Case Law Details
Brief of the Case
ITAT Chennai held In the case of The ACIT vs. M/s. Trimex Industries (P) Ltd that payment of interest which has direct link or immediate nexus with the trading liability being connected with the purchase payment, it will not fall under the category of interest as defined in Sec. 2(28A) of the Act. Payment made by the assessee in the present appeal cannot be termed as interest & rightly observed by CIT (A) that this payment is compensatory in nature. There will be no TDS liability for the same.
Facts of the Case
The assessee is an exporter of minerals exporting to its associate enterprise (A.E) as well as Non-AE. The assessee adopted CUP method, where ever the assessee has comparable transctions, and TNMM method, when comparable transactions are not available. However, A.O/T.P.O has followed CPU method for all products by obtaining export data from Customs department of various ports. The Assessing Officer compared the assessee’s export and originally proposed to add Rs.9,79,93,973/- for various products exported by the assessee. The assessee submitted its objection and after considering the same a sum of A19,48,058/- was added under various products.
On the matter of disallowance u/s 40(a) (i), the facts are that the interest expenditure includes a sum of Rs..28,56,735/- classified as interest paid to others. This interest includes a sum of A1422/- paid towards interest on service tax and the balance of Rs. 28,55,313/- was paid to APMDC [Andhra Pradesh Mineral Development Corporation). As per the agreement with APMDC [supplier of Barites] the buyer is required to pay 104% of the value of the cargo in advance of every lot of 5000MTs. However the assessee company instead of paying advance has opened Letter of Credit (LC) in favour of APMDC Immediately upon LC opening the suppliers gives a Delivery order. These LCs are discounted by the supplier after complying with the terms of LC. APMDC claims compensation/ interest from the date of delivery order till the date of LC realization. This entire interest paid is grouped under interest paid to others. This expense is nothing but a part of purchase costs as the supplier has different arrangements with different buyers and accordingly the prices are adjusted. Further it is so held in many cases that to claim interest u/s.36 (1) (iii), the relationship of borrower and lender is necessary. In our case as the interest payment is due to different arrangement with the supplier, this is to be treated as a part of Purchase Consideration. Hence TDS for this payment does not arise. AO found the assessee reply is not convincing and he make addition of Rs.28,55,313/
Contention of the Assessee
The ld counsel of the assessee submitted that the transfer pricing officer and in turn the Assessing Officer was not justified in making adjustment to the sale price on account of transfer pricing. The TPO has failed to appreciate that during the year there were six instances of sale of Barite lumps to Associated Enterprise and that in all but one instance the sale price compared favorably with the arms length price. As rightly held by the Commissioner of Income Tax (Appeals), the TPO while making adjustment to sale price of the assesses has not given weightage to the CIF sale of the competitor. The TPO simply deducted the freight incurred by the competitor from the sale price to arrive at the FOB price. Due weightage was not given to investment and risks associated.
On the matter of disallowance u/s 40(a) (i), it was submitted that the assessing officer is not justified in invoking the provisions of Sec.40(a)(ia) to the additional purchase price of goods procured from Andhra Pradesh Mineral Development Corporation by treating it as a payment in the nature of ‘interest’. The Assessing Officer failed to appreciate that the additional purchase price paid by the assessee represented compensation for the credit period utilized. The CIT (A) is absolutely justified in relying on the decision rendered by the Ahmedabad Bench of ITAT in the case of Income Tax Officer, Vs. Parag Mahasukhlal Shah (2011) 12 Taxmann.com 37(Ahd.) 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 ambit of the provisions of Sec.194A.
It was further submitted that it is settled law that if a statute is curative or merely declaratory of the previous law, retrospective operation is intended. An amending Act may be purely clarificatory to clear a meaning of a provision of the Principal Act which was already complicit. A clarificatory amendment of this nature will have retrospective effect, and therefore, if the Principal Act was existing law when the constitution came into force, the amending Act also will be part of the existing law. In this regard, we invite attention to the decision rendered by the Supreme Court in the case of Allied Motors (P) Ltd. vs. CIT [1997] 91 Taxmann 205/224 ITR 677 (SC). As per the latest decision of Allahabad High Court in the case of CIT vs. Vector Shipping Services (P) Ltd. (Allahabad), Sec.40(a)(ia) disallowance applies only to amounts ‘payable’ as on 31st March and not to amounts already paid during the year. The majority decision in Merilyn Shipping 136 ITD 23(SB) was approved by the Allahabad High Court. The SLP filed by the revenue was dismissed in limine by the Apex court. He prays that since the Commissioner of Income Tax (Appeals) has allowed the appeal on proper appreciation of facts, the Tribunal may dismiss the departmental appeal and render justice.
Contention of the Revenue
The ld counsel of the revenue supported the order of AO.
Held by CIT (A)
CIT (A) deleted the addition made by AO. It was held that the Assessing Officer added a sum of Rs.17,03,792/- under the head Barite lumps by comparing the month to month sales with that of competitors from the data obtained from the customs department. It may be seen from the department working that except in the month of June export realization of the assessee in all other months are favourable. The Assessing Officer erred in making addition to the June month sales on the ground that the average price realized by the assessee is less than that of competitors. The entire provisions of transfer pricing is to determine the arms length transactions of the assessee and not a mere arithmetical exercise for making additions in unfavourable months ignoring other transactions where the assessee has fetched higher than that of competitors. The inconsistency in the pricing of the comparable was not taken note of by the Assessing Officer.
CIT (A) further submitted that the Assessing Officer also erred by comparing the FOB sales of the assessee with the CIF sales of the competitor only by reducing the freight charges. The AO’s assumption that by reducing freight from the CIF sales both are comparable is incorrect due to the reason that no further weightage is given to the higher investment and risks assumed in CIF sale. It is therefore natural that the sales made under CIF terms might command higher premium to compensate the additional investment and the higher risks assumed.
Disallowance u/s 40(a) (i)
CIT (A) observed that it is not a question of money borrowed, and interest thereon, but a payment made for purchase and a compensatory charge for the period of credit utilized for payment of the amount due. The compensation is referred to as interest, it cannot fall under the definition of interest and hence the disallowance made is not warranted and is directed to be deleted.
Held by ITAT
Transfer pricing adjustment
It was brought to our notice that similar issue was decided by this Tribunal in assessee’s own case in ITA No.2117/Mds/2010 for the assessment year 2006-07, dated 25.06.20.12, wherein it was held that – a) The TPO has not made any external comparison of the prices, even though the assessee has furnished the price details of M/s. IBC Ltd. The TPO has accepted the particulars furnished by M/s. IBC Ltd. in the assessment of that company whereas there is no material difference in the price quoted by the assessee and that company. b) The TPO has adopted the special sale price attributable to non AEs on small quantity by ignoring the price quoted by the assessee to its AE for bulk and regular sales. The variables adopted by the TPO for making comparison are fundamentally different and, therefore, the comparison is erroneous. c) The TPO has overlooked the basic difference between FOB and CIF value while comparing the sale price attributable to AE as well as to non AEs. While accepting the comparing sale value in the case of non AE, the TPO has ignored the factors like deployment of additional capital and risk involved. d) The TPO has not considered quality variation in different consignments and the corresponding variations reflected in the pricing of exports.
Since the facts in assessment year 2007-2008 are identical, we confirm the order of the Commissioner of Income Tax (Appeals) on this issue by placing reliance on the above order of the Tribunal. This ground of the Revenue is rejected
Disallowance u/s 40(a) (i)
CIT (A) observed that The payment made is compensatory and the decision relied upon by the assessed holds that the definition of interest covers interest payable in any manner in respect of loans, debts, deposits, claims and other similar rights or obligation. It may even include service charges but only with regard to money borrowed. In this case, it is not a question of money borrowed, and interest thereon, but a payment made for purchase and a compensatory charge for the period of credit utilized for payment of the amount due. Though the compensation is referred to as interest, it cannot fall under the definition of interest and the hence the disallowance made is not warranted and accordingly he deleted the addition.
In our opinion, the impugned payment which has direct link or immediate nexus with the trading liability being connected with the purchase payment and it will not fall under the category of interest as defined in Sec. 2(28A) of the Act. Payment made by the assessee in the present appeal cannot be termed as interest and accordingly we are in agreement with the findings of the Commissioner of Income Tax (Appeals). Without entering into the controversy so as to whether the payment is within the ambit of interest in Sec. 2(28A), the assessee is also bound to succeed in its alternative argument that the entire payment if made during the previous year relevant to the assessment year under dispute no disallowance would be made u/s. 40(a)(ia)t in view of the decision cited by the ld. counsel for assessee.
Accordingly, appeal of the revenue dismissed.
Difference of Opinion
Whether merely because the assessee has already paid the amount on the last date of financial year, whether no disallowance could be made under Section 40(a) (ia) of the Act?
This issue has been elaborately considered by the Cochin Bench of this Tribunal in Shri Thomas George Muthoot v. ACIT in I.T.A. No. 63 & 64/Coch/2014 dated 28.08.2014. In this case, It was held that Section 40(a)(ia) would cover not only to the amounts which are payable as on 20 ITA No. 63&64m 83-85&7-72/Coch/2014 31st March of a particular year but also which are payable at any time during the year. Of course, as long as the other requirement of the said provision exist. In that context, in our opinion the decision of the Special Bench of the Tribunal in the case of M/s Merilyn Shipping & Transports vs ACIT (supra), does not lay down correct law.”
In fact, the Punjab & Haryana High Court has also taken a similar view as that of the Kerala High Court. The Income-tax Act, being a Central enactment, is applicable to throughout India. Therefore, judicial discipline requires interpretation of law uniformly in all the States. Merely because the Members are sitting in Chennai Bench of this Tribunal, that cannot be a reason to take different view when the same Members have taken a particular view in Cochin Bench of this Tribunal. The fact remains that the Kerala High Court has confirmed the order of Cochin Bench to which both the Members are party. Therefore, in the absence of any contrary view by the Jurisdictional High Court, there is no reason to take a view other than the one taken by Cochin Bench of this Tribunal.
With the above reason, I am of the considered opinion that Section 40(a)(ia is applicable not only for the amount paid by the assessee but also the amount yet to be paid and given credit in the accounts of the assessee. As already observed, however, the assessee is not liable to deduct tax under Section 194A of the Act. Therefore, the CIT (Appeals) has rightly allowed the claim of the assessee.
