2017 (2) TMI 1362 - HC - Income Tax

Tax Tribunal Ruling: Key Issues on Lending, Interest Rates, and Deductions

The case involved multiple issues including the treatment of lending transactions under Section 92B, benchmarking interest rates, adjustment of interest ... TDS u/s 194H - TDS liability on dealer's incentive - examination of the relationship between the Respondent-Assessee and its dealers as principal-to-principal basis - Held that:- The impugned order of the Tribunal has held that the dealers incentive is not subject to tax deduction at source under Section 194H of the Act as the sale between the Respondent-Assessee and its dealer was on principal to principal basis. The impugned order of the Tribunal place reliance upon its earlier order for the Assessment Year 2007-08 wherein on detailed examination of the relationship between the Respondent-Assessee and its dealers was found to be on principal to principal basis and, therefore, not hit by Section 194H of the Act. The impugned order, therefore allowed the Respondent-Assessee's appeal. The issue now stands concluded against the Revenue by the decision of this Court in CIT v/s. Intervet India P. Ltd. [2014 (4) TMI 353 - BOMBAY HIGH COURT] - Decided in favour of assessee. Appeal admitted on Questions at (a), (b), (c), (d), (f) and (g) as substantial questions of law. Issues Involved:1. Treatment of lending transaction in contravention to Section 92B.2. Benchmarking interest at prevailing LIBOR rate.3. Adjustment of interest rate on interest-free loan advanced to AE.4. Treatment of pro rata premium on redemption of FCCB.5. Tax deduction on dealer's incentive.6. Disallowance of reversal of provision for medical benefits.7. Disallowance under Section 40(a)(ia) for non-deduction of tax at source.Analysis:1. The first issue revolves around the treatment of lending transactions in contravention to Section 92B of the Income Tax Act. The Tribunal was questioned for treating lending transactions on par with borrowing transactions, thereby overlooking crucial factors like opportunity cost and risk borne by the leading entity. The Tribunal's decision to benchmark interest at the prevailing LIBOR rate instead of the rupee loan rate was also challenged, arguing that LIBOR does not govern monetary or interest rates in India. The Tribunal's deletion of adjustments made by the TPO regarding interest rates on interest-free loans was also contested, citing domestic interest rates as a benchmark.2. The second issue concerns the deletion of the pro rata premium payable on the redemption of Foreign Currency Convertible Bonds (FCCB). The Tribunal's decision to treat such expenses as capital expenditure was challenged, questioning the correctness of deleting the premium amount.3. The third issue involves the tax deduction on the dealer's incentive. The Tribunal held that the incentive was not covered under Section 194H as the sale was on a principal-to-principal basis. This decision was based on the nature of the relationship between the dealer and the assessee, as established in the AO's order. The appellant pointed out the need for TDS deduction under Section 194H or 194C, which was disregarded by the Tribunal.4. The fourth issue pertains to the disallowance of the reversal of a provision for medical benefits. The Tribunal deleted the disallowance of a certain amount, arguing that it was a reversal of a provision disallowed in earlier years. The appellant contested this decision, stating that the disallowance during the current year was consequential to the previous disallowance.5. The fifth issue addresses the disallowance under Section 40(a)(ia) for not deducting tax at source. The Tribunal set aside the disallowance, relying on certain decisions, despite the appellant's liability to deduct tax at source as per Chapter XVIIB provisions. The appellant argued against the Tribunal's decision, citing the Madras High Court's ruling on TDS liability.In conclusion, the judgment involves intricate tax law interpretations and challenges to the Tribunal's decisions on various aspects of income tax assessments for the relevant assessment year. The issues range from benchmarking interest rates to tax deductions and disallowances, reflecting the complexity of tax disputes and the need for detailed legal analysis.