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of <h1>Appeal allowed: Advance to AE for machinery, not loan; no interest charge. Assessing Officer's addition deleted.</h1> <h3>M/s. Essar Steel Orissa Ltd., (Since merged with Essar Steel India Ltd.) Versus The ACIT, Range 5 (1), Mumbai</h3> M/s. Essar Steel Orissa Ltd., (Since merged with Essar Steel India Ltd.) Versus The ACIT, Range 5 (1), Mumbai - TMI Issues Involved:- Whether the Ld. CIT(A) erred in upholding the adjustments made by the Assessing Officer on account of non-charging of interest on advance given towards the supply of equipment by the assessee to its AE.Detailed Analysis:1. Background and Facts:The assessee-company, a wholly owned subsidiary of Essar Steel India Ltd, was in the process of setting up an 8.0 MTPA integrated Iron Ore Pellet plant. For the assessment year 2008-09, the assessee filed a return declaring a total income of Rs. 91,88,612/-. The case was referred to the TPO due to international transactions exceeding Rs. 15 crores. The TPO proposed an adjustment of Rs. 1,24,30,054/- on account of Arm’s Length Pricing of the International Transactions. This adjustment was based on the non-charging of interest on a trade advance given to the assessee's AE, Global Supplies (UAE) FZE.2. Issue of Non-Charging of Interest:The core issue was whether the assessee should have charged interest on the trade advance made to its AE. The TPO argued that interest should be charged and determined an interest rate of 18.81% using the CUP method, resulting in an adjustment of Rs. 1,24,30,054/-. The assessee contended that the advance was purely for the supply of equipment and not a loan, thus no interest was required. The Ld. CIT(A) upheld the TPO's view.3. Assessee's Arguments:The assessee argued that the payment was a trade advance and not a loan. It was supported by a bank guarantee and was made for the procurement of machinery. The assessee provided evidence of the transaction and cited several case laws to argue that the TPO cannot re-characterize a transaction without material evidence. The assessee also contended that if interest were to be charged, it should be based on LIBOR rates, not the prime lending rate used by the TPO.4. Departmental Representative's Position:The Ld. Departmental Representative supported the orders of the lower authorities, maintaining that the interest should be charged on the advance.5. Tribunal's Findings:The Tribunal noted that the TPO had not provided any material evidence to suggest that the advance was a loan. The Tribunal referred to several case laws where it was held that the TPO cannot re-characterize a transaction without evidence of it being a sham or bogus. The Tribunal found that the advance was for the supply of machinery and thus, no interest was chargeable. The Tribunal directed the Assessing Officer to delete the addition made towards interest on the advances.6. Conclusion:The Tribunal allowed the appeal of the assessee, concluding that the advance was for the supply of machinery and not a loan, and therefore, no interest should be charged. The addition made by the Assessing Officer was directed to be deleted.Order:The appeal of the assessee was allowed, and the order was pronounced in the open court on 22nd June 2016.
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