Tribunal partially allows appeal on Transfer Pricing issues with specific directions

The appeal was partly allowed with specific directions and remittals provided for certain issues. The Tribunal rejected the assessee's objections to the Transfer Pricing Adjustment and initiation of penalty proceedings. However, the Tribunal partially allowed the appeal regarding the method adopted by the Transfer Pricing Officer, corporate guarantee as an international transaction, advances to subsidiary companies, and interest on outstanding receivables. The Tribunal's decision was pronounced on 11th May 2018.

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Issues Involved:
1. Transfer Pricing Adjustment.
2. Method Adopted by TPO.
3. Corporate Guarantee as an International Transaction.
4. Advances to Subsidiary Companies.
5. Interest on Outstanding Receivables.
6. Initiation of Penalty Proceedings.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee objected to the Transfer Pricing Adjustment on the grounds that both the assessee and its Associated Enterprise (AE) incurred losses, arguing that no Arm’s Length Price (ALP) adjustment should be made. The Tribunal found that the decisions cited by the assessee (Apollo Health Street, APP Labs Technologies, and Global Vantedge Pvt Ltd.) did not apply to the facts of the case. Consequently, the assessee’s ground of appeal on this issue was rejected.

2. Method Adopted by TPO:
The assessee initially adopted the Cost Plus Method (CPM), while the TPO adopted the Transactional Net Margin Method (TNMM) as the most appropriate method. The assessee did not object to the adoption of TNMM but requested that only the segmental results of the comparable companies be considered. The Tribunal remitted the issue to the TPO with the direction to consider only the segmental results of both the assessee and the comparables for determining the ALP of the international transaction. This ground of appeal was partly allowed.

3. Corporate Guarantee as an International Transaction:
The assessee contended that a corporate guarantee is not an international transaction for the A.Y 2012-13. The Tribunal referred to the case of Dr. Reddy’s Laboratories Vs. ACIT, where it was held that before the amendment of Sec. 92B of the IT Act effective from A.Y 2013-14, a corporate guarantee could not be considered an international transaction. Respectfully following this decision, the Tribunal allowed the ground of appeal, holding that the corporate guarantee is not an international transaction for the A.Y 2012-13.

4. Advances to Subsidiary Companies:
The assessee had made advances to its subsidiary and argued that no interest should be charged as no interest was charged on similar transactions with unrelated parties, and the advances were made using interest-free funds. The Tribunal found that the nature and purpose of the advances were not clear and remitted the matter back to the A.O. If the advances were trade advances, no interest should be levied; if treated as loans, the interest should be at LIBOR plus percentage. This ground of appeal was partly allowed for statistical purposes.

5. Interest on Outstanding Receivables:
The assessee had outstanding receivables from its AE, and the TPO treated these as advances, requiring interest charges. The Tribunal referred to previous decisions (GSS Infotech Ltd. and Batronics India Ltd.) and held that no interest is chargeable on receivables if the credit period is reasonable. Since the receivables were received within a year, the Tribunal allowed the ground of appeal, canceling the interest levied.

6. Initiation of Penalty Proceedings:
The ground of appeal against the initiation of penalty proceedings was rejected as premature. The general ground of objection was also rejected as it needed no adjudication.

Conclusion:
The appeal was partly allowed, with specific directions and remittals provided for certain issues. The Tribunal’s decision was pronounced in the open court on 11th May 2018.

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