Tribunal allows assessee's appeal, directing deletion of additions by Assessing Officer on Transfer Pricing adjustments.

M/s. Aries Agro Ltd. Versus Dy. Commissioner of Income Tax 14 (1) (1), Mumbai

M/s. Aries Agro Ltd. Versus Dy. Commissioner of Income Tax 14 (1) (1), Mumbai - TMI Issues Involved:

1. Transfer Pricing Adjustment on Interest Charged from Associated Enterprise (AE).
2. Disallowance of Hedging Loss Incurred by the Assessee.
3. Addition on Account of Notional Interest on Share Application Money.

Detailed Analysis:

1. Transfer Pricing Adjustment on Interest Charged from AE:

The first issue pertains to the confirmation of the Transfer Pricing Officer (TPO) in making interest adjustments on the interest charged from the AE on the loan advanced. The assessee borrowed funds from ICICI Bank Bahrain to set up a manufacturing facility at Fujairah for its AE, Golden Harvest. The interest charged to Golden Harvest was the same as that paid to ICICI Bank (LIBOR plus 250 basis points). However, the TPO argued that the loan to the AE was unsecured, unlike the secured loan from ICICI, and thus bore additional risk. Consequently, the TPO benchmarked the interest rate at 5.82% using the Bloomberg database, resulting in an adjustment of Rs. 62,77,368/-. The Disputes Resolution Panel (DRP) upheld this adjustment, reasoning that the assessee should have been compensated for the additional risk.

The Tribunal, however, disagreed with the DRP, referencing multiple decisions that upheld the use of LIBOR for benchmarking loans denominated in foreign currency. The Tribunal cited the decision of the co-ordinate bench in Everest Kanto Cylinder Ltd. v. ACIT, which supported the use of LIBOR plus 250 basis points as an arm's length rate. Therefore, the Tribunal directed the deletion of the addition, allowing the assessee's appeal on this ground.

2. Disallowance of Hedging Loss Incurred by the Assessee:

The second issue involves the disallowance of hedging loss of Rs. 61,63,000/- incurred by the assessee. The loss was related to a hedging transaction undertaken to mitigate the risk of foreign exchange fluctuations on the loan advanced to Golden Harvest. The TPO treated this hedging loss as an international transaction, making an adjustment accordingly. The DRP upheld this view, stating that the hedging loss was directly attributable to the loan availed for the AE's benefit and thus fell under the definition of an international transaction per Section 92B of the Income Tax Act.

The Tribunal, however, found merit in the assessee's contention that the hedging contract was between the assessee and ICICI Bank, Mumbai, an independent third party, and not with the AE. The Tribunal held that the loss was not an international transaction under Section 92C of the Act. It concluded that while the expense might not be wholly and exclusively for the business purpose of the assessee, it was not liable for transfer pricing adjustment. Therefore, the Tribunal directed the deletion of the disallowance, allowing the assessee's appeal on this ground.

3. Addition on Account of Notional Interest on Share Application Money:

The third issue concerns the addition of notional interest on share application money invested by the assessee in its overseas subsidiary, Golden Harvest. The TPO treated the share application money, which remained unallotted for a long period, as an interest-free loan and applied an interest rate of 12.06%, resulting in an adjustment of Rs. 2,44,20,173/-. The DRP upheld this adjustment, reasoning that in an arm's length situation, no third party would leave share application money unallotted for such a long period without compensation.

The Tribunal, however, found that no income accrued from the share application money to the assessee and thus such transactions could not be subjected to transfer pricing provisions. Citing the Hon’ble Bombay High Court's decisions in Shell India Markets Pvt. Ltd. vs. ACIT and Equinox Business Parks (P.) Ltd. vs. Union of India, the Tribunal held that Chapter X of the Act applies only when income arises from international transactions. Consequently, the Tribunal reversed the DRP's direction and directed the deletion of the addition on account of notional interest, allowing the assessee's appeal on this ground.

Conclusion:

The Tribunal allowed the appeal of the assessee on all grounds, directing the deletion of the additions made by the AO based on the TPO's adjustments. The Tribunal emphasized the importance of adhering to established legal principles and precedents in determining the arm's length nature of transactions and the applicability of transfer pricing provisions.