Tribunal rules in favor of assessee, allowing appeal on interest & employee contributions

The Tribunal allowed the appeal, ruling in favor of the assessee by deleting the disallowance of interest on loans from related parties and the disallowance of employees' contribution to PF & ESI paid before the due date of filing the return of income under section 139(1). The decision was pronounced on 04/09/2019.

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Issues Involved:
1. Disallowance of interest on loan from related parties.
2. Disallowance of employees' contribution to PF & ESI paid after the due date under relevant Acts but before the due date of filing the return of income under section 139(1) of the IT Act.

Issue-wise Detailed Analysis:

1. Disallowance of Interest on Loan from Related Parties:
The assessee challenged the disallowance of Rs. 1,50,528/- made on account of interest on loans from related parties. The assessee argued that the transactions of payment of interest to related parties were at Arm's Length Price (ALP) when compared using the Internal Comparable Uncontrolled Price (CUP) method. The assessee's Transfer Pricing Study Analysis showed that the average effective interest rate paid to unrelated parties, including brokerage, was 15.36%, whereas the interest paid to related parties was 15%. The Transfer Pricing Officer (TPO) rejected the Internal CUP method and applied the External CUP method, using the average SBI Base Rate plus 300 basis points, resulting in an ALP of 12.83%. This led to an adjustment of Rs. 6,53,288/-. The CIT (A) accepted the Internal CUP method but excluded brokerage, arriving at an ALP of 14.5%.

The Tribunal found no plausible reason for the TPO's rejection of the Internal CUP method. The assessee had almost equal numbers of transactions with related and unrelated parties, and the average effective interest rate paid to unrelated parties, including brokerage, was 15.36%. The Tribunal concluded that the payment of interest to related parties at 15% was at Arm's Length and within the tolerance range of (+)(-) 3% as per section 92C(2). Therefore, the addition sustained by the CIT (A) was deleted.

2. Disallowance of Employees' Contribution to PF & ESI:
The assessee contested the disallowance of Rs. 1,03,508/- for employees' contribution to PF & ESI, which was paid after the due date under the relevant Acts but before the due date of filing the return of income under section 139(1). The CIT (A) upheld the disallowance based on the decision of the Hon'ble Rajasthan High Court in the case of M/s. Rajasthan Renewable Energy Corporation Limited, where the issue was pending before the Supreme Court.

The Tribunal noted that the CIT (A) misunderstood the decision of the Hon'ble Rajasthan High Court. The Tribunal referred to its consistent view, including the case of Rajasthan Cottage Industries vs. ITO, where it was held that employees' contribution to PF & ESI paid before the due date of filing the return under section 139(1) should be allowed. The Tribunal cited the Hon'ble Supreme Court's dismissal of the Revenue's SLP against the decision in the case of PCIT vs. Rajasthan State Beverages Corporation Ltd., which supported the assessee's claim. Therefore, the disallowance made by the AO was deleted.

Conclusion:
The Tribunal allowed the appeal of the assessee, deleting the disallowance of interest on loans from related parties and the disallowance of employees' contribution to PF & ESI paid before the due date of filing the return of income under section 139(1). The order was pronounced in the open court on 04/09/2019.

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