Tribunal adjusts interest payments on debentures, allows education cess deduction.

The appeal was partly allowed for statistical purposes. The Tribunal directed the Transfer Pricing Officer to recompute the Arm's Length Price of interest payments on debentures/CCDs and instructed the Assessing Officer to allow the deduction of education cess after verification. The Tribunal's decision was pronounced on 06th September 2021.

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Issues Involved:
1. Transfer Pricing Adjustment related to interest payments on debentures.
2. Addition on reworking of Work-in-Progress (WIP).
3. Deduction of 'Education Cess' and 'Secondary and Higher Education Cess'.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment related to interest payments on debentures:
The primary issue was the Transfer Pricing Officer's (TPO) adjustment regarding the interest payment on Compulsory Convertible Debentures (CCDs) issued to the assessee's Associated Enterprises (AEs). The TPO determined that the interest payment was a shareholder activity, leading to a self-inflicted loss, and thus, the Arm's Length Price (ALP) of the interest payment was taken as Nil. The TPO's decision was based on the OECD guidelines and various case laws, resulting in an upward adjustment of Rs. 3,92,81,275/-. The CIT(A) partially allowed the appeal based on precedents from previous assessment years and the Tribunal's decision in the assessee's own case for AY 2013-14. The Tribunal upheld the CIT(A)'s decision, stating that the AO was not justified in re-characterizing the transaction and directed the AO/TPO to recompute the ALP of the interest payments on debentures/CCDs.

2. Addition on reworking of Work-in-Progress (WIP):
The second issue involved the addition of Rs. 2,75,41,987/- based on reworking of WIP. The Assessing Officer (AO) added this amount to the total income of the assessee, following the CIT(A)'s decision for AY 2013-14, which upheld the TP adjustment and directed the reduction of WIP by the debenture interest. The CIT(A) confirmed this addition for AY 2016-17, stating it emanated from the previous decision. The Tribunal referred to its own order for AY 2015-16, which followed the precedent set for AY 2013-14, and directed that the amount of capitalized interest on debentures/CCDs should be disallowed proportionately in the years when the WIP is reversed. Consequently, Ground No. 2 was allowed.

3. Deduction of 'Education Cess' and 'Secondary and Higher Education Cess':
The third issue was the deduction of 'Education Cess' and 'Secondary and Higher Education Cess' amounting to Rs. 42,46,460/-. Both parties agreed that this issue was covered in favor of the assessee based on the Tribunal's decision for AY 2014-15. The Tribunal admitted the additional ground, citing the Hon'ble Supreme Court's decision in National Thermal Power Company Ltd. Vs. CIT, which allows raising a question of law even if not previously raised. On merits, the Tribunal followed the Hon'ble jurisdictional High Court's judgment in Sesa Goa Ltd. Vs. JCIT, which held that Education Cess is not disallowable u/s 40(a)(ii) of the Income Tax Act. The matter was remanded to the AO to ascertain the exact amount of education cess and allow a deduction after providing an opportunity for hearing to the assessee. Thus, Ground No. 3 was allowed for statistical purposes.

General Grounds:
Grounds No. 4 and 5 were general in nature and did not require adjudication.

Conclusion:
The appeal was partly allowed for statistical purposes, with specific directions for recomputing the ALP of interest payments on debentures/CCDs and allowing the deduction of education cess after due verification. The Tribunal's order was pronounced on 06th September 2021.

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