Rule 8D straightaway without considering the correctness of the assessee's claim in respect of expenditure incurred in relation to the exempt income. We agree with the view of the ITAT that in the present case the AO has neither examined the claim in respect of expenditure incurred in relation to exempt income of the assessee nor has recorded any satisfaction with regard to the correctness of assessee's claim with reference to the books of account. Consequently, the disallowance made by applying the Rule 8D is not only against the statutory mandate but contrary to the legal principles laid down. In our view too, the CIT (A) has rightly deleted the addition made on account of interest expenditure as the assessee had sufficient interest free surplus fund to make the investment and the ITAT has rightly deleted the disallowance made by the AO us 14A r.w Rule 8D. Consequently we hold that, the interest expenditure cannot be disallowed u/s14A r.w. Rule 8D(2)(ii) under any circumstances.”

Similar view was taken by the Hon'ble High Court of Bombay in the case of Tata Capital Ltd. (supra). The relevant findings read as under:-