2015 (12) TMI 1406 - AT - Income Tax

Tribunal Upholds Assessee's Approach in Loan Transaction, Directs AO for Further Determinations

The Tribunal partly allowed the appeal, upholding the assessee's approach in benchmarking a foreign currency loan transaction and deleting the ALP ... Arm's Length Price (ALP) determination for international loan transactions - Comparable Uncontrolled Price (CUP) method - internal comparable vs external market rates - Relevance of currency of denomination in benchmarking interest rates - Chargeability of interest on unpaid interest (compounding) as ALP - Arm's length pricing of corporate guarantees and requirement of bearing on profits/income/assets - Remand for fresh quantification and verification by Assessing Officer/Transfer Pricing Officer - Disallowance under section 40(a)(ia) for failure to deduct tax at source (TDS) - applicability of section 194C - Deduction for employees' Provident Fund contributions paid before filing of return - Allowability of depreciation on goodwill on acquisitionArm's Length Price (ALP) determination for international loan transactions - Comparable Uncontrolled Price (CUP) method - internal comparable vs external market rates - Relevance of currency of denomination in benchmarking interest rates - Deletion of ALP adjustment made by TPO by benchmarking foreign currency loan to fixed deposit rates; internal CUP based on Exim Bank foreign currency borrowing accepted. - HELD THAT: - The Tribunal held that interest on foreign currency advances must be benchmarked by reference to comparable foreign currency loans and not by reference to rupee market rates or domestic fixed deposit yields. It followed coordinate bench authorities which recognised that currency of denomination materially affects the time value of money and, therefore, rupee interest rates are not relevant comparables for loans denominated in hard currencies. The Tribunal agreed with the assessee that the Exim Bank foreign currency lending rate to the assessee constituted a valid internal CUP for ascertaining the ALP of the loan advanced to the foreign subsidiary, noting that a credit institution's pricing of a foreign currency loan to the assessee reasonably supports that a similar rate could be arm's length for a loan to the AE on similar terms. Accordingly the ALP addition of Rs. 3,01,99,896 was deleted. [Paras 11, 14, 15, 16, 17]ALP adjustment in respect of interest on loan to Advanta Holdings BV deleted.Chargeability of interest on unpaid interest (compounding) as ALP - Application of internal CUP terms to delayed payment of interest - Remand for verification and application of comparable terms - Whether interest on outstanding interest receivable from AE can be charged as ALP and the rate/terms applicable. - HELD THAT: - The Tribunal distinguished earlier authority relied upon by the assessee as relating to continuing debit balances arising from ordinary commercial transactions and held that compounding of interest on unpaid interest is a distinct commercial practice. Having held (in the preceding issue) that the Exim Bank internal CUP is a valid comparable for the underlying loan, the Tribunal directed that the question of levy and quantification of interest on unpaid interest be considered by the Assessing Officer in the light of the terms applicable in a materially similar situation under the internal CUP. The matter was restored to the file of the AO for application of the comparable's rate and terms and for adjudication of the compounding issue accordingly. [Paras 22, 23, 24]Issue remitted to the Assessing Officer for fresh consideration and quantification in accordance with the internal CUP; allowed for statistical purposes.Arm's length pricing of corporate guarantees and requirement of bearing on profits/income/assets - Scope of 'international transaction' - guarantees under Explanation to Section 92B - Remand for de novo determination by TPO with cooperation of assessee - Appropriate course for determining ALP of guarantee fee where the assessee incurred some costs but provided no sufficient information to substantiate arm's length fee. - HELD THAT: - The Tribunal examined the scope of 'international transaction' and held that guarantees can fall within ALP scrutiny where they have a bearing on profits, income, losses or assets. Noting that the assessee did incur a cost for issuance of the guarantee (payment to bank), the Tribunal found the issue not amenable to summary resolution on the record before it and observed there was no scientific basis on the material to uphold the TPO's flat 2% rate. In light of inadequate information furnished by the assessee, the Tribunal remitted the matter to the TPO for de novo adjudication of the ALP of the corporate guarantee, directing the assessee to fully cooperate and permitting it to advance all legal and factual arguments afresh. [Paras 25, 30, 31, 32, 33]Quantification of ALP of guarantee fee remitted to the Transfer Pricing Officer for fresh adjudication after giving opportunity to the assessee; remitted for limited purposes.Application of jurisdictional High Court precedent and remand for de novo adjudication - Agricultural income exemption and related factual findings remitted to AO for fresh adjudication in light of jurisdictional High Court judgment. - HELD THAT: - The Tribunal noted that the issue is covered by the Karnataka High Court's judgment in the assessee's own case and, although a special leave petition is pending before the Supreme Court, the High Court view is binding for now. Consequently, the Tribunal remitted the matter to the Assessing Officer for de novo adjudication in accordance with that judgment. [Paras 35, 36]Matter remitted to the Assessing Officer for de novo adjudication in light of the Karnataka High Court decision.Disallowance under section 40(a)(ia) for failure to deduct TDS - Applicability of section 194C to procurement and processing charges - Deletion of disallowance under section 40(a)(ia) in respect of seed procurement and processing payments. - HELD THAT: - Having regard to coordinate bench decisions in the assessee's own case which held that the payments did not attract TDS under section 194C, the Tribunal followed those precedents and concluded there was no occasion to invoke disallowance under section 40(a)(ia). The Tribunal therefore directed the Assessing Officer to delete the impugned disallowance. [Paras 39, 40, 41]Disallowance under section 40(a)(ia) of Rs. 5,20,47,822 deleted.Deduction for employees' Provident Fund contributions paid before filing of return - Allowability of deduction for employees' PF contributions paid after statutory due date but before filing of return. - HELD THAT: - The Tribunal followed the binding view of the jurisdictional High Court in the assessee's own case and, given the undisputed fact that the payments were made before filing the return, directed deletion of the disallowance. The Tribunal thus allowed the assessee's claim for deduction. [Paras 42, 43, 44, 45]Deduction in respect of employees' PF contributions allowed; disallowance of Rs. 35,28,142 deleted.Allowability of depreciation on goodwill on acquisition - Remand for admission of additional evidence and de novo adjudication - Claim for depreciation on goodwill arising on acquisition remitted to AO for adjudication and admission of additional evidence. - HELD THAT: - The assessee sought admission of additional evidence and relied on Supreme Court authority to support allowability of goodwill depreciation. The Tribunal considered the request and remitted the matter to the Assessing Officer for adjudication on merits, permitting the assessee to file evidence and make arguments in support of the claim. [Paras 46, 47, 48, 49]Issue remitted to the Assessing Officer for fresh adjudication on merits; allowed for statistical purposes.Verification of TDS credit and interest under section 234D - Remand for verification and consequential relief - Credit for tax deducted at source and levy of interest under section 234D remitted to AO for verification and consequential relief. - HELD THAT: - The assessee sought verification and consequential relief regarding claimed TDS credit and interest under section 234D. The Tribunal, with the Revenue unopposed, remitted these matters to the Assessing Officer for necessary verification and adjustment if warranted. [Paras 50, 51, 52]Matters remitted to the Assessing Officer for verification and consequential relief.Final Conclusion: The appeal was partly allowed: the ALP adjustment in respect of interest on the foreign currency loan was deleted; disallowance under section 40(a)(ia) and deduction for PF contributions were allowed; several matters (interest on unpaid interest, guarantee fee quantification, agricultural income issues, depreciation on goodwill, and TDS credit/interest verifications) were remitted to the Assessing Officer/Transfer Pricing Officer for fresh consideration, quantification or verification as directed. Issues Involved:1. Benchmarking of foreign currency loan transaction.2. Adjustment on account of interest on outstanding interest receivable from AE.3. Determination of the ALP of the Guarantee fee.4. Exemption under section 10(1) of the Act in respect of agricultural income.5. Disallowance under section 40(a)(ia) of the Act on account of non-deduction of tax at source.6. Deduction in respect of employees' contribution to Provident Fund (PF).7. Depreciation on goodwill arising on acquisition.8. Credit in respect of tax deducted at source.9. Levy of interest under section 234D of the Act.Detailed Analysis:1. Benchmarking of Foreign Currency Loan Transaction:The assessee had granted a loan to its Amsterdam-based subsidiary and claimed it at arm's length price using internal CUP analysis. The TPO disagreed, stating that the right comparable should be a similar loan to an unrelated party in a similar situation. The TPO used the FD interest rate of scheduled banks in India to compute the arm's length interest rate, leading to an adjustment. However, the Tribunal found that interest rates on foreign currency loans are qualitatively different from rupee loans and should not be compared. The Tribunal upheld the assessee's approach using Exim Bank's foreign currency loan rate as a valid comparable and deleted the ALP adjustment.2. Adjustment on Account of Interest on Outstanding Interest Receivable from AE:The TPO also computed an ALP adjustment for non-realization of interest on interest receivable. The Tribunal noted that interest on unpaid interest is a normal commercial practice. The Tribunal restored the matter to the AO to determine if the delayed payment of interest will invite compounding of interest based on the terms applicable in a similar situation with Exim Bank.3. Determination of the ALP of the Guarantee Fee:The TPO determined the ALP of the guarantee fee at 2% of the guarantee amount, rejecting the internal CUP submitted by the assessee. The Tribunal noted that the issuance of a guarantee did have a bearing on the profits and income of the enterprise as the assessee incurred costs for the guarantee. The Tribunal remitted the matter to the TPO for fresh determination of the ALP of the corporate guarantee issued by the assessee, directing the assessee to provide necessary information.4. Exemption Under Section 10(1) of the Act in Respect of Agricultural Income:The issue of exemption under section 10(1) for agricultural income was remitted to the AO for fresh adjudication in light of the Karnataka High Court's judgment in the assessee's own case. The Tribunal noted that the matter is pending before the Supreme Court and directed the AO to be guided by the Supreme Court's decision if available before finalizing the assessment.5. Disallowance Under Section 40(a)(ia) of the Act on Account of Non-Deduction of Tax at Source:The AO disallowed payments for seed procurement and processing charges under section 40(a)(ia) for non-deduction of tax at source. The Tribunal noted that this issue is covered in favor of the assessee by coordinate bench decisions in the assessee's own case for earlier years, holding that such payments did not attract tax deduction under section 194C. The Tribunal directed the AO to delete the disallowance.6. Deduction in Respect of Employees' Contribution to Provident Fund (PF):The AO disallowed the deduction for employees' PF contributions paid beyond the due date but before the due date of filing the return. The Tribunal, following the jurisdictional High Court's judgment in the assessee's own case, directed the AO to delete the disallowance as the payments were made before the filing of the return.7. Depreciation on Goodwill Arising on Acquisition:The assessee claimed depreciation on goodwill arising from the acquisition of a business. The Tribunal remitted the matter to the AO for adjudication on merits, allowing the assessee to file additional evidence and arguments in support of its claim.8. Credit in Respect of Tax Deducted at Source:The assessee claimed credit for tax deducted at source, which the AO did not allow. The Tribunal remitted the issue to the AO for verification and consequential relief.9. Levy of Interest Under Section 234D of the Act:The issue of interest levied under section 234D was also remitted to the AO for verification and consequential relief.Conclusion:The appeal was partly allowed, with several issues remitted to the AO for fresh adjudication or verification based on the Tribunal's directions and applicable legal principles.