ITAT rules in favor of assessee on transfer pricing adjustments

The ITAT partly allowed both appeals in a transfer pricing case involving adjustments to arm's length prices of corporate guarantees and interest rates on loans to associated enterprises. The ITAT found in favor of the assessee on the arm's length pricing of guarantees and interest rates, reducing adjustments made by the TPO and DRP. The ITAT also addressed issues related to levy of interest under various sections of the Act, penalty proceedings initiation, and additions due to discrepancies in interest income reporting. Additionally, the ITAT acknowledged procedural delays due to the COVID-19 pandemic in pronouncing the order.

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Issues Involved:
1. Adjustment to the arm's length price of Corporate Guarantee.
2. Adjustment to the arm's length price of interest on short-term loan.
3. Adjustment to the arm's length price of Corporate Guarantee for loan availed by AE.
4. Levy of interest under section 234A of the Act.
5. Levy of interest under sections 234B and 234C of the Act.
6. Initiation of penalty proceedings under section 271(1)(c) of the Act.
7. Addition due to difference in interest credited to Profit & Loss account and Form 26AS.

Detailed Analysis:

1. Adjustment to the Arm's Length Price of Corporate Guarantee:
The assessee, engaged in chartering offshore supply vessels, provided a performance guarantee for its AE's outstanding bareboat charter hire charges. The Transfer Pricing Officer (TPO) determined a guarantee commission of 2.5% based on a bank guarantee commission rate of 1.25% from SBI, Singapore Branch. The Dispute Resolution Panel (DRP) reduced it to 1.75%. The ITAT found merit in the assessee’s argument that a performance guarantee cannot be equated with a bank guarantee. It was noted that the assessee had availed a bank guarantee from ICICI Bank at 0.25%. Consequently, the arm's length price of the guarantee commission was reasonably fixed at 0.25%.

2. Adjustment to the Arm's Length Price of Interest on Short-Term Loan:
The assessee provided a short-term loan to its AE at LIBOR plus 1.5%. The TPO adopted SBI’s prime lending rate of 7.50% plus 1.5%, determining an arm's length interest rate of 9%. The DRP directed the interest to be charged at LIBOR plus 4%. The ITAT noted that the AE had availed a loan from SBI, Singapore Branch, at six months LIBOR plus 250 basis points. Therefore, the interest rate charged by the assessee was deemed at arm's length, requiring no further adjustment.

3. Adjustment to the Arm's Length Price of Corporate Guarantee for Loan Availed by AE:
The assessee provided an unsecured corporate guarantee for its subsidiary in the Netherlands, charging a fee of 0.25%. The TPO charged a fee of 2.25%, which the DRP reduced to 2%. The ITAT found that the value of the vessels provided as security to the lender bank was much more than the loan amount, making the loan fully secured. Thus, the guarantee fee charged by the assessee at 0.25% was deemed at arm's length, requiring no further adjustment.

4. Levy of Interest Under Section 234A of the Act:
The ITAT found that the return of income for the impugned assessment year was filed within the due date provided under section 139(1) of the Act. Therefore, no interest under section 234A was chargeable.

5. Levy of Interest Under Sections 234B and 234C of the Act:
The levy of interest under section 234B was deemed consequential and required no adjudication. For section 234C, the ITAT directed the Assessing Officer to charge interest based on the income returned by the assessee, not the assessed income.

6. Initiation of Penalty Proceedings Under Section 271(1)(c) of the Act:
The ground raised by the assessee regarding the initiation of penalty proceedings was dismissed as premature.

7. Addition Due to Difference in Interest Credited to Profit & Loss Account and Form 26AS:
The addition of Rs. 18,62,317 was made due to a difference in interest credited to the Profit & Loss account and Form 26AS. The ITAT noted that the interest income for the last quarter was not accounted for in the financial year 2011–12 but was accounted for in 2012–13. The Assessing Officer added the differential amount without seeking an explanation. The ITAT restored the issue to the Assessing Officer for verification, allowing the assessee to reconcile the difference.

Conclusion:
Both appeals were partly allowed. The ITAT also addressed a procedural issue regarding the delayed pronouncement of the order due to the COVID-19 pandemic, citing precedents and legal provisions to justify the delay.

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