Tribunal adjusts transfer pricing, disallows notional interest, upholds external borrowing price, allows leasehold charge amortization

The tribunal partly allowed the appeals, directing the Ld. TPO to recompute the arm's length price for transfer pricing adjustments and delete the imputation of notional interest on outstanding receivables. The tribunal upheld the determination of the arm's length price for interest on external commercial borrowings and the disallowance of reimbursement of expenses. Additionally, the tribunal allowed the amortization of leasehold charges as revenue expenditure during the relevant assessment year.

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Issues Involved:
1. Validity of the final assessment order passed by the Ld. AO without following the directions of the Ld. DRP.
2. Transfer pricing adjustments related to the manufacturing and sale of fabric.
3. Disallowance of royalty fee paid for technical support services.
4. Determination of arm's length price for interest on external commercial borrowings (ECB).
5. Imputation of notional interest on outstanding receivables.
6. Reimbursement of expenses paid and received.
7. Disallowance of leasehold amortization charges.

Detailed Analysis:

1. Validity of the Final Assessment Order:
The assessee argued that the final assessment order passed by the Ld. AO on 21/7/2022 was not in conformity with the directions of the Ld. DRP, making it invalid under section 144C(13) of the Act. The Ld. DR contended that the error was due to system miscommunication and could be rectified under section 154 of the Act. The tribunal held that since the Ld. AO rectified the order on 13/10/2022, the original assessment order was valid in law. Thus, the grounds raised by the assessee on this issue were dismissed.

2. Transfer Pricing Adjustments:
The tribunal addressed various grounds related to transfer pricing adjustments for the manufacturing and sale of fabric. The Ld. AR submitted that the comparables selected by the Ld. TPO were functionally dissimilar. The tribunal found merit in the argument and directed the Ld. TPO to recompute the ALP after removing dissimilar companies. The tribunal emphasized that fundamentally dissimilar companies rejected by the DRP in previous or subsequent assessment years should not be considered for the impugned assessment year.

3. Disallowance of Royalty Fee Paid:
The assessee contended that the technical support service fee paid to its AE was incurred wholly and exclusively for business operations. The Ld. DR argued that the assessee failed to provide documentary evidence justifying the payment. The tribunal found merit in the assessee's argument and remitted the matter back to the Ld. TPO to decide on merits, subject to the final outcome of the Advance Pricing Agreement (APA) with CBDT.

4. Arm's Length Price for Interest on ECB:
The Ld. AR argued that the ALP should be considered as LIBOR + 300 basis points as per the RBI Master Circular. The Ld. DR contended that LIBOR + 200 basis points was appropriate. The tribunal upheld the Ld. DRP's determination of LIBOR + 200 basis points, considering it rational based on several judicial decisions.

5. Imputation of Notional Interest on Outstanding Receivables:
The assessee argued that notional interest is subsumed in the working capital and no further adjustment is required. The tribunal, following the decision in M/s. Devi Sea Foods Limited, held that no upward adjustment on the outstanding receivables is required and directed the Ld. AO to delete the adjustment. The tribunal also directed the Ld. TPO to consider the working capital adjustment and its impact on profits.

6. Reimbursement of Expenses:
The assessee contended that the AE incurred expenses on behalf of the assessee, which were reimbursed on a cost-to-cost basis. The tribunal found that the assessee failed to provide supporting evidence for the reworking charges and upheld the TP adjustment made by the TPO.

7. Disallowance of Leasehold Amortization Charges:
The assessee argued that leasehold charges should be amortized over the lease period and not considered as capital expenditure. The tribunal agreed with the assessee, allowing the amortization of leasehold charges as revenue expenditure during the relevant assessment year.

Conclusion:
The tribunal partly allowed the appeals for statistical purposes, directing the Ld. TPO to recompute the ALP for transfer pricing adjustments and to delete the upward adjustment on outstanding receivables. The tribunal upheld the Ld. DRP's determination of the ALP for interest on ECB and the disallowance of reimbursement of expenses. The tribunal allowed the amortization of leasehold charges as revenue expenditure.

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