M/s.SunTech Business solutions P Ltd, Trivandrum V. The ACIT, Trivandrum

ITA 113/COCH/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 0973 (ITAT-COCHIN)
• Duration Of Justice: 2 year(s) 6 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-09-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 28-08-2018
• Assessment Year: 2011-2012
• Appeal Filed On: 02-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A S BINDHU
• Assessee Lawyers: SAMPATH RAGHUNATHAN
• Keywords: Related party transaction; Business income; Transfer pricing; Opportunity of being heard; International transaction; Earning of tax free income; Working capital adjustments; Commercial expediency
• Section: 143(3); 92B; 234B; 14A; 12; 90

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI CHANDRA POOJARI, AM & GEORGE GEORGE K., JM I .T . A. NO. 1 1 3 / COCH/ 2016 & 509 /COCH/2016 ASSESSMENT YEAR S : 2011 - 12 & 20 12 - 13 M/S. SUN TEC BUSINESS SOLUTIONS (P) LTD., 321, NILA, TECHNOPARK CAMPUS, TRIVANDRUM-695 581. [PAN:AAICS 8020K] VS. THE DEPUTY COMMISSIONER OF INCOME-TAX,CIRCLE-2(1), TRIVANDRUM. (A SSESSEE - APPELLANT) (REVENUE - RESPONDENT) S.P. NO. 13/COCH/2016 (ARSG. OUT OF I.T.A. NO.113/COCH/2016 ) ASSESSMENT YEAR : 2011 - 12 M/S. SUNTECH BUSINESS SOLUTIONS (P) LTD., 321, NILA, TECHNOPARK CAMPUS, TRIVANDRUM-695 581. [PAN:AAICS 8020K] VS. THE DEPUTY COMMISSIONER OF INCOME-TAX,CIRCLE-2(1), TRIVANDRUM. (ASSESSEE - APPELLANT) (REVENUE - RESPONDENT) A SSESSEE BY SHRI SAMPATH RAGHUNATHAN, CA REVENUE BY SMT. A.S. BINDHU, DR D ATE OF HEARING 28/08 /201 8 DATE OF PRONOUNCEMENT 12 / 09 /2018 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THESE APPEALS FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE DIFFERENT ORDERS OF THE ASSESSING OFFICER PASSED U/S. 143(3) R.W.S. 144C(5) R.W.S. 92CA(3) OF THE I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 2 INCOME TAX ACT, 1961 IN PURSUANT TO THE DIRECTIONS OF THE DRP DATED 31/08/2016 AND PERTAIN TO THE ASSESSMENT YEARS 2011-12 AND 2012-13. 2. THE FIRST COMMON GROUND IN BOTH THE APPEALS IS THAT THE ASSESSMENTS PASSED BY THE TPO ARE BAD IN LAW. THIS GROUND IS GENERAL IN NATURE, AS SUCH DOES NOT REQUIRE ANY ADJUDICATION. 3. THE NEXT GROUND IN BOTH THE APPEALS IS WITH REGARD TO ERRONEOUS IMPUTATION OF INTEREST ON TRANSACTION AS THIS IS OUTSIDE THE PURVIEW OF TRANSFER PRICING REGULATIONS IN INDIA. 3.1 THE FACTS OF THE CASE ARE THAT THE ASSESSEE HAD DIRECTLY TRANSFERRED MONEY TO US BRANCH AND UK BRANCH IN ADDITION TO THE AMOUNT TRANSFERRED TO ITS SUBSIDIARIES. ACCORDING TO THE LOWER AUTHORITIES, THE AMOUNT TRANSFERRED TO THE BRANCHES CLEARLY CAME UNDER THE PURVIEW OF TRANSFER PRICING REGULATIONS. HENCE, THE TPO DETERMINED THE ALP FOR THE AMOUNT SO TRANSFERRED TO THE BRANCHES DIRECTLY. AS NO INTEREST WAS SEEN CHARGED ON THE AMOUNT TRANSFERRED TO THE BRANCHES ALSO, THE RATE WHICH WAS ADOPTED FOR ADVANCES TO SUBSIDIARIES (INCLUDING BALANCES) WAS BEING APPLIED FOR THE BRANCHES ALSO. 3.2 ON APPEAL, THE DRP OBSERVED THAT THE ASSESSEE WAS TREATING THE ADVANCES GIVEN TO EACH OF THE AES DIFFERENTLY AND WAS CHARGING INTEREST FROM ONLY ONE AE, I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 3 I.E., SUNTEC GERMANY WHEREAS THE SERVICES RENDERED BY ALL THESE AES WERE SIMILAR. IN THE CASE OF THE AES THE ASSESSEE HAD ADJUSTED ADVANCES PAID AGAINST THE REIMBURSEMENT OF EXPENSES WHICH THE ASSESSEE OWED TO ITS AE FOR THE SERVICES RENDERED ON ITS BEHALF. SO, THE DRP NOTICED THAT THE TREATMENT OF ADVANCES AND ITS SETTING OFF AGAINST THE REIMBURSEMENTS PAYABLE WERE SIMILAR FOR ALL AES BUT INTEREST WAS CHARGED ONLY FROM SUNTECH, GERMANY. ACCORDING TO THE DRP IF THE RESPECTIVE BRANCHES HAVE RAISED THE SAID AMOUNT FROM THE OPEN MARKET FROM A THIRD PARTY, IT SHOULD HAVE PAID ON INTEREST RATE MUCH HIGHER THAN THIS. IT WAS FOUND THAT DURING THE CORRESPONDING PERIOD THE FUNDS WERE BLOCKED FOR THE ASSESSEE AND THE ASSESSEE IS NOT IN THE BUSINESS OF FINANCING AND IT IS NOT AN INTERBANK ADVANCE. THE ADVANCE WAS FROM THE HOLDING COMPANY TO ITS SUBSIDIARY COMPANY AS THE ASSESSEE HAD NOT MANAGED FUNDS ABROAD AND THUS GIVEN ADVANCE TO THE SUBSIDIARIES. THUS THE DRP CONFIRMED THE FINDINGS OF THE TPO AND HELD THAT THE TRANSACTIONS WITH BRANCHES ARE IN THE NATURE OF LOANS AND COMMERCIAL EXPEDIENCY WILL NOT OVERRIDE THE LAW RELATING TO TRANSFER PRICING. 3.3 AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR SUBMITTED THAT THE ADVANCES WERE NOT IN THE NATURE OF LOANS OR ADVANCES AND WERE SHORT TERM ADVANCES OF TEMPORARY NATURE GIVEN IN THE ORDINARY COURSE OF BUSINESS BASED ON COMMERCIAL EXPEDIENCY. THE ASSESSEE SUBMITTED THAT THE IMPUTATION OF INTEREST ON INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE ASSESSEE WAS OUTSIDE THE PURVIEW OF TRANSFER PRICING REGULATIONS IN INDIA. HE HAS FURTHER ASSERTED THAT THE I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 4 FOREIGN BRANCH AND THE INDIAN COMPANY WERE TO BE TREATED AS ONE LEGAL ENTITY. THE LD. AR RELIED ON THE DECISION BY THE ITAT, HYDERABAD BENCH IN THE CASE OF SEMANTIC SPACE TECHNOLOGIES LTD. VS. DCIT IN I.T.A. NO. 824/HYD/2010 DATED 07/03/2012. 3.4 THE LD. DR RELIED ON THE ORDER OF THE DRP. 3.5 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. WE FIND THAT A SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THIS TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.167/COCH/2015 DATED 13/10/2015 WHEREIN IT WAS HELD AS UNDER: 7. WE HAVE HEARD THE LD. AR AND THE LD. DR ON THE AFORESAID ISSUE. WE DISAGREE WITH THE SUBMISSION MADE BY THE LD. AR THAT THE VIEW TAKEN BY THE ITAT, COCHIN BENCH IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2008-09 IS CONTRARY TO THE ASSERTIONS MADE BY THE ASSESSEE IN SUPPORT OF THE AFORESAID GROUND. THE ITAT, COCHIN BENCH IN ITS ORDER DATED 29/11/2013 IN PARA 9.3 REFERRED ABOVE, HAS SPECIFICALLY DEALT WITH THE SCOPE OF EXPRESSION INTERNATIONAL TRANSACTION AS AMENDED BY FINANCE ACT, 2012 RETROSPECTIVELY. IT WAS HELD THAT THE ADVANCES GIVEN BY THE ASSESSEE TO ITS AES IN UK AND USA CAME WITHIN THE AMBIT OF INTERNATIONAL TRANSACTION AS PER THE AMENDMENT MADE IN THE PROVISIONS OF SECTION 92B OF THE ACT. WE ARE BOUND BY THE DECISION RENDERED BY THE PREVIOUS BENCH IN ASSESSEES OWN CASE. THERE IS NO OCCASION FOR US TO COMMENT UPON THE CORRECTNESS OR OTHERWISE OF THE JUDGMENTS RELIED UPON BY THE ASSESSEE AS THE CASE OF THE ASSESSEE IS COVERED AGAINST THE ASSESSEE BY THE TRIBUNAL ORDER DATED 29/11/2013. IT IS PERTINENT TO REFER TO THE RECENT JUDGMENT RENDERED BY THE HONBLE SUPREME COURT IN THE CASE OF P. SUSEELA & ORS. VS. UNIV. GRANTS COMMN. & ORS. 8 SCC 129, WHEREIN THE EFFECT OF THE PREVIOUS JUDGMENT RENDERED BY THE SAME BENCH WAS DISCUSSED BY THE HONBLE SUPREME COURT AND IT WAS HELD AS UNDER: I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 5 A JUDGMENT OF THE SAME HIGH COURT DATED 6 TH JANUARY, 2014 AGAIN BY A DIVISION BENCH ARRIVED AT THE OPPOSITE CONCLUSION. THIS IS ALSO A MATTER WHICH CAUSES US SOME DISTRESS. A DIVISION BENCH OF THE SAME HIGH COURT IS BINDING ON A SUBSEQUENT DIVISION BENCH. THE SUBSEQUENT DIVISION BENCH CAN EITHER FOLLOW IT OR REFER SUCH JUDGMENT TO THE CHIEF JUSTICE TO CONSTITUTE A FULL BENCH IF IT DIFFERS WITH IT. WE DO NOT APPRECIATE THE MANNER IN WHICH THIS SUBSEQUENT JUDGMENT, (EVEN THOUGH IT HAS REACHED THE RIGHT RESULT) HAS DEALT WITH AN EARLIER BINDING DIVISION BENCH JUDGMENT OF THE SAME HIGH COURT. IN FACT, AS WAS POINTED OUT TO US BY LEARNED COUNSEL FOR THE APPELLANTS, THE DISTINCTION MADE IN PARAGRAPH 20 BETWEEN THE FACTS OF THE EARLIER JUDGMENT AND THE FACTS IN THE LATER JUDGMENT IS NOT A DISTINCTION AT ALL. JUST AS IN THE 2012 JUDGMENT PH.D DEGREES HAD BEEN AWARDED PRIOR TO 2009, EVEN IN THE 2014 JUDGMENT PH.D DEGREES WITH WHICH THAT JUDGMENT WAS CONCERNED WERE ALSO GRANTED PRIOR TO 2009. THERE IS, THEREFORE, NO DISTINCTION BETWEEN THE FACTS OF THE TWO CASES. WHAT IS EVEN MORE DISTRESSING IS THAT ONLY SUB PARA 4 OF THE CONCLUSION IN THE 2012 JUDGMENT IS SET OUT WITHOUT ANY OF THE OTHER SUB PARAGRAPHS OF PARAGRAPH 104 EXTRACTED ABOVE TO ARRIVE AT A RESULT WHICH IS THE EXACT OPPOSITE OF THE EARLIER JUDGMENT. THIS JUDGMENT IS ALSO SET ASIDE ONLY FOR THE REASON THAT IT DID NOT FOLLOW AN EARLIER BINDING JUDGMENT. IN VIEW OF THE ABOVE, GROUND NO. 1 RAISED BY THE ASSESSEE IS DISMISSED. 3.6 IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, WE ARE INCLINED TO DECIDE THE ISSUE AGAINST THE ASSESSEE AND IN FAVOUR OF THE DEPARTMENT. HENCE, THIS GROUND OF APPEAL OF THE ASSESSEE FOR BOTH THE ASSESSMENT YEARS IS DISMISSED. 3.7 THE NEXT GROUND IN BOTH THE APPEALS IS WITH REGARD TO ERRONEOUS IMPUTATION OF INTEREST ON ADVANCES GIVEN TO SUBSIDIARIES. I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 6 3.8 THE LD. AR SUBMITTED THAT THE TPO COMPUTED INTEREST AT THE RATE OF 5% PER ANNUM WHICH IS NOT AN INTERNAL COMPARABLE UNCONTROLLED PRICE INSTEAD OF USING LIBOR. THE LD. DR RELIED ON THE ORDER OF THE DRP. 3.9 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. WE FIND THAT A SIMILAR ISSUE CAME UP FOR OUR CONSIDERATION IN ASSESSEE OWN CASE IN ITA NO. 167/COCH/2015 DATED 13/10/2015 WHEREIN IT WAS HELD AS UNDER: 9. WE HAVE HEARD THE RIVAL CONTENTION AND PERUSED THE FACTS OF THE CASE. WE ARE NOT IN AGREEMENT WITH THE SUBMISSIONS MADE BY THE LD. AR. THE LD. AR HAS FAILED TO BRING ON RECORD ANY DISTINGUISHING FEATURE BETWEEN THE PRESENT CASE AND CASE OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2008-09. IN THE ASSESSMENT YEAR 2008-09, AN IDENTICAL ISSUE CAME UP FOR CONSIDERATION BEFORE THE ITAT, COCHIN BENCH IN ASSESSEES OWN CASE WHEREIN THE ASSESSEE HAD CHARGED INTEREST AT THE RATE OF 5% ON THE ADVANCES MADE TO ITS AE SUNTEC GERMANY AND CHARGED NO INTEREST ON THE ADVANCES MADE TO ITS AES IN USA AND UK. THE BENCH IN PARA 9.4 (EXTRACTED ABOVE) HELD THAT COMMERCIAL EXPEDIENCY CANNOT BE A GROUND FOR NOT CHARGING INTEREST ON THE ADVANCES GIVEN TO SUNTEC US AND SUNTEC UK AND UPHELD THE CHARGE OF INTEREST AT THE RATE OF 5% ON THE ADVANCES MADE TO ITS AES IN USA AND UK. 10. THE QUESTION RAISED IN THE PRESENT APPEAL IS IDENTICAL TO THE QUESTION THAT CAME UP FOR CONSIDERATION FOR THE ASSESSMENT YEAR 2008-09 IN IT(TP)A NO. 01/COCH/2013 IN THE CASE OF SUNTEC BUSINESS SOLUTIONS PVT. LTD. DATED 29/11/2013 (SUPRA). WE ARE BOUND BY THE PREVIOUS DECISION OF THE ITAT, COCHIN BENCH RENDERED IN THE CASE OF THE ASSESSEE WHICH IS COVERED AGAINST THE ASSESSEE VIDE ITS ORDER DATED 29/11/2013. WE SEE NO REASON TO INTERFERE WITH THE SAME IN THE PRESENT APPEAL. THE INTEREST RATE OF 5% CHOSEN AS AN INTERNAL COMPARABLE IS CORRECTLY APPLIED. GROUND NO. 2 IS THEREFORE DISMISSED. 3.9.1 IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, WE ARE INCLINED TO DECIDE THE ISSUE AGAINST THE ASSESSEE AND IN FAVOUR OF THE DEPARTMENT. HENCE, THIS GROUND OF APPEAL OF THE ASSESSEE FOR BOTH THE ASSESSMENT YEARS IS DISMISSED. I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 7 4. THE NEXT GROUND IN ITA NO.113/COCH/2016 IS WITH REGARD TO COMPUTATION OF SEGMENTAL MARGIN. 4.1 THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS AN ENTREPRENEUR AND BEARS THE MAJOR RISK RELATING TO BUSINESS AND OPERATIONS AND ALL SIGNIFICANT BUSINESS AND ENTREPRENEURIAL RISKS. DURING FY 2010-11, THE TOTAL REVENUE FROM OPERATIONS OF SUN TEC INDIA WAS INR 694,302,800 OUT OF WHICH INR 109,486,023 WAS ATTRIBUTABLE TO THE SALES FROM AE (SUN TECH UAE) WHICH CONSTITUTES ONLY 15.77% OF THE TOTAL REVENUE FROM OPERATION. DURING THE PREVIOUS YEAR, THE ASSESSEE HAD ENTERED INTO A CONTRACT WITH CITIBANK, NA (CITI). 4.2 THE LD. AR SUBMITTED THAT THERE WAS A DISPUTE IN THE CONTRACT AS A RESULT OF WHICH THE COMPANY HAD TO DIFFER RECOGNIZING THE COST INCURRED ON THE CONTRACT IN THE PREVIOUS YEAR AS WELL AS ADVANCE RECEIVED DURING THE PREVIOUS YEAR AND THE SAME WAS RECOGNIZED IN THE CURRENT YEAR AND THIS BEING AN EXTRAORDINARY ITEM, THE SAME NEEDED TO BE REMOVED WHILE CONSIDERING THE SEGMENTAL PROFITABILITY OF THE ASSESSEE. THE LD. AR DREW OUR ATTENTION TO THE SEGMENTAL PROFITABILITY OF THE ASSESSEE. IT WAS SUBMITTED THAT THE PROFIT EARNED BY SUN TEC INDIA FROM ITS AE SEGMENT IS 17.89% WAS HIGHER THAN THE PROFIT EARNED FROM NON-AE SEGMENT AT 12.06%. SINCE THE MARGINS EARNED BY THE ASSESSEE FROM ITS OPERATIONS WITH ITS AES WAS MORE THAN THE MARGINS EARNED FROM NON-AES, IT WAS SUBMITTED THAT THE ASSESSEE HAD NOT SHIFTED ANY PROFITS OUTSIDE INDIA AND THEREBY I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 8 THE UPWARD ADJUSTMENT MADE TO THE IT SEGMENT BY THE TPO WAS ERRONEOUS. IT WAS SUBMITTED THAT THE TPO HAD PROPOSED TO MAKE AN UPWARD ADJUSTMENT ON THE TOTAL REVENUE EARNED BY THE ASSESSEE BY WAY OF TRANSFER PRICING ASSESSMENT WHEN THE ASSESSEE ONLY HAD A 16% RELATED PARTY TRANSACTION. AGAINST THIS, THE ASSESSEE HAD RAISED GROUND NOS. 4 AND 5 BEFORE THE DRP AS FOLLOWS: GROUNDS OF OBJECTION : 4 1. SUN TEC INDIA MAKES AN OVERALL MARGIN OF 10.81%. REVENUE FROM AES ACCOUNT TO ONLY 16% OF THE TOTAL REVENUE. THE TWO SEGMENTS AES AND NON-AES AND THE MARGIN EARNED BY THE ASSESSEE WITH THE RESPECTIVE SEGMENTS ARE 17.89% AND 12.06%. 2. THE MARGIN EARNED BY AE SEGMENT IS HIGHER WHEN COMPARED TO THE MARGIN EARNED BY THE NON-AE SEGMENT AND HENCE THE PROVISION OF SOFTWARE PRODUCTS AND SERVICES IS SAID TO BE AT ARMS LENGTH. GROUNDS OF OBJECTION:5 1. THE TPO IN HIS ORDER INCORRECTLY RECOGNIZED THE FUNCTIONAL PROFITS OF SUN TEC INDIA AND IN DOING SO MISINTERPRETED COMPARABILITY TO THE ASSESSEE IN CASE OF CERTAIN COMPARABLES. THE LD. ASSESSING OFFICER ERRED IN UPHOLDING THE ACTIONS OF THE TPO. 2. THE TPO ERRED ON FACTS AND IN LAW IN CONDUCTING A FRESH BENCHMARKING ANALYSIS USING NO CONTEMPORANEOUS DATA AND SUBSTITUTING THE ASSESSEES ANALYSIS WITH FRESH BENCHMARKING ANALYSIS CONDUCTED BY THE LEARNED TPO IS LIABLE TO BE QUASHED. 3. THE TPO ERRED IN LAW IN APPLYING ARBITRARY FILTERS TO ARRIVE AT A FRESH SET OF COMPANIES AS COMPARABLES TO THE ASSESSEE, WITHOUT ESTABLISHING FUNCTIONAL COMPARABILITY. THE LD. AR ERRED IN UPHOLDING THE ACTIONS OF THE TPO. 4. THE TPO HAS REJECTED COMPANIES HAVING RELATED PARTY TRANSACTIONS GREATER THAN 25% AND APPLIED THIS FILTER INCONSISTENTLY. 5. THE TPO GROSSLY ERRED ON FACTS IN ARBITRARILY REJECTING COMPANIES HAVING SOFTWARE DEVELOPMENT REVENUE LESS THAN 75% OF TOTAL OPERATING REVENUE AND APPLYING INCONSISTENTLY SUCH FILTER, WITHOUT CONSIDERING THE SPECIFIC SEGMENTAL RESULTS. THE LD. AO ERRED IN UPHOLDING THE ACTIONS OF THE TPO. I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 9 6. THE TPO ERRED ON FACTS AND ARBITRARILY REJECTING COMPANIES HAVING EXPORT REVENUES LESS THAN 75% OF TOTAL SALES AND APPLYING INCONSISTENTLY SUCH FILTER. THE LD. ASSESSING OFFICER ERRED IN UPHOLDING THE ACTIONS OF THE TPO. 7. THE TPO ERRED IN REJECTING COMPANIES HAVING EMPLOYEE COST LESS THAN 25% OF TOTAL SALES AND APPLY INCONSISTENTLY SUCH FILTER. THE LD. ASSESSING OFFICER ERRED IN UPHOLDING THE ACTIONS OF THE TPO. 4.4 HE SUBMITTED THAT THESE GROUNDS WERE CONSIDERED BY THE DRP AS FOLLOWS: AS REGARDS THE COMPARABLES THIS PANEL FINDS THAT THE TPO HAS FOUND THAT CERTAIN COMPARABLES IDENTIFIED BY THE ASSESSEE ARE NOT PROPER COMPARABLES. THE PROPER COMPARABILITY CAN BE ACHIEVED ONLY AFTER MAKING PROPER FAR ANALYSIS OF THE TESTED PARTY AND BASED ON THIS ANALYSIS SIGNIFICANT ECONOMIC FUNCTIONS ARE IDENTIFIED AND THEREAFTER THE RELEVANT FILTERS ARE ADOPTED BASED ON SIGNIFICANT ECONOMIC FUNCTIONS PERFORMED BY THE TESTED PARTY. ONCE PROPER FILTER ARE CHOSEN AND APPLIED ON THE PUBLIC DATA BASE THE PROPER COMPARABLES CAN BE IDENTIFIED. SEEN FROM THIS PERSPECTIVE THIS PANEL FINDS THAT THERE ARE CERTAIN FILTERS WHICH THE ASSESSEE HAS NOT APPLIED. THIS DEFICIENCY WAS CURED BY THE TPO WHO APPLIED PROPER FILTERS AS MENTIONED IN THE TP ORDER. THE TPO HAS GIVEN REASONS FOR REJECTING THESE COMPARABLES SUGGESTED BY THE ASSESSEE. THEREFORE, THE ACTION OF THE TPO SUGGESTS THAT THE REASON FOR REJECTION OF ALP DETERMINED BY THE ASSESSEE HAS BEEN USE OF DATA BY THE ASSESSEE WHICH IS NOT RELIABLE OR CORRECT. CONSIDERING THE ABOVE DISCUSSION, WE CONSIDER THAT THE ACTION OF THE TPO IS JUSTIFIED AND THE CLAIM OF THE ASSESSEE COMPANY IS NOT ACCEPTABLE. 4.5 AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. ACCORDING TO THE LD. AR, THE ABOVE FINDINGS OF THE DRP IS CRYPTIC IN NATURE AND IT HAS NOT CONSIDERED THE OBJECTIONS RAISED BY THE ASSESSEE IN A PROPER MANNER. HENCE, HE SUBMITTED THAT THE ISSUE MAY BE REMITTED TO THE FILE OF THE DRP TO CONSIDER THE OBJECTIONS OF THE ASSESSEE IN A PROPER PERSPECTIVE. I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 10 4.6 THE LD. DR RELIED ON THE FINDINGS OF THE DRP. 4.7 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE MATTER WAS REFERRED TO THE DRP U/S 144C OF THE IT ACT. UNDER SUB-SECTION (1) OF SECTION 144C, THE ASSESSING OFFICER IS UNDER AN OBLIGATION TO FORWARD A DRAFT OF THE PROPOSED ORDER OF ASSESSMENT TO THE ASSESSEE IF HE PROPOSES TO MAKE ANY VARIATION IN THE INCOME OR LOSS RETURNED WHICH IS PREJUDICIAL TO THE INTEREST OF SUCH ASSESSEE. UNDER SUB-SECTION (2) OF SECTION 144, THE ASSESSEE WITHIN 30 DAYS OF THE RECEIPT OF SUCH DRAFT ORDER CAN ACCEPT THE VARIATION MADE BY THE ASSESSING OFFICER OR HE CAN FILE OBJECTIONS EITHER TO DISPUTE RESOLUTION PANEL OR TO THE ASSESSING OFFICER. SINCE THE ASSESSEE HAD FILED HIS OBJECTIONS WITH DRP, THEN, UNDER SUB-SECTION (5) THE DRP, UPON RECEIPT OF OBJECTION IS UNDER OBLIGATION TO ISSUE DIRECTIONS AS IT THINKS FIT FOR THE GUIDANCE OF THE ASSESSING OFFICER TO ENABLE HIM TO COMPLETE THE ASSESSMENT AND UNDER SUBSECTION (6) SUCH DIRECTIONS WHICH ARE PUT UP UNDER SUB-SECTION (5) WOULD BE FURTHER CONSIDERING THE FOLLOWING DOCUMENTS: (A) DRAFT ORDER; (B) THE OBJECTION FILED BY THE ASSESSEE; (C) THE EVIDENCE FURNISHED BY THE ASSESSEE; (D) REPORT, IF ANY, OF THE ASSESSING OFFICER, VALUATION OFFICER, OR TPO OR ANY OTHER AUTHORITY; (E) RECORDS RELATING TO THE DRAFT ORDER; I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 11 (F) EVIDENCE COLLECTED BY, OR CAUSED TO BE COLLECTED BY, IT; AND (G) RESULT OF ANY INQUIRY MADE BY, OR CAUSED TO BE MADE BY IT. 4.8 UNDER SUB-SECTION (7), DRP IS ALSO AUTHORIZED BEFORE ISSUING OF DIRECTION UNDER SUB-SECTION (5) TO MAKE SUCH FURTHER INQUIRY, AS IT THINK FIT OR CAUSE ANY FURTHER INQUIRY TO BE MADE BY ANY INCOME-TAX AUTHORITY AND REPORT THE RESULT OF THE SAME TO IT. UNDER SUB-SECTION (8), THE DRP HAS POWER TO CONFIRM, REDUCE OR ENHANCE THE VARIATIONS PROPOSED IN THE DRAFT ORDER SO, HOWEVER, THAT IT SHALL NOT SET ASIDE ANY PROPOSED VARIATION OR ISSUE ANY DIRECTION UNDER SUB-SECTION (5) FOR FURTHER INQUIRY AND PASSING OF THE ASSESSMENT ORDER. UNDER SUB-SECTION (11), NO DIRECTION U/S SUB SECTION (5) SHALL BE ISSUED UNLESS AN OPPORTUNITY OF BEING HEARD IS GIVEN TO THE ASSESSEE AND THE ASSESSING OFFICER ON SUCH DIRECTIONS WHICH ARE PREJUDICIAL TO THE INTEREST OF THE ASSESSEE OR THE INTEREST OF THE REVENUE RESPECTIVELY. UNDER SUB-SECTION (12), DIRECTIONS UNDER SUB-SECTION (5) CANNOT BE PASSED AFTER NINE MONTHS FROM THE END OF THE MONTH IN WHICH DRAFT ORDER IS FORWARDED TO THE ELIGIBLE ASSESSEE. UNDER SUB-SECTION (13), ON RECEIPT OF DIRECTIONS ISSUED UNDER SUBSECTION (5), THE ASSESSING OFFICER HAS TO PASS THE ASSESSMENT ORDER IN CONFORMITY WITH THE DIRECTIONS WITHOUT PROVIDING ANY FURTHER OPPORTUNITY OF BEING HEARD TO THE ASSESSEE WITHIN ONE MONTH FROM THE END OF THE MONTH IN WHICH SUCH DIRECTIONS ARE RECEIVED. I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 12 4.9 THE DIRECTIONS PASSED BY DRP U/S 144C (5), AS IT CAN BE SEEN IN THE PRESENT CASE, ARE NOT SPEAKING ABOUT WHAT OBJECTIONS WERE RAISED BY THE ASSESSEE AND HOW THEY HAVE BEEN FOUND TO BE NOT ACCEPTABLE. THE DRP HAS SIMPLY OBSERVED THAT THE TPO HAS GIVEN REASONS FOR REJECTING THE COMPARABLES AND BY THE ASSESSING OFFICER IN THE DRAFT ORDER. THEREFORE, THE ORDER PASSED BY THE DRP IS A NON-SPEAKING ORDER ON THE ISSUES RAISED BY THE ASSESSEE, NOT STATING THE OBJECTIONS RAISED BY THE ASSESSEE AND THE REASONS HAVE ALSO NOT BEEN GIVEN AS SIMPLY THE ORDER OF TPO AND ASSESSING OFFICER ARE REFERRED. WE FIND THAT SIMILAR ISSUE WAS CONSIDERED BY THE HON'BLE DELHI HIGH COURT IN THE AFOREMENTIONED CASE OF VODAFONE ESSAR LTD. (340 ITR 352) AGAINST THE ORDER PASSED BY THE DRP. 4.9.1 IN VIEW OF THE ABOVE, WE FIND THAT IT IS A FIT CASE WHERE THIS ISSUE SHOULD BE RESTORED BACK TO THE FILE OF DRP TO PASS A DETAILED ORDER STATING ALL THE OBJECTIONS OF THE ASSESSEE AND DISPOSING THEM BY GIVING A COGENT AND GERMANE REASON FOR ADJUDICATION OF THE OBJECTIONS OF THE ASSESSEE. WE DIRECT ACCORDINGLY. AFTER RECEIVING THE ORDER FROM DRP, THE ASSESSING OFFICER WILL AGAIN PASS ORDER U/S 144C(13) AND THE PRESENT ASSESSMENT PASSED BY THE ASSESSING OFFICER IS SET ASIDE AS THE DRP IS DIRECTED TO READJUDICATE THE OBJECTIONS RAISED BY THE ASSESSEE AS PER DIRECTIONS GIVE ABOVE. WE DIRECT ACCORDINGLY. THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 13 5. THE NEXT GROUND IN ITA NO. 113/COCH/2016 IS WITH REGARD TO DISALLOWANCE OF WORKING CAPITAL ADJUSTMENTS. 5.1 THE FACTS OF THE CASE ARE THAT TPO ALLOWED NIL WORKING CAPITAL ADJUSTMENT ON THE REASON THAT IT WAS MINUS 0.17%. THE DRP REJECTED THE CLAIM OF THE ASSESSEE BY OBSERVING THAT NEGATIVE WORKING CAPITAL ADJUSTMENT IS NOT BEING MADE IN THE CASE OF THE ASSESSEE BY FOLLOWING THE PRINCIPLES LAID DOWN BY THE ITAT, BANGALORE BENCH IN THE CASE OF LAM RESEARCH INDIA PRIVATE LTD IN ITA NO. 1437/BANG/2014 DATED 30/04/2015. THEREFORE, NO RISK ADJUSTMENT IS REQUIRED TO BE MADE IN THE CASE OF THE ASSESSEE. THE ASSESSEE CLAIMED THAT THERE WERE SOME ARITHMETICAL ERRORS IN CALCULATION OF WORKING CAPITAL ADJUSTMENTS BY THE TPO. THE DRP DIRECTED THE TPO TO VERIFY IF THERE ARE ANY INACCURACIES IN ANY FIGURES, CORRECTION BE MADE IN COMPUTATION OF WORKING CAPITAL ADJUSTMENT AND CASE WORKING CAPITAL ADJUSTMENT IS POSITIVE SAME ALONGWITH 1% RISK ADJUSTMENT MAY BE PROVIDED. 5.2 AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR SUBMITTED THAT THE LEVEL OF WORKING CAPITAL REQUIRED FOR THE ASSESSEE AND COMPARABLES IS DIFFERENT. AS SUCH, THE WORKING CAPITAL ADJUSTMENT IS TO BE GIVEN. IT WAS SUBMITTED THAT THE CONTENTION OF THE ASSESSEE WAS REJECTED WITHOUT GIVING PROPER OPPORTUNITY OF HEARING TO THE ASSESSEE. THE LD. AR SUBMITTED THAT DRP HAS NOT CONSIDERED THE OBJECTION OF THE ASSESSEE IN PROPER PERSPECTIVE. THE LD. AR RELIED I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 14 ON THE DECISION OF THE ITAT, COCHIN BENCH IN THE CASE OF ZAFIN SOFTWARE CENTRE OF EXCELLENCE PVT. LTD. VS. ACIT IN IT(TP)A NO. 331/COCH/2017I DATED 16/05/2018. 5.3 THE LD. DR RELIED ON THE ORDER OF THE DRP. 5.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. A SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THIS TRIBUNAL IN THE CASE OF ZAFIN SOFTWARE CENTRE OF EXCELLENCE PVT. LTD. VS. ACIT (SUPRA) WHEREIN IT WAS HELD AS UNDER: 5.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. THE LD. AR RELIED ON THE DECISION OF THE ITAT, CHENNAI BENCH IN THE CASE OF FOXTEQ SERVICES INDIA (P) LTD. VS. ACIT IN 74 TAXMAN.COM 216 WHERE IN IT WAS HELD AS UNDER: 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE ASSESSEE OBJECTED TO THE ADJUSTMENT MADE BY THE TRANSFER PRICING OFFICER. WITH REGARD TO WORKING CAPITAL ADJUSTMENT, THE ASSESSEE CLAIMS THAT THE DIFFERENCE IN WORKING CAPITAL BETWEEN THE ASSESSEE AND THE COMPARABLE COMPANIES WOULD MATERIALLY AFFECT THE PROFIT DETERMINED. THEREFORE, CERTAIN ADJUSTMENT NEEDS TO BE MADE TO BRING THEM ON EQUAL FOOTING. THE ASSESSEE ALSO BROUGHT TO THE NOTICE OF THE DRP THAT THE WORKING CAPITAL ADJUSTMENT, WHICH WAS TO ENSURE THE PROFIT DERIVED BY THE COMPARABLE COMPANIES, CAN BE COMPARED WITH THE PROFIT OF THE ASSESSEE. THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE CAPITAL EMPLOYED BY THE ASSESSEE, INCLUDING THE WORKING CAPITAL, AND THAT OF COMPARABLE COMPANIES NEEDS TO BE TAKEN INTO CONSIDERATION. WITHOUT COMPARING THE WORKING CAPITAL EMPLOYED BY THE COMPARABLE COMPANIES AND THAT OF THE ASSESSEE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THERE CANNOT BE ANY TRANSFER PRICING ADJUSTMENT. I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 15 5.4 IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, WE ARE INCLINED TO DIRECT THE ASSESSING OFFICER TO CONSIDER THE WORKING CAPITAL ADJUSTMENT AS COMPUTED BY HIM WHILE DETERMINING THE ALP OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AES. HENCE, THIS GROUND OF APPEAL TAKEN BY THE ASSESSEE IS PARTLY ALLOWED. 5.5 IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, WE ARE INCLINED TO DIRECT THE ASSESSING OFFICER TO CONSIDER WORKING CAPITAL ADJUSTMENT WHILE DETERMINING THE ALP OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AES IN THIS CASE ALSO. HENCE THIS GROUND OF APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 6. THE NEXT GROUND, GROUND NO. 8 IN ITA NO. 113/COCH/2016 WITH REGARD TO DISALLOWANCE OF APPROPRIATE ADJUSTMENTS TO THE COMPARABLE COMPANIES WHICH WAS NOT PRESSED BEFORE US AND HENCE THE SAME IS DISMISSED AS NOT PRESSED. 7. THE NEXT COMMON GROUND IN BOTH THE APPEALS REGARDING VARIATION OF 5 PERCENT FROM THE ARITHMETIC MEAN U/S. 92C(2) OF THE ACT IS CONSEQUENTIAL IN NATURE WHICH IS TO BE CONSIDERED AFTER DECIDING THE ISSUE. HENCE, THIS GROUND OF APPEAL OF THE ASSESSEE IS DISMISSED FOR BOTH THE ASSESSMENT YEARS. 8. THE NEXT GROUND IN ITA NO. 509/COCH/2016 IS WITH REGARD TO DISALLOWANCE MADE U/S. 14A OF THE ACT. I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 16 8.1 THE FACTS OF THE CASE ARE THAT THE TPO DENIED THE CLAIM OF THE ASSESSEE U/S. 14A FOR THE REASON THAT CERTAIN EXPENSES WERE INCURRED BY THE ASSESSEE WHILE MANAGING THE INVESTMENTS AND EARNING THE TAX FREE INCOME . ON APPEAL, THE DRP CONFIRMED THE FINDINGS OF THE TPO. 8.2 AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR SUBMITTED THAT WHILE MAKING THE DISALLOWANCE UNDER SECTION14A, THE LOWER AUTHORITIES HAVE CONSIDERED THE INTEREST PAYMENTS RELATING TO SPECIFIC BORROWINGS AND IN NO WAY IT WAS RELATED TO EXEMPT INCOME YIELDING INVESTMENTS AND THAT EXPENDITURE SHOULD BE EXCLUDED. FOR THIS PROPOSITION, HE RELIED ON THE ORDER OF THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF TAFE MOTORS & TRACTORS LTD. VS. ACIT (48 ITR 150) (TRIBUNAL). 8.3 THE LD. DR RELIED ON THE ORDER OF THE DRP. 8.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. WE FIND THAT A SIMILAR ISSUE CAME UP FOR CONSIDERATION OF THE ITAT, CHENNAI BENCH IN THE CASE OF TAFE MOTORS & TRACTORS LTD. VS. ACIT (SUPRA) WHEREIN IT WAS HELD AS UNDER: 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE MAIN CONTENTION OF THE ASSESSEE'S COUNSEL IS THAT THE AO CONSIDERED THE INVESTMENTS YIELDING TAXABLE INCOME AND ALSO INVESTMENTS NOT YIELDING TAXABLE INCOME TO APPLY THE FORMULA IN RULE 8D OF I.T RULES. ACCORDING TO HIM, THE AO ALSO INCLUDED THE INTEREST EXPENDITURE WHICH IS INCURRED FOR A SPECIFIC PURPOSE WHILE COMPUTING THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST, OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 17 DURING THE PREVIOUS YEAR AND ALL THE COMPONENTS IN RULE-8D BEING APPLIED WRONGLY, IT IS TO BE RECOMPUTED. 6. IN OUR OPINION, THERE IS MERIT IN THE PLEA OF THE ASSESSEE. THE INTEREST PAID BY THE ASSESSEE ON BORROWINGS, WHICH ARE USED FOR SPECIFIC PURPOSE CANNOT BE CONSIDERED FOR THE PURPOSE OF COMPUTING DISALLOWANCE U/S.14A R.W.RULE 8D. SIMILARLY INVESTMENTS, WHICH ARE YIELDING TAXABLE INCOME ALSO, CANNOT BE CONSIDERED WHILE APPLYING THE (B) IN THE FORMULA SPECIFIED IN RULE-8D. MORE SO, SIMILAR ISSUE WAS CONSIDERED BY THE CO-ORDINATE BENCH IN THE CASE OF ASSTT. CIT V. BEST & CROMPTON ENGINEERING LTD. (2013) 36 TAXMANN.COM.555/60 SOT 53 (URO) (CHENNAI TRIB.) WHEREIN HELD THAT: '10. HEARD BOTH SIDES. PERUSED THE ORDERS OF LOWER AUTHORITIES AND THE DECISION OF CALCUTTA BENCH OF THIS TRIBUNAL RELIED ON BY THE ASSESSEE'S COUNSEL. THIS ISSUE HAS BEEN CONSIDERED ELABORATELY BY THE COMMISSIONER OF INCOME TAX (APPEALS) AND DELETED THE INTEREST ON BANK LOAN AND TERM LOANS WHICH WERE NOT UTILIZED FOR MAKING ANY INVESTMENTS HAVING TAX FREE INCOME. WHILE HOLDING SO, THE COMMISSIONER OF INCOME TAX (APPEALS) HELD AS UNDER: '5.2.1 HAVING HELD THAT PROVISIONS OF RULE 8D ARE APPLICABLE. LET US NOW EXAMINE WHETHER THE AMOUNT HAS BEEN CORRECTLY QUANTIFIED. THE AO HAD CALCULATED THE DISALLOWANCE AT RS. NIL, RS. L,04,38,000/- AND RS. 26,87,000/- UNDER (I). (II) & (III) OF RULE 8D (2) RESPECTIVELY. THERE IS NO DISPUTE REGARDING THE FIRST COMPONENT, BECAUSE IT IS NIL. WITH REGARD TO THE SECOND COMPONENT BEING THE EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, THE AO HAS DETERMINED THE AMOUNT AT RS. 1,04,38,000/-. THE AO HAS TAKEN INTO ACCOUNT THE ENTIRE INTEREST EXPENDITURE OF RS. 5,79,46,000/- FOR COMPUTING THE ABOVE DISALLOWANCE. THE LD. AR IN HIS SUBMISSION, HAS GIVEN THE BREAK-UP OF INTEREST WHICH INCLUDES (1) INTEREST ON BANK LOANS: RS. 67,92,000/- (2) INTEREST ON TERM LOANS RS. 3,82,11,000/- AND (3) INTEREST ON OTHER ACCOUNTS: RS. 1,29,43,000/-. IF LOANS HAVE BEEN SANCTIONED FOR SPECIFIC PROJECTS/EXPANSION AND HAVE BEEN UTILIZED TOWARDS THE SAME, THEN OBVIOUSLY THEY COULD NOT HAVE BEEN UTILIZED FOR MAKING ANY INVESTMENTS HAVING TAX-FREE INCOMES. FROM THE COPY OF THE SANCTION LETTERS FROM STATE BANK OF BIKANER & JAIPUR IT CAN BE SEEN THAT THE LOAN WAS GRANTED WITH A SPECIFIC REQUIREMENT THAT THE LOAN SHALL BE UTILIZED FOR PURCHASE OF IMPORTED MACHINERY WHILE IN THE CASE OF LOAN FROM FEDERAL BANK, IT IS SEEN THAT THE LOAN WAS TO BE UTILIZED FOR EXPANSION OF PROJECTS. SANCTION OF BOTH THESE LOANS I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 18 PROHIBIT UTILIZATION OF FUNDS FOR PURPOSES OTHER THAN FOR THE UTILIZATION FOR WHICH THEY ARE SANCTIONED. FROM THE LEDGER EXTRACT FOR THE YEAR ENDED 31.03.2008 FOR BOTH LOAN ACCOUNTS, IT IS SEEN THAT NO AMOUNT HAS BEEN UTILIZED FOR INVESTMENT IN SUBSIDIARIES WHICH EARNS TAX-FREE INCOME. THE LOAN AMOUNTS WERE FULLY DISBURSED AND UTILIZED IN THE YEAR ENDED 31.03.2008 (A.Y. 2008-09) ITSELF. TAKING INTO ALL THE FACTS AS STATED ABOVE, I AM OF THE CONSIDERED OPINION THAT IF LOANS/BORROWED AMOUNTS ARE GRANTED FOR SPECIFIC PROJECTS/EXPANSION AND NO AMOUNT FROM THE SAME HAS BEEN DIRECTLY UTILIZED FOR INVESTMENTS, THEN THE FIRST AND SECOND LIMB OF RULE 8D ATTRIBUTING THE INTEREST PAYMENTS TO THE INVESTMENTS WILL NOT BE APPLICABLE. ACCORDINGLY, INTEREST ON BANK LOAN AND TERM LOAN AMOUNTING TO RS. 67,92,000/- AND RS. 3,82,11,000/- RESPECTIVELY ARE TO BE EXCLUDED FROM THE CALCULATION TO DETERMINE THE DISALLOWANCE UNDER RULE 8D(2)(II). THE AO IS, THEREFORE, DIRECTED TO TAKE INTO ACCOUNT ONLY THE REMAINING INTEREST ON OTHER ACCOUNTS AMOUNTING TO RS. 1,29,43,000/- FOR COMPUTING THE PROPORTIONATE DISALLOWANCE UNDER RULE 80 (2)(II).' 11. ON GOING THROUGH THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), WE FIND THAT THE COMMISSIONER OF INCOME TAX (APPEALS) EXCLUDED THE INTEREST ON BANK LOAN AND TERM LOANS FROM THE CALCULATION OF DISALLOWANCE UNDER RULE 8D(2)(II) AS THE ASSESSEE HAS UTILIZED THE BANK LOAN AND TERM LOAN FOR THE PURPOSE OF PURCHASE OF MACHINERIES AND FOR EXPANSION OF PROJECTS AND THESE LOANS WERE SPECIFICALLY SANCTIONED FOR SPECIFIC PROJECT AND SUCH LOANS WERE ALSO USED FOR THE PURPOSE FOR WHICH THEY WERE SANCTIONED. IN THE CIRCUMSTANCES, WE FIND THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS RIGHTLY EXCLUDED SUCH INTEREST FROM THE PURVIEW OF COMPUTATION OF DISALLOWANCE UNDER RULE 8D(2)(II). 12. THE DECISION OF CALCUTTA BENCH OF THIS TRIBUNAL IN THE CASE OF CHAMPION COMMERCIAL CO. LTD. (SUPRA) ALSO SUPPORTS THE VIEW OF THE COMMISSIONER OF INCOME TAX (APPEALS). THE TRIBUNAL HAD CONSIDERED A SITUATION WHEN THE LOANS WERE UTILIZED FOR THE PURCHASE OF MACHINERIES, INTEREST ARISING OUT OF SUCH LOANS, WHETHER SUCH INTEREST IS TO BE EXCLUDED FOR THE PURPOSE OF COMPUTING DISALLOWANCE UNDER RULE 8D(2)(II), THE TRIBUNAL HELD THAT SUCH INTEREST HAS TO BE EXCLUDED. WHILE HOLDING SO, IT HAS HELD AS UNDER: '11. THERE IS NO DISPUTE ABOUT WORKING OF THIS METHOD SO FAR AS RULE 8D(2)(I) AND (II) IS CONCERNED. IT IS ONLY WITH REGARD TO THE I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 19 COMPUTATION UNDER RULE 8D(2)(II) THAT THE ASSESSING OFFICER AND THE CIT(A) HAVE DIFFERENT APPROACHES. THIS PROVISION ADMITTEDLY DEALS WITH A SITUATION IN WHICH 'THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT'. CLEARLY, THEREFORE, THIS SUB CLAUSE SEEKS TO ALLOCATE 'COMMON INTEREST EXPENSES' TO TAXABLE INCOME AND TAX EXEMPT INCOME. IN OTHER WORDS, GOING BY THE PLAIN WORDINGS OF RULE 8D(2)(II) WHAT IS SOUGHT TO BE ALLOCATED IS 'EXPENDITURE BY WAY OF INTEREST...........WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT' AND THE ONLY CATEGORIES OF INCOME AND RECEIPT, SO FAR AS SCHEME OF RULE 8D IS CONCERNED, ARE MUTUALLY EXCLUSIVE CATEGORIES OF 'TAX EXEMPT INCOME AND RECEIPT' AND 'TAXABLE INCOME AND RECEIPT'. NO OTHER CLASSIFICATION IS GERMANE TO THE CONTEXT IN WHICH RULE 8D IS SET OUT NOR DOES THE SCHEME OF SECTION 14A LEAVE ANY AMBIGUITY ABOUT IT. 12. IRONICALLY, HOWEVER, THE DEFINITION OF VARIABLE 'A' EMBEDDED IN FORMULA UNDER RULE 8D(2)(II) IS CLEARLY INCONGRUOUS INASMUCH WHILE IT SPECIFICALLY EXCLUDES INTEREST EXPENDITURE DIRECTLY RELATED TO TAX EXEMPT INCOME, IT DOES NOT EXCLUDE INTEREST EXPENDITURE DIRECTLY RELATED TO TAXABLE INCOME. RESULTANTLY. WHILE RULE 8D(2)(II) ADMITTEDLY SEEKS TO ALLOCATE 'EXPENDITURE BY WAY OF INTEREST, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT' IT ENDS UP ALLOCATING 'EXPENDITURE BY WAY OF INTEREST, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, PLUS INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME' (EMPHASIS BY UNDERLINING SUPPLIED BY US). THIS INCONGRUITY WILL BE MORE GLARING WITH THE HELP OF FOLLOWING SIMPLE EXAMPLE: IN THE CASE OF A & CO LTD, TOTAL INTEREST EXPENDITURE IS RS 1,00,000, OUT OF WHICH INTEREST EXPENDITURE IN RESPECT OF ACQUIRING SHARES FROM WHICH TAX FREE DIVIDEND EARNED IS RS 10,000. OUT OF THE BALANCE RS 90,000, THE ASSESSEE HAS PAID INTEREST OF RS 80,000 FOR FACTORY BUILDING CONSTRUCTION WHICH CLEARLY RELATES TO THE TAXABLE INCOME. THE INTEREST EXPENDITURE WHICH IS 'NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR RECEIPT OR INCOME' IS THUS ONLY RS 10,000. HOWEVER, IN TERMS OF THE FORMULA IN RULE 8D (2)(II), ALLOCATION OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT WILL BE FOR RS 90,000 BECAUSE, AS PER FORMULA THE VALUE OF A (I.E. SUCH INTEREST EXPENSES TO BE ALLOCATED BETWEEN TAX EXEMPT AND TAXABLE INCOME) WILL BE 'A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) [ I.E. DIRECT INTEREST EXPENSES FOR TAX EXEMPT INCOME] INCURRED DURING THE PREVIOUS YEAR'. LET US SAY THE ASSETS RELATING TO TAXABLE INCOME AND TAX EXEMPT INCOME ARE IN THE RATIO OF 4:1. IN SUCH A CASE, THE I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 20 INTEREST DISALLOWABLE UNDER RULE 8D(2)(II) WILL BE RS 18,000 WHEREAS ENTIRE COMMON INTEREST EXPENDITURE WILL ONLY BE RS. 10,000/-. 13. THE INCONGRUITY ARISES BECAUSE, AS THE WORDINGS OF RULE 8D(2)(II) EXIST, OUT OF TOTAL INTEREST EXPENSES, INTEREST EXPENSES DIRECTLY RELATABLE TO TAX EXEMPT INCOME ARE EXCLUDED, INTEREST EXPENSES DIRECTLY RELATABLE TO TAXABLE INCOME, EVEN IF ANY, ARE NOT EXCLUDED. 14. THE QUESTION THEN ARISES WHETHER WE CAN TINKER WITH THE FORMULA PRESCRIBED UNDER RULE 8D(2)(II) OF THE INCOME TAX RULES, OR CONSTRUE IT ANY OTHER MANNER OTHER THAN WHAT IS SUPPORTED BY PLAIN WORDS OF THE RULE 8 D (2)(II). 15. WE FIND THAT NOTWITHSTANDING THE RIGID WORDS OF RULE 8D(2)(II), THE STAND TAKEN BY THE REVENUE AUTHORITIES ABOUT ITS APPLICATION, AS WAS BEFORE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG CO LTD VS DCIT (328 ITR 81) WHEN CONSTITUTIONAL VALIDITY OF RULE 8D WAS IN CHALLENGE, IS THAT 'IT IS ONLY THE INTEREST ON BORROWED FUNDS THAT WOULD BE APPORTIONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN (AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLE-ANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.)'. THEREFORE, IT IS NOT ONLY THE INTEREST DIRECTLY ATTRIBUTABLE TO TAX EXEMPT INCOME, I.E. UNDER RULE 6D(2)(I), BUT ALSO INTEREST DIRECTLY RELATABLE TO TAXABLE INCOME, WHICH IS TO BE EXCLUDED FROM THE DEFINITION OF VARIABLE 'A' IN FORMULA AS PER RULE 6D(2)(II), AND RIGHTLY SO, BECAUSE IT IS ONLY THEN THAT COMMON INTEREST EXPENSES, WHICH ARE TO BE ALLOCATED AS INDIRECTLY RELATABLE TO TAXABLE INCOME AND TAX EXEMPT INCOME, CAN BE COMPUTED. THIS IS CLEAR FROM THE FOLLOWING OBSERVATIONS MADE BY THEIR LORDSHIPS OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE (SUPRA): 60. IN THE AFFIDAVIT-IN-REPLY THAT HAS BEEN FILED ON BEHALF OF THE REVENUE AN EXPLANATION HAS BEEN PROVIDED OF THE RATIONALE UNDERLYING R. 8D. IN THE WRITTEN SUBMISSIONS WHICH HAVE BEEN FILED BY THE ADDL. SOLICITOR GENERAL IT HAS BEEN STATED, WITH REFERENCE TO R. 8D(2)(II) THAT SINCE FUNDS ARE FUNGIBLE, IT WOULD BE DIFFICULT TO ALLOCATE THE ACTUAL QUANTUM OF BORROWED FUNDS THAT HAVE BEEN USED FOR MAKING TAX-FREE INVESTMENTS. IT IS ONLY THE INTEREST ON BORROWED FUNDS THAT WOULD BE APPORTIONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN (AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 21 RECEIPT (FOR EXAMPLE-ANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.)............... THE JUSTIFICATION THAT HAS BEEN OFFERED IN SUPPORT OF THE RATIONALE FOR R. 8D CANNOT BE REGARDED AS BEING CAPRICIOUS, PERVERSE OR ARBITRARY. APPLYING THE TESTS FORMULATED BY THE SUPREME COURT IT IS NOT POSSIBLE FOR THIS COURT TO HOLD THAT THERE IS WRIT ON THE STATUTE OR ON THE SUBORDINATE LEGISLATION PERVERSITY, CAPRICE OR IRRATIONALITY. THERE IS CERTAINLY NO 'MADNESS IN THE METHOD'. 16. ONCE THE REVENUE AUTHORITIES HAVE TAKEN A PARTICULAR STAND ABOUT THE APPLICABILITY OF FORMULA SET OUT IN RULE 8 D(2)(II) AND BASED ON SUCH A STAND CONSTITUTIONAL VALIDITY IS UPHELD BY HON'BLE HIGH COURT, IT CANNOT BE OPEN TO REVENUE AUTHORITIES TO TAKE ANY OTHER STAND ON THE ISSUE WITH REGARD TO THE ACTUAL IMPLEMENTATION OF THE FORMULA IN THE CASE OF ANY ASSESSEE. VIEWED THUS, THE CORRECT APPLICATION OF THE FORMULA SET OUT IN RULE 8D(2)(II) IS THAT, AS HAS BEEN NOTED BY HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE (SUPRA), 'AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN (AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLE-ANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.)'. ACCORDINGLY, EVEN BY REVENUE'S OWN ADMISSION, INTEREST EXPENSES DIRECTLY ATTRIBUTABLE TO TAX EXEMPT INCOME AS ALSO DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME, ARE REQUIRED TO BE EXCLUDED FROM COMPUTATION OF COMMON INTEREST EXPENSES TO BE ALLOCATED UNDER RULE 8D(2)(II). 17. TO THE ABOVE EXTENT, THEREFORE, WE HAVE TO PROCEED ON THE BASIS THAT RIGOUR OF RULE 8D (2)(II) IS RELAXED IN ACTUAL IMPLEMENTATION, AND REVENUE AUTHORITIES, HAVING TAKEN THAT STAND WHEN CONSTITUTIONAL VALIDITY OF RULE 8D WAS IN CHALLENGE BEFORE HON'BLE HIGH COURT, CANNOT NOW DECLINE THE SAME. IDEALLY, IT IS FOR THE CENTRAL BOARD OF DIRECT TAXES TO MAKE THE POSITION CLEAR ONE WAY OR THE OTHER EITHER BY INITIATING SUITABLE AMENDMENT TO RULE 8D(2)(II) OR BY ADOPTING AN INTERPRETATION AS PER PLAIN WORDS OF THE SAID RULE, BUT EVEN ON THE FACE OF THINGS AS THEY ARE AT PRESENT, IN OUR HUMBLE UNDERSTANDING, REVENUE AUTHORITIES CANNOT TAKE ONE STAND WHEN DEMONSTRATING LACK OF 'PERVERSITY, CAPRICE OR IRRATIONALITY' IN RULE 8D BEFORE HON'BLE HIGH COURT, AND TAKE ANOTHER STAND WHEN IT COMES TO ACTUAL IMPLEMENTATION OF THE RULE IN REAL LIFE SITUATIONS. THEREFORE, EVEN AS WE ARE ALIVE TO THE FACT THAT THE STAND OF THE LEARNED DEPARTMENTAL REPRESENTATIVE IS IN ACCORDANCE WITH THE STRICT WORDING OF RULE 8D(2)(II), WE HAVE TO HOLD THAT, FOR I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 22 THE REASONS SET OUT ABOVE, THIS RIGID STAND CANNOT BE APPLIED IN PRACTICE.' 13. IN VIEW OF THE DECISION OF THE CALCUTTA BENCH OF THIS TRIBUNAL CITED ABOVE, WE UPHOLD THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) IN EXCLUDING THE INTEREST ON BANK LOAN AND TERM LOANS FOR THE PURPOSE OF COMPUTING DISALLOWANCE UNDER RULE 8D(2)(II). THE GROUNDS RAISED BY THE REVENUE ARE REJECTED ON THIS ISSUE.' 8.5 IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, WE ARE INCLINED TO DIRECT THE ASSESSING OFFICER TO EXCLUDE INTEREST AND BANK CHARGES WHICH ARE NOT RELATED TO EXEMPT INCOME YIELDING INVESTMENTS. HENCE, THIS GROUND OF APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 9. THE NEXT GROUND IN BOTH THE APPEALS IS WITH REGARD TO LEVYING CONSEQUENTIAL INTEREST U/S. 234B AND 234C. THIS GROUND IS CONSEQUENTIAL IN NATURE AND DOES NOT REQUIRE ADJUDICATION. 10. THE NEXT COMMON GROUND IN BOTH THE APPEALS IS WITH REGARD TO NON GRANTING OF CREDIT IN RESPECT OF PREPAID TAXES AS PER THE WITHHOLDING TAX CERTIFICATES IN ITS POSSESSION. 10.1. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT A SIMILAR ISSUE CAME UP FOR CONSIDERATION OF THIS TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO. 167/COCH/2015 DATED 13/10/2015 WHEREIN THE I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 23 ASSESSING OFFICER WAS DIRECTED TO GRANT TAX CREDITS DUE TO THE ASSESSEE IN ACCORDANCE WITH LAW AS REFLECTED IN INCOME TAX RECORDS. 10.2 IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, THE ASSESSING OFFICER IS DIRECTED TO GRANT TAX CREDITS DUE TO THE ASSESSEE IN ACCORDANCE WITH LAW AS REFLECTED IN INCOME TAX RECORDS IN THIS CASE ALSO. HENCE, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES FOR BOTH THE ASSESSMENT YEARS. 11. THE NEXT GROUND IN ITA NO. 509/COCH/2016 IS WITH REGARD TO DENIAL OF FOREIGN TAX CREDIT CLAIMED BY THE ASSESSEE U/S. 90 OF THE I.T. ACT. AFTER HEARING BOTH THE PARTIES, THE DRP IS DIRECTED TO GIVE OPPORTUNITY OF HEARING TO THE ASSESSEE AND DECIDE THE ISSUE AFRESH. THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 12. THE NEXT GROUND IN ITA NO.509/COCH/2016 IS WITH REGARD TO LEVYING PENALTY U/S. 271 OF THE ACT WHICH IS PREPOSTERIOUS AND DOES NOT REQUIRE ANY ADJUDICATION. HENCE, THIS GROUND OF APPEAL OF THE ASSESSEE IS DISMISSED. S.P. NO. 13/COCH/2016 13. SINCE WE HAVE DISPOSED OF THE ASSESSEES APPEALS, THE STAY PETITION FILED BY THE ASSESSEE IN S.P. NO. 13/COCH/2016 IN I.T.A. NO.113/COCH/2016 HAS BECOME INFRUCTUOUS AND THE SAME IS DISMISSED AS INFRUCTUOUS. I.T.A. NO.133/C/2016 & 509/C/2016 & S.P. 13/COCH/2016 24 14. IN THE RESULT, THE APPEALS FILED BY THE ASSESSEE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE STAY PETITION FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 12 TH SEPTEMBER, 2018. SD/- SD/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: DATED: 12 TH SEPTEMBER, 2018 GJ COPY TO: 1. M/S. SUN TEC BUSINESS SOLUTIONS (P) LTD., 321, NILA, TECHNOPARK CAMPUS, TRIVANDRUM-695 581. 2. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-2(1),TRIVANDRUM. 3. THE PR. COMMISSIONER OF INCOME-TAX, TRIVANDRUM. 4. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T., COCHIN