2014 (11) TMI 254 - AT - Income Tax

Tribunal upholds CIT(A)'s decisions on interest payment & transfer pricing adjustment

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions to delete the disallowance of interest payment on External Commercial ... Determination of ALP - Interest payment on External Commercial Borrowings - Conditions laid down in section 10(15)(iv)(c) fulfilled or not – Held that:- It is a fact that the CBDT has examined the receipt of interest as per the provisions of section 10(15)(iv)(c) of the Act - where the utilization is for purchase outside India of raw material, components or Plant & Machinery, so long as exemption granted is valid, the interest received by the other party is not covered by the IT Act and by virtue of exemption granted by the Central Govt., the question of TDS on the above amount does not arise at all. Since there is no requirement of TDS, question of disallowance under section 40(a)(ia) for non deduction of tax also does not arise - They also placed on record the approval of the RBI for the purpose of financing the Put Option under Euro Convertible Bonds issue of USD 75 Million - After examining the relevant certificates the CBDT Foreign Tax Division vide letter dated 12.03.1997 granted the approval under section 10(15)(iv)(c) - the contention of assessee now made at the time of payment of interest does not survive as the issue of utilization of the funds was already examined by the CBDT at the time of granting exemption - once the interest income is not taxable in the hands of recipient and was exempted by the Govt. of India, question of TDS on the interest paid by assessee does not arise – Decided against Revenue. Addition in respect of sale of AE – Held that:- Assessee has already considered all the 8 transactions with its AE in totality by aggregating the same whereas the TPO picked up two transactions where the price charge was less than the average market price - Rule 10(A)(a) defines a transaction to include a number of closely linked transaction – in case they are closely linked then they can be aggregated for determining the ALP - assessee has exported hot rolled coils to its AE between 30-6-2005 to 10-3-2006, the price has been determined from the website whose data is not subject to challenge - The product remains the same and the source from which the average price has been taken remains the same - if the average price is adopted for all the 8 transactions, then the average comes exactly to 420.71 which is what the price charged by the assessee to its AE - the detailed finding recorded by the CIT(A) – there is no reason to interfere in the order of CIT(A) for deleting the addition in respect of adjustment – Decided against revenue. Issues Involved:1. Disallowance of interest payment on External Commercial Borrowings (ECB).2. Transfer pricing adjustment related to sales to an Associate Enterprise (AE).Detailed Analysis:1. Disallowance of Interest Payment on External Commercial Borrowings (ECB):The Revenue appealed against the CIT(A)'s order, which deleted the disallowance of Rs. 14.37 crores related to interest payment on ECB. The AO had disallowed this interest payment on the grounds that the assessee did not fulfill the conditions under Section 10(15)(iv)(c) of the IT Act, which would qualify the interest for exemption from tax.The CIT(A) observed that this issue had been decided in favor of the assessee in previous years (from AY 2000-01 onwards), and there were no new compelling reasons to deviate from the earlier decisions. The CIT(A) noted that the interest paid by the appellant could not be treated as 'income taxable' in the hands of the recipient by virtue of Section 10(15)(iv)(c), and thus, TDS provisions were not applicable, making Section 40(a) inapplicable.The Tribunal upheld the CIT(A)'s decision, noting that the same loan and interest payment issues had been resolved in favor of the assessee in earlier years. The Tribunal emphasized that the CBDT had granted approval under Section 10(15)(iv)(c), which had not been withdrawn, and thus, the interest payment was exempt from TDS. The Tribunal cited the Supreme Court's decision in CIT vs. Chotatingrai Tea and Others (258 ITR 529) to support its conclusion. Consequently, the Tribunal dismissed the Revenue's appeal on this ground.2. Transfer Pricing Adjustment Related to Sales to an Associate Enterprise (AE):The Revenue also appealed against the CIT(A)'s order, which deleted the addition of Rs. 5.82 crores made by the AO on account of transfer pricing adjustments. The AO had made this adjustment by comparing the sales price of Hot Rolled Coils (HRC) to the AE with the average market price, rather than the actual sale price, leading to an addition.The CIT(A) found that the assessee had used the Comparable Uncontrolled Price (CUP) method, comparing the price of HRC in the international market using data from the website www.stellbb.com. The CIT(A) observed that the TPO had selectively picked two transactions where the sale price was less than the average market price, ignoring other transactions where the price was higher.The CIT(A) emphasized that Rule 10(A)(a) allows for the aggregation of closely linked transactions for determining the Arm's Length Price (ALP). The CIT(A) noted that if the average price of all eight transactions was considered, it matched the price charged by the assessee to its AE. The CIT(A) cited the Mumbai Tribunal's decision in Audco India Ltd. Vs ACIT (2010 TII 57-ITAT-MUM-TP), which supported the aggregation approach and criticized the TPO's selective adjustments.The Tribunal upheld the CIT(A)'s decision, agreeing that the transactions should be aggregated and that the average price charged by the assessee was in line with the ALP. The Tribunal found no reason to interfere with the CIT(A)'s order and dismissed the Revenue's appeal on this ground.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions to delete the disallowance of interest payment on ECB and the transfer pricing adjustment related to sales to the AE. The Tribunal emphasized the principles of judicial consistency and fairness in transfer pricing adjustments.