Transfer pricing & Computation of ALP : Notional interest accrued on account of delayed payment by AE, could not be treated as part of assessee’s income and made the subject-matter of the adjustments

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Transfer pricing & Computation of ALP : Notional interest accrued on account of delayed payment by AE, could not be treated as part of assessee’s income and made the subject-matter of the adjustments

short overview :  Notional interest accrued on account of delayed payment by AE could not be treated as part of assessee’s income.

Issue under consideration was whether Revenue was justified in making adjustment of notional interest accrued on account of delay in realization of debts by assessee-company from its AE.

it is held that  Notional interest accrued on account of delayed payment by AE, could not be treated as part of assessee’s income and made the subject-matter of the adjustments.

Decision: In assessee’s favour.

Followed: CIT, Udaipur v. M/s. Secure Meters Ltd., E-Class, Pratapnagar Industrial Area, Udaipur in (D.B. Income Tax Appeal No. 139/2018, 142/2018, dt. 29-7-2019).

IN THE RAJASTHAN HIGH COURT

S. RAVINDRA BHAT & MR. VINIT KUMAR MATHUR, JJ.

CIT v. Secure Meters Ltd.

D.B. Income Tax Appeal Nos. 81/2017, 10, 11/2013, 118/2014, 74, 92, 93/2017

7 August, 2019

Appellant(s) by: K.K. Bissa G.S. Chouhan

Respondent(s) by: Anjay Kothari

ORDER

Admit.

2. The following question of law for arises consideration:–

“1. Whether on the facts and in law the learned ITAT was justified in directing to include other income for computing deduction under section 80IB/80IC of the Act ignoring the fact that the other income is not at all ‘profit derived from industrial undertaking’ and hence not eligible for deduction under section 80IB/80IC of the Income Tax Act?

3. Whether on the facts and in law the learned ITAT was justified in deleting the apportionment of depreciation made on assets of Head Office used also for activities of different eligible industrial undertaking for computing deduction under section 80IB/80IC?

5. Whether on the facts and in law the learned ITAT was justified in deleting the apportionment of expenses on product development for activities of different eligible industrial undertaking for computing deduction under section 80IB/80IC?”

3. Mr. Anjay Kothari accepts notice on behalf of the respondents.

4. The other questions of law urged are first with respect to justifiability of deduction of certain amount under section 80 IB/IC as part of trading profits for the bated unit. The second question is with respect to deletion of apportionment of expenses on information system for activity of different eligible industrial undertaking; the third question is with respect to disallowance of deduction of certain amount in respect of service income; the fourth question is with respect to adjustment of certain amount, towards interest chargeable on credit facility for the extended period or delay in realization of debts, the assessee A.E. The last question relates disallowance of certain amount under section 14A of the Income Tax Act.

5. It is not dispute that the last two questions i.e. ALP determination and disallowance under section 14A are now covered by decision of the Supreme Court. The decision in Godrej & Boyce Manufacturing Company Ltd. v. Dy. CIT & Anr. (2017) 394 ITR 449 (SC) covers the question of disallowance against the revenue under section 14A. As regards the ALP determination and adjustment, the question does not arise in view of the recent decision of this Court in Pr. CIT, Udaipur v. M/s. Secure Meters Ltd., E-Class, Pratapnagar Industrial Area, Udaipur in (D.B. Income Tax Appeal No. 139/2018, 142/2018, dt. 29-7-2019).

6. As far as the question relating to trading profit is concerned, the record shows that the assessee derived this income from the sale of boxes manufactured by it to house electric meters. It is not disputed that the deduction under section 80 IB/IC was for manufacture of electric meters. The manufacture and supply of boxes, which are essentially for housing electronics meters so as to make it convenient for use by the consumers is an activity intrinsically connected with the business qualifying for deduction. As a consequence, it is held that this question of law does not arise.

7. The other two questions in the opinion of this Court relating to service income and apportionment of the expenses, having regard to the concurrent findings do not arise.

8. This Court is further of the opinion that in ITA No. 74/2017, the additional question urged i.e. adjustment on account of the corporate guarantee provided by the assessee to its A.E, does not arise. The reasoning is that such corporate guarantee is part of the commercial activity of the assessee and no cost was incurred by the assessee when it provided this benefit to its A.E. By all accounts it appears, therefore, to be book transaction.

9. List the appeals for hearing on 3-9-2019. The parties shall file brief synopsis not exceeding five pages each.

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