Order upholds transfer pricing, accepts 9% and 12% CCD interest, recharacterises as ECBs; deletes disallowance under s.14A r.w. Rule 8D

ITAT upheld the assessee's transfer-pricing study, accepting interest rates of 9% and 12% on CCDs and recharacterisation as ECBs, and held the royalty payment at arm's length. The tribunal deleted the disallowance under section 14A r.w. Rule 8D and directed that no addition under section 14A be made when computing book profits under section 115JB. The AO was directed to verify and consider the claim for short credit of TDS and to adjudicate consequential interest under section 244A in accordance with law.

---

---

Issues Involved:
1. Transfer Pricing Adjustments
2. Corporate Tax Adjustments

Detailed Analysis:

1. Transfer Pricing Adjustments

Adjustment of Transfer Price:
The Tribunal addressed the issue of the adjustment of the transfer price by INR 304,03,79,433/- concerning international transactions under section 92CA of the Income-tax Act, 1961. The Tribunal noted that the Assessing Officer (AO), Transfer Pricing Officer (TPO), and Dispute Resolution Panel (DRP) erred in not accepting the transfer pricing analysis undertaken by the appellant.

Interest on Compulsory Convertible Debentures (CCDs):
The Tribunal examined the TPO's decision to recharacterize the CCDs as External Commercial Borrowings (ECBs) and determine the Arm's Length Price (ALP) for interest payments as 'Nil'. The Tribunal upheld the appellant's position, referencing previous decisions in the appellant's own case for AY 2011-12 and AY 2012-13, where it was established that CCDs are hybrid instruments and should not be treated as ECBs. The Tribunal emphasized that CCDs were issued, interest paid, and repaid in INR, making the appellant's benchmarking against the SBI prime lending rate appropriate.

Royalty Payment:
The Tribunal addressed the restriction of royalty payment to 1% of net sales by the AO/TPO/DRP, resulting in an addition of INR 47,57,01,597/-. The Tribunal referred to previous decisions in the appellant's own case for AY 2011-12 and AY 2012-13, where the payment of royalty at 4% was accepted as being at arm's length. The Tribunal upheld the appellant's claim that the royalty payment was justified and at arm's length.

2. Corporate Tax Adjustments

Disallowance under Section 14A:
The Tribunal examined the disallowance of expenditure under section 14A of the Income-tax Act, read with Rule 8D, amounting to INR 89,46,750/-. The Tribunal noted that the appellant did not earn any exempt income during the year under consideration. Citing the jurisdictional High Court's decision, the Tribunal held that in the absence of exempt income, no disallowance under section 14A is warranted. The Tribunal directed the AO to delete the disallowance.

Addition under Section 115JB:
The Tribunal addressed the addition of INR 89,46,750 as per clause (f) of Explanation 1 to section 115JB for computing book profits. The Tribunal referenced the Special Bench decision in ACIT vs. Vireet Investments Pvt. Ltd. and the Karnataka High Court ruling in CIT vs. Gokaldas Images Pvt. Ltd., which held that disallowances under section 14A should not be applied to the computation of book profits under section 115JB. The Tribunal directed the AO to delete the disallowance while computing book profits.

Short Credit of Tax Deducted at Source (TDS):
The Tribunal noted the appellant's claim of short credit for TDS, where the AO credited INR 77,61,556 instead of INR 5,85,89,000. The Tribunal directed the AO to verify and rectify the TDS credit in accordance with the law.

Interest under Section 244A:
The Tribunal addressed the appellant's claim for consequential interest under section 244A, directing the AO to verify and grant the interest as per the law.

Penalty Proceedings under Section 271(1)(c):
The Tribunal deemed the ground related to penalty proceedings under section 271(1)(c) as premature and did not require adjudication at this stage.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, directing the AO to make necessary adjustments and deletions as indicated, thereby providing relief to the appellant on all contested grounds. The order was pronounced in the open court on 14th November 2022.

---