2017 (5) TMI 7 - AT - Income Tax

Tribunal decision on Transfer Pricing adjustments and Corporate Tax Matters

The Tribunal remanded the Transfer Pricing (TP) adjustments for the purchase of Green Petroleum Coke (GPC) to the Transfer Pricing Officer (TPO) for a ... Arm's Length Price - Comparable Uncontrolled Price (CUP) method - Transfer pricing remand to TPO for fresh analysis under Rule 10B(1)(a) - Corporate guarantee - treatment as international transaction v. shareholder activity - Benchmarking of corporate guarantee fee - Use of LIBOR as benchmark rate for cross border intra group lending - Computation of deduction under section 10B on standalone basis of eligible undertaking - Verification of tax credits (TDS/TCS/foreign tax/advance tax) by AO - Prematurity of penalty proceedings under section 271(1)(c)Comparable Uncontrolled Price (CUP) method - Arm's Length Price - Transfer pricing remand to TPO for fresh analysis under Rule 10B(1)(a) - ALP determination for purchases of Green Petroleum Coke (GPC) involving associated enterprises for A.Y. 2009-10 remitted to TPO for fresh analysis - HELD THAT: - The Tribunal found that the TPO had compared controlled transactions with other controlled transactions and had not adequately considered product quality, geographic source, timing and other CUP adjustments required for close comparability. The Tribunal followed the Coordinate Bench's detailed reasoning in the group cases and held that the TP analysis requires re consideration in light of differences in product quality, sulphur content, source and timing. Consequently the issue was remitted to the TPO/Assessing Officer for fresh analysis in accordance with Rule 10B(1)(a) of the Income Tax Rules.Remitted to TPO/Assessing Officer for fresh analysis; grounds relating to GPC purchases (grounds 2-7) treated as allowed for statistical purposes.Benchmarking of corporate guarantee fee - Corporate guarantee - treatment as international transaction v. shareholder activity - Arm's Length Price - ALP for shareholder corporate guarantees - adopted approach and quantum for A.Y. 2009-10; related grounds allowed - HELD THAT: - Having regard to earlier decisions in the group (including the Tribunal's consideration of precedents such as Glenmark/EVEREST/Infotech and coordinate bench reasoning), the Tribunal concluded that the appropriate approach was to follow the group/coordinate bench guidance and that, in the circumstances of the group's cases for the relevant year, a low corporate guarantee fee is reasonable. The Tribunal followed the Coordinate Bench's decision and held that the corporate guarantee fee of 0.50% is reasonable for the relevant assessment year, directing the Assessing Officer/TPO to adopt the same.Grounds relating to shareholder corporate guarantee (grounds 8-16 for A.Y. 2009-10) allowed and ALP to be determined adopting 0.50% corporate guarantee fee.Verification of tax credits (TDS/TCS/foreign tax/advance tax) by AO - Credit for TDS/TCS/other tax credits not finally adjudicated and remitted for verification - HELD THAT: - The Tribunal found that claims for credit of TDS/TCS (and other tax credits/claims identified in various appeals) required factual verification which the Assessing Officer had not completed. The Tribunal therefore directed the AO to verify the relevant records, give the assessee an opportunity of being heard and grant relief if the claim is substantiated.Claims for tax credits remitted to AO for verification and consequential relief in accordance with law.Computation of deduction under section 10B on standalone basis of eligible undertaking - Deduction under section 10B (A.Y. 2010-11) to be computed without setting off profits/losses of non eligible units - HELD THAT: - Following the Supreme Court authority cited by the Tribunal, the deduction available to an eligible undertaking under section 10B must be computed on a stand alone basis and without adjusting profits or losses of non eligible units. The Tribunal applied that principle and allowed the assessee's grounds challenging the AO's set off treatment.Grounds challenging AO's set off against non eligible unit (grounds 9-10 in ITA No.309/A.Y.2010-11) allowed.Use of LIBOR as benchmark rate for cross border intra group lending - Arm's Length Price - Benchmark for interest on funds advanced to foreign wholly owned subsidiaries - adoption of LIBOR based rates upheld for relevant years - HELD THAT: - The Tribunal followed coordinate bench precedents and the DRP's directions which adopted LIBOR based benchmarks (e.g., LIBOR + specified basis points) for determining ALP on cross border intra group lending. The Tribunal declined to disturb that approach and remitted or affirmed directions accordingly where applicable.DRP/Tribunal directions to adopt LIBOR based benchmark for interest on loans to foreign WOS upheld; related grounds rejected where DRP directions were followed.Corporate guarantee - treatment as international transaction v. shareholder activity - Arm's Length Price - For certain assessment years (notably A.Y. 2011-12 and related appeals) corporate guarantees were held not to constitute international transactions on the facts and were excluded from TP adjustments; Revenue appeals dismissed - HELD THAT: - On facts where guarantees were in the nature of shareholder/quasi capital activity and did not have a demonstrable bearing on profits, income, losses or assets (or no fee was charged), the Tribunal applied coordinate bench reasoning and OECD guidance to hold that such guarantees are not to be treated as provision of services attracting transfer pricing adjustments. Consequently, in the appeals where this factual position obtained, the Tribunal rejected the TPO/AO approach and dismissed the Revenue's challenge.Corporate guarantees held not to be international transactions on the facts for the relevant appeals (Revenue appeals on this point dismissed).Prematurity of penalty proceedings under section 271(1)(c) - Initiation of penalty proceedings under section 271(1)(c) found to be premature and such grounds rejected - HELD THAT: - The Tribunal repeatedly observed that penalty proceedings initiated or proposed were premature at the stage of assessment/appeal and therefore not amenable to adjudication in the present appeals. Those grounds were rejected.Grounds challenging initiation of penalty proceedings dismissed as premature.Transfer pricing remand to TPO for fresh analysis under Rule 10B(1)(a) - Disallowance under section 14A r.w. Rule 8D and related factual contentions remitted to AO for verification - HELD THAT: - Where the Tribunal found that factual aspects (for example whether an investment generated a taxable benefit in the hands of the company or whether investments should be excluded under rule 8D(iii)) had not been verified, it remitted those discrete factual issues to the AO for examination and consequential relief if warranted.Issues under section 14A/Rule 8D and allied factual matters remitted to AO for verification; grounds partly allowed to that limited extent.Final Conclusion: The Tribunal partly allowed the assessee's appeals and dismissed the Revenue's appeals. Key outcomes include remand of TP analysis on GPC purchases to the TPO for fresh consideration (A.Y. 2009 10), adoption of a low corporate guarantee fee (0.50%) for the group's relevant assessment year(s) where directed, acceptance of LIBOR based benchmarks for cross border intra group lending in the stated cases, allowance of section 10B deduction on a standalone basis for eligible units, remittal to the Assessing Officer for verification of various tax credit and consequential computations, and rejection of premature penalty proceedings. Issues Involved:1. Transfer Pricing (TP) Adjustments for Purchase of Green Petroleum Coke (GPC)2. TP Adjustments for Shareholders Corporate Guarantee3. Corporate Tax Matters including Credit of TDS, Computation of Interest u/s 234C, and Penalty Proceedings u/s 271(1)(c)Detailed Analysis:1. Transfer Pricing Adjustments for Purchase of Green Petroleum Coke (GPC):The assessee challenged the TP adjustments made by the AO for the purchase of GPC from its Associated Enterprise (AE). The AO had determined the Arm's Length Price (ALP) and made adjustments, which were confirmed by the Dispute Resolution Panel (DRP). The Tribunal found that the AO had selectively compared transactions and failed to consider the quality and market conditions affecting GPC prices. The Tribunal remanded the issue to the Transfer Pricing Officer (TPO) for fresh analysis in accordance with Rule 10B(1)(a) of the Income Tax Rules, emphasizing the need for a comprehensive comparison considering the quality, market conditions, and other relevant factors.2. TP Adjustments for Shareholders Corporate Guarantee:The assessee provided a corporate guarantee for loans taken by its Wholly Owned Subsidiary (WOS) in the USA. The TPO determined the ALP for the guarantee fee at 2%, which was confirmed by the DRP. The Tribunal, following its earlier decisions and the decision in the case of Rain Commodities Ltd., held that a corporate guarantee fee of 0.50% was reasonable. The Tribunal also noted that the corporate guarantee should not be treated as an international transaction under section 92B of the Act before the amendment by the Finance Act of 2012. The Tribunal remanded the issue to the TPO for computation of the guarantee fee in accordance with the directions provided.3. Corporate Tax Matters:- Credit of TDS: The Tribunal remitted the issue to the AO for verification and to provide relief if the assessee's claims were found to be correct.- Computation of Interest u/s 234C: The Tribunal noted that this issue is consequential to the computation of income and remanded it to the AO for giving consequential relief.- Penalty Proceedings u/s 271(1)(c): The Tribunal held that the initiation of penalty proceedings was premature and rejected the ground.Separate Judgments:The Tribunal delivered separate judgments for different assessment years, consistently applying the principles established in earlier cases and remanding issues for fresh analysis where necessary. The Tribunal's decisions emphasized the importance of a comprehensive and fair analysis in TP matters and the need for verification in corporate tax matters.Conclusion:The Tribunal's detailed analysis and directions for remand highlight the need for thorough and fair evaluation in TP adjustments and corporate tax matters, ensuring that all relevant factors are considered and that the assessee is given a fair opportunity to present their case.