2022 (8) TMI 891 - AT - Income Tax

Tribunal Upholds Assessee's Cross-Objection, Emphasizes Consistency in Transfer Pricing

The Tribunal dismissed the Department's appeal and partly allowed the assessee's cross-objection. It upheld the CIT(A)'s decisions on the arm's length ... TP adjustment - interest earned on loan to AE - HELD THAT:- This issue is squarely covered in favour of the assessee by the decision of the Hon’ble coordinate bench of the ITAT Kolkata in the assessee’s own case Assessment Year: 2012-13 [2018 (9) TMI 1909 - ITAT KOLKATA] Assessment Year 2012-13 & 2013-14 [2018 (11) TMI 1711 - ITAT KOLKATA], there being no change in the facts except for the quantum. Further, we find that the assessee had benchmarked the transactions of loan given to its AE by applying CUP method as mentioned in the TPSR. The assessee has obtained the prevailing LIBOR rates by applying external CUP method and considered itself as the tested party for the purpose of benchmarking the transactions. We note from the TPSR that the assessee has earned interest income of USD 1,39,479.45 (equivalent to Rs.82,70,726/-) @ 5% per annum on the USD amount which is based on LIBOR + 345 bps. Since the issue is already covered and has been dealt extensively by the Co-ordinate Bench of the ITAT Kolkata in the assessee’s own case and the Department has failed to suggest any exception on facts or law involved in the Assessment Year under consideration, we respectfully adopt the detailed reasoning given by the Co-ordinate Bench (supra) and accordingly dismiss the ground/s relating to this issue raised by the Department in its appeal. Fees on corporate guarantee for AE - On the perusal of the audited financial statements of the assessee, we failed to understand from where and how the ld. TPO has figured out that the assessee has issued corporate guarantee for its AE and proceeded to benchmark @ 3.125% and arrive at an upward adjustment - We fully concur with the submissions made by the ld. Counsel for the assessee as noted above that the impugned addition is arbitrary, imaginary, untenable and not backed by any evidence of fact as is also demonstrated from the additional notes on financial statements placed - Hence, we find no reason to interfere with the factual finding given by the ld. CIT(A) while deleting the impugned adjustment - We thus, accordingly dismiss the grounds taken in this respect by the Department in its appeal. Sale and purchase of raw material and other goods with AEs - manner in which the PLI is to be worked out - Assessee has computed it on the basis of OP/OR as the most appropriate PLI as against which the ld. TPO has considered OP/OC to be the most appropriate PLI. The ld. CIT(A) has given a finding that application of PLI as OP/OC is the most appropriate PLI and has directed the ld. TPO / AO to re-compute and re-work the PLI and the mean of PLI of the comparables. The assessee has not challenged this finding of the ld. CIT(A) and we do not find any reason to interfere with the finding given by the ld. CIT(A) to this effect. Accordingly, the PLI is to be computed on the basis of OP/OC. Selection and rejection of comparables identified by the ld. TPO and by the assessee - We find that the ld. CIT(A) has meritoriously dealt with the matter by taking note of the FAR analysis and the economic analysis undertaken by the assessee in its TPSR which the ld. TPO failed to undertake in respect of the seven new comparables identified by him. We find force in the submissions made by the ld. Counsel of the assessee in respect of selection and rejection of comparables noted above. Accordingly, on this specific issue also we do not find any merit in interfering with the factual findings given by the ld. CIT(A) Inclusion of excise duty on the operating revenue for two comparables out of the said 19 comparables by the ld. TPO - AO ought to have maintained consistency within the comparables and not to have included excise duty component in the case of two comparables while excluding it in all other cases. Ld. Counsel took us through the records to demonstrate the effect of excise duty on the computation of PLI in the case of two comparables vis-à-vis other comparables and from the perusal of the same we find that while computing the PLI, the assessee has excluded the excise duty component from the operating revenue for the purpose of benchmarking. By including excise duty in the case of two comparables by the ld. TPO, the operating profit has been artificially increased by the amount of excise duty and, therefore, the PLI computed by the learned TPO stands comparatively incorrect. We thus, find no fault with the computation of PLI after netting of excise duty done by the assessee for the purpose of benchmarking its sale and purchase transactions of raw material and goods with its AEs. The ld. CIT(A) has given a direction to the ld. TPO/AO to re-work the PLI of tested party and re-compute the mean PLI of the comparables with reference to the accepted set of comparables based on his meritorious findings. We find that giving such directions is well within the powers of the Commissioner of Income Tax (Appeals) as enunciated u/s 251(1)(a) of the Act. Accordingly we dismiss the grounds of appeal raised by the Department on this issue and also Ground No. 3 of the cross objection of the assessee. Ground Nos. 1 and 2 of the cross-objections filed by the assessee are allowed. Issues Involved:1. Delay in filing appeal and cross-objection.2. Determination of arm's length rate of interest.3. Comparability analysis and adjustments for differences in transactions.4. Rejection and acceptance of comparables.5. Acceptance of fresh annual reports.6. Deletion of TP adjustment on guarantee fee.7. Findings on corporate guarantee.Issue-wise Detailed Analysis:1. Delay in Filing Appeal and Cross-Objection:The Tribunal considered the delay of 25 days in filing the appeal by the Department and 681 days in filing the cross-objection by the assessee. The Tribunal referenced the Supreme Court's liberal interpretation of 'sufficient cause' for condonation of delay, emphasizing that justice should not be defeated on technical grounds. The Tribunal condoned both delays, allowing the appeal and cross-objection to be adjudicated on merits.2. Determination of Arm's Length Rate of Interest:The Department challenged the CIT(A)'s decision on the arm's length rate of interest. The CIT(A) held that the interest rate charged by the assessee from its AE should be benchmarked against the prevailing LIBOR rate. Since the interest rate charged was 5%, which was higher than the LIBOR rate of 0.72%, no ALP adjustment was required. The Tribunal upheld this decision, citing consistent rulings that international loans should be benchmarked against international rates like LIBOR.3. Comparability Analysis and Adjustments:The Department argued that the CIT(A) erred in the comparability analysis and adjustments for differences between international loan transactions and comparable uncontrolled transactions. The Tribunal found that the CIT(A) had correctly applied the external CUP method and benchmarked the transactions against the LIBOR rate, dismissing the Department's grounds.4. Rejection and Acceptance of Comparables:The Department contested the rejection of three comparables and the acceptance of fresh annual reports by the CIT(A). The Tribunal noted that the CIT(A) had accepted the comparables based on their availability in the public domain and rejected the new comparables identified by the TPO due to lack of appropriate FAR analysis. The Tribunal upheld the CIT(A)'s decision, emphasizing the need for consistency in the selection of comparables.5. Acceptance of Fresh Annual Reports:The Tribunal found that the CIT(A) had accepted fresh annual reports of comparables which were previously rejected by the TPO due to non-availability. The Tribunal upheld this acceptance, noting that the comparables were functionally similar and their annual reports were available in the public domain.6. Deletion of TP Adjustment on Guarantee Fee:The CIT(A) deleted the TP adjustment on guarantee fee, noting that no corporate guarantee was issued by the assessee during the relevant assessment year. The Tribunal upheld this deletion, finding no evidence to support the TPO's adjustment.7. Findings on Corporate Guarantee:The Tribunal found that the TPO's adjustment for corporate guarantee was arbitrary and not backed by evidence. The CIT(A) had correctly noted the absence of any corporate guarantee in the assessee's financial statements. The Tribunal upheld the CIT(A)'s deletion of the adjustment.Conclusion:The Tribunal dismissed the Department's appeal and partly allowed the assessee's cross-objection. The Tribunal upheld the CIT(A)'s decisions on the arm's length rate of interest, comparability analysis, acceptance of fresh annual reports, and deletion of TP adjustment on guarantee fee. The Tribunal emphasized the need for consistency and evidence-based adjustments in transfer pricing cases.