2017 (4) TMI 1009 - AT - Income Tax

Tribunal Upholds Transfer Pricing, Adjusts Interest Rate, and Treats Forex Loss as Business Loss 'sLengthPrice

Soma Textiles and Industries Ltd. Versus Additional Commissioner of Income Tax, Range - 8, Ahmedabad

The Tribunal upheld the applicability of transfer pricing provisions to the transactions with the subsidiary. It confirmed the addition of Rs. ... ALP adjustment - addition to LIBOR plus 2% - Held that:- So far as the issue of ALP adjustment being required, in principle, is concerned, learned counsel for the assessee has fairly conceded that this issue must be decided against the assessee at this forum, and that he will carry the matter, if so advised, in further appeal before Hon’ble Courts above. Ground no. 1 and 2, therefore, have to be decided against the assessee Coming to the quantum of addition, we find that the approach adopted by the authorities below is not justified and cannot meet any judicial approval. The adjustment on account of guarantee fees, as made by the TPO, it is wholly unwarranted as no such guarantee is given and, as such, there is no such transaction for determination of arm’s length price. In any event, as regards the question as to whether an additional arm’s length price adjustment on account of higher risk of lending to a low rated subsidiary is required, this issue is now covered, in favour of the assessee, by a coordinate bench decision in the case of UFO Movies India Ltd Vs ACIT [2016 (2) TMI 196 - ITAT DELHI] Forex derivative loss - speculative and notional loss not allowable for set-off against taxable income - Held that:- All the derivate transactions are specific hedging transactions against foreign exchange transactions of the assessee and are to be treated as integral part of the business transactions of the assessee. These transactions, by no stretch of logic, cannot be treated as standalone transactions, and as such loss on these transactions cannot be treated as loss from speculation business ineligible for set off against normal business profits. As for the CBDT instruction relied upon by the Assessing Officer, such instructions do not bind the appellate authorities, and nothing, therefore, turns on the same- so far as our adjudication is concerned. The losses on account of foreign exchange contracts are bonafide expenses incurred in furtherance of legitimate business interests of the assessee and are to be allowed as deduction under section 37(1) as such - Decided in favour of assessee Issues Involved:1. Applicability of Transfer Pricing provisions.2. Addition of Rs. 3,34,28,873/- on account of Arm's Length Price (ALP) of loan interest.3. Adoption of 8.7% interest rate for ALP instead of LIBOR+2%.4. Disallowance of Rs. 15,02,592/- under Section 35D of the Income Tax Act.5. Treatment of forex derivative loss amounting to Rs. 57,76,604/-.6. Non-allowance of exchange rate fluctuation loss of Rs. 68,96,702/-.Issue-wise Detailed Analysis:1. Applicability of Transfer Pricing Provisions:The assessee contested the applicability of transfer pricing provisions to its transactions with its 100% subsidiary, Soma Textile FZE. The Tribunal noted that the issue was already covered against the assessee in principle by a previous decision in the assessee's own case for the assessment year 2007-08. The Tribunal upheld that the provisions of transfer pricing were applicable.2. Addition of Rs. 3,34,28,873/- on Account of ALP of Loan Interest:The assessee argued that the amount given to Soma Textiles FZE was a contribution towards capital or quasi-equity capital, and thus, the addition of Rs. 3,34,28,873/- based on the findings of the Additional CIT (TPO) was incorrect. The Tribunal referred to previous decisions and clarified that quasi-capital loans are treated differently than normal loan transactions. The Tribunal found no merit in the assessee's argument that the ALP of such quasi-capital loans should be nil. The Tribunal confirmed the stand of the authorities below and dismissed the assessee's grounds on this issue.3. Adoption of 8.7% Interest Rate for ALP Instead of LIBOR+2%:The Tribunal noted that the TPO had adopted an interest rate of 8.7% for the ALP, considering an additional 2% for the higher risk in lending to the subsidiary. The Tribunal found this approach unjustified, as no actual guarantee was given, and there was no material change in the facts and circumstances from the previous assessment year where LIBOR+2% was adopted. The Tribunal upheld the assessee's plea to adopt LIBOR+2% for the ALP adjustment and allowed the related ground.4. Disallowance of Rs. 15,02,592/- Under Section 35D of the Income Tax Act:The assessee claimed deduction under Section 35D for GDR issue expenses. The Tribunal referred to the Supreme Court's decision in Brooke Bond India Ltd. and concluded that such expenses are capital in nature and not eligible for amortization under Section 35D, as they were not incurred for the extension of the undertaking or setting up a new industrial undertaking. The Tribunal dismissed the assessee's grounds on this issue.5. Treatment of Forex Derivative Loss Amounting to Rs. 57,76,604/-:The assessee claimed a loss on derivative transactions as a business loss. The Assessing Officer treated it as a speculative loss under Section 43(5) and disallowed the deduction. The Tribunal found that speculative transactions incidental to the main business should not be treated separately as speculation business. The Tribunal upheld the assessee's plea, noting that the transactions were specific hedging transactions against foreign exchange obligations and directed the deletion of the disallowance.6. Non-allowance of Exchange Rate Fluctuation Loss of Rs. 68,96,702/-:The assessee did not press this grievance, and the Tribunal dismissed it as not pressed.Conclusion:The appeal was partly allowed, with the Tribunal upholding the assessee's plea on the adoption of LIBOR+2% for ALP adjustment and the treatment of forex derivative loss, while dismissing other grounds.