One cannot refuse to pay interest on the money advanced to a sister firm

Fact and issue of the case

These cross appeals by the assessee and Revenue for the assessment years 2009-10 & 2013-14 are arising out of the orders of the Commissioner of Income Tax (Appeals)-18, Chennai in ITBA/APL/M/250/2022-23/1045817426(1) & 1046514558(1) dated 22.09.2022 & 28.10.2022. The assessments were framed by the ACIT, Central Circle 1(3), Chennai for the assessment years 200910 & 2013-14 u/s.143(3) r.w.s. 92CA(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’), vide orders dated 25.03.2013 & 20.12.2016 respectively. The appeal by the assessee for the assessment year 2012-13 in IT(TP)A No.77/CHNY/2022 is arising out of the order of the Commissioner of Income Tax (Appeals)-18, Chennai in ITBA/APL/M/250/2022-23/1046514079(1) dated 28.10.2022. The assessment was framed by the ACIT, Central Circle 1(3), Chennai u/s.143(3) r.w.s. 92CA(3) of the Act dated 07.03.2016. Assessee’s Appeals in IT(TP)A Nos. 77 & 78/CHNY/2022

The only common issue in these two appeals of assessee for the assessment years 2012-13 & 2013-14 is as regards to the order of CIT(A) confirming the action of the AO in disallowing expenses relatable to exempt income by invoking the provisions of section 14A of the Act r.w. rule 8D(2)(ii) & 8D(2)(iii) of the Income Tax Rules, 1962 (hereinafter the ‘Rules’) for interest disallowance and administrative expenses disallowance. For this, the assessee has raised various grounds in both the years, which are exhaustive and argumentative and hence, need not be reproduced.

The facts and circumstances are exactly identical in both the years and hence, by way of this common order these appeals are being disposed off.

Brief facts relating to assessment year 2012-13 in IT(TP)A No.77/CHNY/2022 are that the AO while framing assessment noticed that the assessee has received dividend income of Rs.32,78,79,872/- which includes dividend of Rs.32,78,44,905/-from the investment made by assessee in the shares of Trimex Sands Pvt. Ltd., a subsidiary company. The AO noted that the assessee has claimed interest expenditure in its P&L account amounting to Rs.16,63,71,259/-. He also noted that the investment in shares of Trimex Sands Pvt. Ltd., as on 31.03.2011 was at Rs.67,50,99,900/- and the same investment was in the financial year ending 31.03.2012. The AO noted that the funds available as on 31.03.2011 was only Rs.31,93,83,450/- and as on 31.03.2012, the availability of funds was Rs.44,25,66,430/- and this was due to increase in share capital to the tune of Rs.2,14,46,600/-. The AO observed that the interest expenses has not materially altered from Rs.17,06,44,678/- as on 31.03.2011 to Rs.16,63,71,259/- as on 31.03.2012. Accordingly the AO invoked Rule 8D(2)(ii) and disallowed interest expenses to the extent of Rs.4,80,62,722/-.

Similarly, the AO also taken average value of investment made by assessee and computed disallowance by taking 0.5% of the average value of investment under Rule 8D(2)(iii) at Rs.33,75,500/-Thereby the AO computed the disallowance u/s.14 of the Act r.w. rule 8D(2)(ii) at Rs.4,80,62,722/- and under rule 8D(2)(iii) at Rs.33,75,500/- and thereby aggregate disallowance at Rs.5,14,38,221/-. Aggrieved assessee preferred appeal before the CIT(A).

The CIT(A) simpliciter dismissed the ground of assessee despite the fact that the assessee before CIT(A) filed complete details of availability of funds but without going into the same, he observed that the AO has adopted the formula enacted by legislature under Rule 8D(2) and the formula prescribes that no such ground can be taken that the assessee has more interest free funds without one to one correlation. Hence, he dismissed the assessee’s ground. Aggrieved, now assessee is in appeal before the Tribunal.

Observation of the court

We have heard rival contentions and gone through facts and circumstance of the case. We noted that apart from the above difference pointed out by CIT(A) in his order that the single transaction adopted by TPO for comparing the AE and non-AE transactions for which CUP method is applied. Apart from this, we noted from the sheet that the mark up cost for transaction with AE is 40.16% as against 41.93% with non-AE. This difference is within the range of +/- 5% variations allowed under the second proviso to sub-section (2) of section 92C of the Act. Once this is a fact, we find no infirmity in the order of CIT(A) and hence, we confirm the same. This issue of Revenue’s appeal is dismissed.

The next issue in this appeal of Revenue is as regards to the order of CIT(A) deleting the disallowance of expenses made by AO by invoking the provisions of section 40(a)(ia) of the Act for non-deduction of TDS on compensatory charges. For this, Revenue has raised following ground No.3:-

The learned CIT(A) erred in deleting the disallowance made u/s. 40(a) (ia) of the IT Act on the compensatory charges paid by the assessee without deduction of tax at source and without appreciating the fact that the compensatory charges were paid in lieu of the credit period availed from the suppliers, as per the agreement and as such the payments would partake the character of “interest” and requires deduction of tax u/s.194A of the IT Act.

Brief facts are that the AO on perusal of tax audit report noted that the assessee has paid a sum of Rs.24,44,193/- to Empire Mineral and Transport on account of plot rent. According to AO, the assessee has not deducted TDS on the above amount. Hence, he invoking the provisions of section 40(a)(ia) of the Act, made disallowance of Rs.26,44,193/- and added to the total income of the assessee. Aggrieved, assessee came in appeal before the CIT(A).

The CIT(A) has gone into the submissions of the assessee and noted that the facts recorded by AO are not correct as the assessee procures barite lumps from Andhra Pradesh Mineral Development Corporation (APMDC) for the purpose of its trading. The supplier initially agreed for interest free credit for a period of 90 days. Thereafter it has renegotiated the supplies for either cash or payment of interest for the credit period enjoyed by the assessee. The assessee has paid a sum of Rs.26,44,193/- as compensation charges for the credit period obtained by it. This amount was debited by the assessee under the interest. The assessee further stated that the payment made to APMDC is compensatory in nature but not interest as contemplated u/s.194A for the purpose of deduction of tax at source as held by AO. The assessee relied on the decision of Co-ordinate Bench of Ahmedabad Tribunal in the case of ITO vs. Parag Mahasukhalal Shah, [2011] (Ahd-ITAT), wherein it was held that “When a payment is compensatory in nature and not related to any deposit/ debt/ loan then such a payment is out of ambits of provisions of section 194A. In this case, the assessee was allowed interest free credit for a period of 60 days. In case of overdue payment cost of Purchase was paddled with a liability to pay a Compensatory sum which was termed as interest. It was further held that the compensatory payment had a direct link and immediate nexus with the trade liability being connected with delayed purchase payment, It did not fall within the category of interest as defined in section 2(28) (A) for the purpose of deduction of tax at source as per the provisions of section 194A.” In view of the above, the ld.counsel for the assessee stated that these payments being compensatory in nature, the CIT(A) deleted the disallowance by observing in para 8.3 as under:-

Following judicial discipline of jurisdictional ITAT’s order on the very same issue in the case of very same assessee for the AY 2007-08, I delete the addition made by the AO. The grounds in this regard are allowed.” Aggrieved, Revenue came in appeal before the Tribunal.

We have heard rival contentions and gone through the facts and circumstances of the case. We noted that the payments made to APMDC is clearly in the nature of compensatory and these cannot be called as interest which are contemplated in the provisions of section 194A of the Act, for the purpose of deduction of TDS. Hence, we find no infirmity in the order of CIT(A), who has rightly deleted the disallowance and we confirm the same. Accordingly, this appeal of the Revenue is dismissed. Revenue’s Appeal in ITA No.1120/CHNY/2022, AY 2013-14 23. The only issue in this appeal of Revenue is against the order of CIT(A) deleting the addition made by AO/TPO towards adjustment on account of transfer pricing relating to barite-lumps. For this, Revenue has raised the following grounds:-

On the facts and circumstances of the case. the learned CIT(A) has erred in deleting the addition of Rs. 2,18,07,420/- made towards adjustment on account of transfer pricing relating to barite-Lumps.

The Ld. CIT(A) has failed to note that the adjustment was done by the AO as per the relevant provisions of the Act/ Rules, taking into account all the comparability characteristics prescribed.

Since we have already decided this issue for the assessment year 2009-10 in ITA No.1035/CHNY/2022 in preceding para 18, taking a consistent view we find no infirmity in the order of CIT(A) and hence, we confirm the same. This issue of Revenue’s appeal is dismissed.

In the result, the appeals filed by the assessee in ITA Nos.77 & 78/CHNY/2022 are partly-allowed & ITA No.993/CHNY/2022 is allowed and both the appeals of the Revenue in ITA Nos.1035 & 1120/CHNY/2022 are dismissed.

Order pronounced in the open court on 11th October, 2023 at Chennai.