Toll (India) Logistics Private Limited, CHENNAI V. ACIT, CHENNAI

ITA 961/CHNY/2015

• Counselvise Citation: 96121714 RSA 2015
• Duration Of Justice: 7 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-12-2015
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 15-10-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 28-04-2015
• Court: TRIBUNAL
• Assessee Lawyers: R VENKATESAN
• Keywords: Transfer pricing; Earning of tax free income; Wholly owned subsidiary
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI ... , . , , BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NO.961 /MDS./2015 ( !' #' / ASSESSMENT YEAR :2010-11) M/S.TOLL (INDIA) LOGISTICS PRIVATE LIMITED , NO.9A PUZHAL AMBUTTUR ROAD, 1 ST STREET, PUZHAL, CHENNAI 600 066. VS. ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE 3(1), AAUALAR NJAVAM. CHENNAI 600 034. PAN AAACS 8152 Q ( / APPELLANT ) ( / RESPONDENT ) $% & ' / APPELLANT BY : MR.R.VENKATESAN,ADVOCATE ()$% & ' / RESPONDENT BY : MR.MILIND MADHUKAR BHUSARI, CIT, D.R * + & ,- / DATE OF HEARING : 15.10.2015 .# & ,- /DATE OF PRONOUNCEMENT : 22.12.2015 / O R D E R PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: THIS APPEAL IS FILED BY THE ASSESSEE, AGGRIEVED B Y THE ORDER OF THE ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 3(1) ITA NO. 961/MDS/2015 2 CHENNAI DATED 26.02.2015 PASSED U/S.143(3) R.W.S. 9 2CA(4) & 144C(1) OF THE ACT PURSUANT TO THE ORDER OF THE T.P .O AND THE DIRECTIONS ISSUED BY THE D.R.P. 2. THE ASSESSEE HAS RAISED TWO ELABORATE GROUNDS I N ITS APPEAL, HOWEVER THE CRUX OF THE ISSUE IS CONCISED HEREIN BE LOW FOR ADJUDICATION:- THE LD. ASSESSING OFFICER HAS ERRED IN INVOKING TH E PROVISIONS OF SECTION 14A OF THE ACT BECAUSE THE COMPANY HAS NOT EARNED ANY EXEMPT INCOME DURING THE YEAR UNDER CONSIDERATION A ND THEREFORE DISALLOWANCE OF ` 11,79,079 AS EXPENSES ATTRIBUTABLE TOWARDS EARNING EXEMPT INCOME IS NOT WARRANTED. 3.1 THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PRO VIDING LOGISTICS SERVICES AND SUPPLY CHAIN MANAGEMENT, FILED ITS RET URN OF INCOME ON 15.10.2010 ADMITTING LOSS OF ` 1,16,55,581/-. SUBSEQUENTLY THE CASE WAS SELECTED FOR SCRUTINY AND REFERENCE WAS MADE U/ S.92CA(1) OF THE ACT ON 11.02.2013 FOR DETERMINATION OF ARMS LENGTH PRICE(ALP). THEREAFTER IN THE DRAFT ASSESSMENT ORDER DATED 31.0 3.2014 THE LD. ITA NO. 961/MDS/2015 3 ASSESSING OFFICER DISALLOWED ` 11,79,079/- INVOKING THE PROVISIONS OF SECTION U/S.14A OF THE ACT BY OBSERVING AS UNDER:- 2 .1. THE INVESTMENT PORTFOLIO OF THE ASSESSEE FOR TH E YEAR STANDS AT RS. 38,54,31,227/- ON A PERUSAL OF THE BALANCE SHEET AN D P & L SHOWED THE FOLLOWING: SL. NO. DESCRIPTION AS ON 31.03.2009(RS.) AS ON 31.03.2010(RS.) INCREASE/ DECREASE OVER F.Y.2010-11 1 INVESTMENTS 54,06,227 38,54,31,227 38,00,25,000 2 FINANCE CHARGES 4,10,696 6,15,020 2,04,324 2.2. THE ABOVE TABLE INDICATES THAT AGAINST A SUBSTANTIA L INCREASE IN INVESTMENTS, THERE IS A CORRESPONDING INCREASE IN FINANCE CHARGE S ALSO. THIS CLEARLY INDICATES THAT THERE IS A DIRECT NEXUS BETWEEN THE INCREASE I N INVESTMENTS AND BORROWED CAPITAL, WITH INTEREST RELATING SUCH INVESTMENTS BE ING CHARGED TO P & L A/C. 2.3. HERE, SECTION 14A PROVIDES FOR THE PRINCIPLES TO BE APPLIED IN SUCH A SITUATION. 14A(2) : THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHO D AS MAY BE PRESCRIBED, IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOM E WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. 144(3): THE PROVISIONS OF SUB-SECTION (2) SHALL A/S O APPLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE H AS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. ITA NO. 961/MDS/2015 4 2.4 ALSO RELIANCE IS PLACED ON MEMORANDUM EXPLAIN ING THE PROVISIONS, NOTES ON CLAUSE RELATING TO FINANCE BILL, 2001 BY WHICH T HE SAID PROVISION WAS INSERTED INTO THE ACT. .. THE EXPENSES INCURRED CAN BE ALLOWED ONL Y TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. 2.5 THE ASSESSEE HAS NOT ADMITTED ANY EXPENDITURE A GAINST THE EARNING OF EXEMPT INCOME. HOWEVER, GIVEN THE VOLUME AND PORTFO LIO OF INVESTMENT, THE ASSESSEE SHOULD HAVE INCURRED EXPENDITURE IN THE FO RM OF MANAGERIAL, ADMINISTRATIVE AND MONITORING NATURE. THEREFORE, I AM NOT SATISFIED WITH THE ASSESSEES EXPLANATION THAT NO EXPENDITURE WAS INCU RRED IN EARNING INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. FURTHER, THE RECENT CLARIFICATION REGARDING DISALLOWANCE U/S 14A BY CBDT VIDE CIRCULA R NO. 5 OF 2014 DATED 11- 02-2014 HAS CLARIFIED THAT EVEN WHEN THERE IS NO EX EMPT INCOME EARNED DURING THE YEAR, SECTION 14A CAN BE INVOKED. HENCE, INVOKI NG SEC.14A(3) READ WITH SUB-RULE 8D(2), THE DISALLOWANCE U/S 14A IS QUANTIF IED AS UNDER:- I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO I NCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. NIL II) A . AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER TH AN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR 7,02,070 B . THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHIC H DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARI NG IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAS T DAY OF THE PREVIOUS YEAR 19,54,18,727 VALUE OF INVESTMENT ON THE FIRST DAY OF THE PREVIOU S YEAR 38,54,31,227 VALUE OF INVESTMENT ON THE LAST DAY OF THE PREVIOUS YEAR 54,06,227 C . THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR 67,92,43,890 TOTAL ASSETS ON THE FIRST DAY OF THE PREVIOUS YEAR 87,55,95,891 TOTAL ASSETS ON THE LAST DAY OF THE PREVIOUS YEAR 4 8,28,91,889 A X B/C 2,01,985 II) ONE HALF PER CENT OF AVERAGE VALUE OF INVESTMEN T, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR 9,77,094 DISALLOWANCE U/S.14A R.W.RULE 8D AGGREGATE *I), (II) AND (III) 11,79,079 ITA NO. 961/MDS/2015 5 3.2 ON FURTHER REFERENCE TO THE DISPUTE RESOLUTION PANEL (DRP), THE ASSESSEE MADE THE FOLLOWING SUBMISSIONS BEFORE THE DRP:- I) THE AO HAS ERRED IN LAW AND FACTS IN APPLYING T HE PROVISIONS OF THE SECTION 14A OF THE ACT WHERE THE COMPANY HAS NOT EA RNED ANY INCOME DURING THE YEAR WHICH WOULD BE EXEMPT UNDER THE PRO VISIONS OF THE ACT . II. THE AO HAS ERRED IN LAW AND FACTS IN MAKING A D ISALLOWANCE OF RS.11,79,079 AS EXPENSES ATTRIBUTABLE TOWARDS EARNI NG EXEMPT INCOME BY APPLYING SECTION 14A OF THE ACT. III. THE A() HAS ERRED IN FACTS BY NOT CONSIDERING THE ASSESSEES CLAIM THAT NO EXPENDITURE HAD BEEN INCURRED FOR THE PURPOSE OF EARNING EXEMPT INCOME, IF ANY. IV. THE AO HAS ERRED IN LAW BY NOT CONSIDERING THAT RULE 8D READ WITH SECTION 14A(2) CAN BE INVOKED ONLY IF THE ASSESSING OFFICER HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INC URRED IN RELATION TO TAX FREE INCOME. V. THE AO HAS ERRED IN FACTS BY STATING IN HIS ORDE R THAT THE ASSESSEE HAD UTILIZED BORROWED FUNDS FOR MAKING FRESH INVESTMENT S DURING THE SUBJECT ASSESSMENT YEAR. VI. THE AO HAS ERRED IN LAW BY INVOKING PROVISIONS OF RULE 8D(2)(II) AND DISALLOWING A PROPORTION OF INTEREST EXPENDITURE AM OUNTING TO RS.1,67,492 UNDER SECTION 14A OF THE ACT. VII. THE AO HAS ERRED IN FACTS BY NOT CONSIDERING T HAT THE ASSESSEE HAD INVESTED INTO ITS FOREIGN SUBSIDIARY COMPANY OUT OF THE PROCEEDS RECEIVED TOWARDS SHARE CAPITAL AND NOT FRONT BORROWED FUNDS. VIII) THE LEARNED DCLT HAS ERRED IN FACTS BY TREATI NG THE ENTIRE SHARE CAPITAL OF THE COMPANY FUNDS. ITA NO. 961/MDS/2015 6 IX. THE AO HAS ERRED IN FACTS AND LAW BY NOT CONSID ERING THAT ANY INCOME RECEIVED BY THE ASSESSEE FROM THE FOREIGN SUBSIDIAR Y COMPANY WOULD HE TAXABLE IN INDIA AND SECTION 14A OF THE ACT WOULD N OT APPLY TO SUCH INCOME. X. THE AO HAS ERRED IN LAW, BY INCLUDING THE AMOUNT OF INVESTMENT MADE INTO THE FOREIGN COMPANY IN THE TOTAL INVESTMENTS W HILE COMPUTING THE VALUE OF AVERAGE INVESTMENTS DURING THE YEAR. XI. AU HAS ERRED IN FACTS AND LAW WHILE CALCULATING THE TOTAL VALUE OF ASSETS OF THE ASSESSEE AS ON THE FIRST DAY AND LAST DAY OF THE RELEVANT PREVIOUS. 3.3 HOWEVER THE LD. DRP UPHELD THE ORDER OF THE LD . ASSESSING OFFICER BY OBSERVING AS UNDER:- THIS PANEL HAS TAKEN INTO CONSIDERATION ALL THE AR GUMENTS OF THE ASSESSEE. THIS PANEL HAS ALSO TAKEN INTO CONSIDERAT ION WHAT ASSESSING OFFICER HAS OBSERVED IN DRAFT ORDER WHILE INVOKING RULE-8D IN THIS CASE. THE ASSESSING OFFICER FIND THAT THERE IS AN INCREASE IN INVESTMENT OF MORE THAN 38 CRORES AS ON 31.03.2010 AS COMPARED TO INVESTMEN T AS ON 31.03.2009, THE ASSESSING OFFICER FINDS THAT THERE IS CORRESPON DING THE INCREASE IN FINANCIAL CHARGES. THIS CLEARLY INDICATES THERE IS A DIRECT NEXUS IN INCREASE IN INVESTMENT AND BORROWED CAPITAL AND INTEREST ON BORROWED CAPITAL CHARGES TO P&L A/C. THEREFORE, THIS PANEL DOES NOT FIND ANY FLAW IN THE ACTION OF THE ASSESSING OFFICER AND THEREFORE ALL O BJECTIONS RAISED BY THE ASSESSEE ARE HEREBY REJECTED. ACCORDINGLY, THE FINAL ASSESSMENT ORDER U/S.143(3) R.W.S 92CA(4) AND 144C(1) WAS COMPLETED ON 26.02.2015 WHEREIN THE LD. ASSESSING ITA NO. 961/MDS/2015 7 OFFICER MADE ADDITION OF ` 11,79,079/- INVOKING SECTION 14A OF THE ACT ON ACCOUNT OF EXPENSES ATTRIBUTABLE TOWARDS EARNING EXEMPT INCOME. 4. BEFORE US LD. A.R REITERATED THE SUBMISSIONS MA DE BEFORE THE REVENUE ON EARLIER OCCASIONS AND FURTHER STRESSED T HAT THE ENTIRE INVESTMENTS WERE MADE IN THE SISTER CONCERNS OF THE ASSESSEE COMPANY AND FURTHER ONLY NON-INTEREST BEARING FUNDS WERE UTILIZED FOR ACQUIRING THE SHARES OF THE SISTERS COMPANY. ON T HE OTHER HAND LD. D.R ARGUED IN SUPPORT OF THE ORDERS OF THE REVENUE AND PLEADED THAT THE ORDER OF THE LD.DRP MAY BE SUSTAINED. 5. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PE RUSED THE MATERIALS AVAILABLE ON RECORD. THE MAIN CONTENTION OF THE ASSESSEE IS THAT THE INVESTMENTS WERE MADE FOR ACQUIRING CON TROL OF OTHER COMPANIES WHICH ARE IN THE SIMILAR BUSINESS OF THE ASSESSEE AND ALL THOSE COMPANIES SUBSEQUENT TO ACQUISITION OF THE SH ARES HAS BECOME THE SISTER CONCERNS OF THE ASSESSEE. MOREOVE R, THE INVESTMENTS MADE WERE OUT OF NON-INTEREST BEARING F UNDS OF THE ASSESSEE COMPANY. WE FIND THAT THESE FACTS WERE NO T TAKEN INTO ITA NO. 961/MDS/2015 8 CONSIDERATION BY THE REVENUE BEFORE INVOKING THE PR OVISIONS OF SECTION.14A OF THE ACT IN THE CASE OF THE ASSESSEE. IN SIMILAR CIRCUMSTANCE THIS BENCH OF THE TRIBUNAL IN THE CASE OF M/S AGILE ELECTRIC SUB ASSEMBLY PVT. LTD., IN I.T.A.NO.1272/M DS./2015 VIDE ORDER DATED 27.11.2015, FOLLOWING THE EARLIER ORDER , HAS HELD AS FOLLOWS :- 7.2 IN REGARD TO APPLICABILITY OF SECTION 14A OF THE ACT READ WITH RULE 8D ALSO; THE ABOVE VIEW WILL BE APPLICABLE. M OREOVER IN THE CASE EIH ASSOCIATED HOTELS LTD V. DCIT REPORTED IN 2013 (9) TMI 604 IN ITA NO.1503, 1624/MDS/2012 DATED 17 TH JULY, 2013, IT HAS BEEN HELD BY THE CHENNAI BENCH OF THE TRIBUNAL AS FOLLOWS:- DISALLOWANCE U/S. 14A RW RULE 8D CIT UPHELD DISAL LOWANCE HELD THAT INVESTMENTS MADE BY THE ASSESSEE IN THE SUBS IDIARY COMPANY ARE NOT ON ACCOUNT OF INVESTMENT FOR EARNING CAPITA L GAINS OR DIVIDEND INCOME. SUCH INVESTMENTS HAVE BEEN MADE BY THE ASS ESSEE TO PROMOTE SUBSIDIARY COMPANY INTO THE HOTEL INDUSTRY. A PERUSAL OF THE ORDER OF THE CIT(APPEALS) SHOWS THAT OUT OF TOTAL I NVESTMENT OF RS.64,18,19,775/-, RS.63,31,25,715/- IS INVESTED IN WHOLLY OWNED SUBSIDIARY. THIS FACT SUPPORTS THE CASE OF THE ASS ESSEE THAT THE ASSESSEE IS NOT INTO THE BUSINESS OF INVESTMENT AND THE INVESTMENTS ITA NO. 961/MDS/2015 9 MADE BY THE ASSESSEE ARE ON ACCOUNT OF BUSINESS EXP EDIENCY. ANY DIVIDEND EARNED BY THE ASSESSEE FROM INVESTMENT IN SUBSIDIARY COMPANY IS PURELY INCIDENTAL. THEREFORE, THE INVES TMENTS MADE BY THE ASSESSEE IN ITS SUBSIDIARY ARE NOT TO BE RECKONED F OR DISALLOWANCE U/S. 14A R.W.R. 8D. THE ASSESSING OFFICER IS DIRECTED T O RE-COMPUTE THE AVERAGE VALUE OF INVESTMENT UNDER THE PROVISIONS OF RULE 8D AFTER DELETING INVESTMENTS MADE BY THE ASSESSEE IN SUBSID IARY COMPANY DECIDED IN FAVOUR OF ASSESSEE. FOR THE ABOVE SAID REASONS, WE HEREBY HOLD THAT IN THE CASE OF THE ASSESSEE THE PROVISIONS OF SECTION 14A READ WITH RULE 8D WILL NO T BE APPLICABLE IN REGARD TO INVESTMENTS MADE FOR ACQUIRING THE SHARES OF THE AS SESSEES SISTER CONCERNS. ACCORDINGLY WE RESTRAIN OURSELVES FROM INTERFERING WITH THE ORDER OF THE LD.CIT(A) ON THIS REGARD. 6 SINCE THE REVENUE HAS NOT EXAMINED THESE FACTS, IN THE INTEREST OF JUSTICE, WE HEREBY REMIT BACK THE MATTE R TO THE FILE OF LD. ASSESSING OFFICER, IN ORDER TO VERIFY WHETHER THE I NVESTMENTS MADE BY THE ASSESSEE COMPANY WERE IN ITS SISTER CONCERNS, O R AFTER SUCH INVESTMENTS THOSE COMPANIES HAVE BECOME THE SISTER CONCERNS OF THE ASSESSEE COMPANY BY VIRTUE OF SUCH INVESTMENTS, AND FURTHER ITA NO. 961/MDS/2015 10 SUCH INVESTMENTS WERE MADE FROM THE NON-INTEREST BE ARING FUND OF THE ASSESSEE COMPANY, AND IF FOUND SO, GRANT RELIEF TO THE ASSESSEE IN THE LIGHT OF THE DECISION OF THE CHENNAI BENCH O F THE TRIBUNAL MENTIONED HEREIN ABOVE. 7. IN THE RESULT, THE APPEAL OF ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES AS INDICATED HEREIN ABOVE. ORDER PRONOUNCED ON THE 22 ND DECEMBER, 2015 AT CHENNAI. SD/- SD/- ( . . . ) ( N.R.S.GANESAN ) ( . '#$ %' ) (A.MOHAN ALANKAMONY) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED 22 ND DECEMBER, 2015. K S SUNDARAM. & (,/0 1 0#, /COPY TO: 1. $% /APPELLANT 2. ()$% /RESPONDENT 3. * 2, ( ) /CIT(A) 4. * 2, /CIT 5. 05 (,6! /DR 6. ' 7+ /GF