Tribunal ruling on transfer pricing, disallowances, and forex loss in appeal case

The Tribunal allowed the appeal of the assessee in a case involving transfer pricing adjustments on royalty and interest on Compulsory Convertible Debentures (CCDs), disallowance of expenditure under Sections 14A and 40(a)(ia), and disallowance of foreign exchange loss. The Tribunal directed the deletion of disallowances under Sections 14A and 40(a)(ia) as the assessee had no exempt income and remanded the issue of non-deduction of tax at source for reconsideration. The Tribunal upheld the transfer pricing adjustments on royalty and interest on CCDs, as well as allowed the forex loss as a deduction.

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Issues Involved:

1. Transfer Pricing adjustment on payment of royalty.
2. Transfer Pricing adjustment on payment of interest on Compulsory Convertible Debentures (CCDs).
3. Disallowance of expenditure under Section 14A of the Income-tax Act.
4. Disallowance of foreign exchange loss.
5. Disallowance of expenditure under Section 40(a)(ia) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment on Payment of Royalty:

The first issue addressed was the transfer pricing adjustment made by the TPO concerning the payment of royalty at 1% instead of the 4% claimed by the assessee. The assessee argued that this issue was already settled in its favor in previous assessment years (2009-2010 and 2010-2011) by the Tribunal, where the TPO had accepted the payment of royalty at 4% as being at arm's length. The Tribunal reiterated its previous decisions and held that the payment of royalty at 4% in the current assessment year is also at arm's length. Consequently, this ground was allowed in favor of the assessee.

2. Transfer Pricing Adjustment on Payment of Interest on CCDs:

The next issue was the adjustment made by the TPO by re-characterizing the payment of interest on CCDs as External Commercial Borrowings (ECBs). The assessee contended that this issue was also covered in its favor in previous assessment years by the Tribunal, which had held that CCDs, being hybrid instruments, cannot be treated as ECBs. The Tribunal, relying on its earlier decisions and the judgment of the Hon'ble Delhi High Court in the case of CIT v. Cotton Naturals (I) Pvt. Ltd., upheld the assessee's TP study that justified the interest rate based on the average rupee cost compared with the SBI prime lending rate. Thus, the assessee's claim was allowed.

3. Disallowance of Expenditure under Section 14A:

The third issue was the disallowance of expenditure under Section 14A read with Rule 8D of the Act. The assessee argued that it had not earned any exempt income during the year under consideration, and therefore, no disallowance could be made under Section 14A. The Tribunal referred to the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Quest Global Engineering Services Pvt. Ltd., which held that in the absence of any exempt income, no disallowance can be made under Section 14A. Consequently, the Tribunal held that the disallowance made under Section 14A should be deleted, as the assessee was not in receipt of any exempt income during the relevant assessment year.

4. Disallowance of Foreign Exchange Loss:

The fourth issue was the disallowance of foreign exchange loss amounting to Rs. 20,22,99,856/-. The assessee had obtained a foreign currency loan for general corporate purposes and claimed the forex fluctuation loss as an expenditure. The AO rejected the claim, stating that the loan was used for repaying short-term borrowings. The Tribunal, however, found that the loan was approved by the RBI for general corporate purposes and noted that the cash flow statement alone could not conclusively determine the utilization of the loan. The Tribunal also considered that the assessee had offered forex gains for tax in previous years. Relying on the decision of the Apex Court in CIT v. Woodward Governor India (P.) Ltd., the Tribunal held that the forex loss should be allowed as a deduction, as the loan was utilized for revenue purposes.

5. Disallowance of Expenditure under Section 40(a)(ia):

The last issue was the disallowance of expenditure under Section 40(a)(ia) amounting to Rs. 5,42,35,783/-. The assessee had previously disallowed this amount for non-deduction of tax at source and claimed it as a deduction in the current year, stating that the expenditure was incurred for business purposes and taxes were deducted where applicable. The Tribunal noted that this issue had been remanded back to the AO for reconsideration in the previous assessment year (2011-12). Following the same direction, the Tribunal remanded the issue back to the AO for fresh examination and directed the AO to reconsider the allowability of the expenditure.

Conclusion:

The appeal of the assessee was largely allowed, with the Tribunal directing the deletion of disallowances made under Sections 14A and 40(a)(ia), and allowing the claims related to transfer pricing adjustments on royalty and interest on CCDs, as well as the forex loss. The decision was pronounced in court on 25th February 2022.

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