Assessee's 13.13% interest rate on debentures adjusted to 12.275% under Section 92A transfer pricing rules

ITAT Hyderabad upheld transfer pricing adjustment for interest on non-convertible debentures between assessee and DB International (Asia) Ltd, confirming their associated enterprise status under Section 92A(2) regardless of timing of control acquisition. The tribunal rejected assessee's comparables due to credit rating and tenor mismatches, applying safe harbor guidance to determine 12.275% as arm's length price against assessee's 13.13% rate. For debenture issue expenses, ALP was set at 1.5% versus assessee's 2.5% payment. Addition under Section 56(2)(viia) was deleted, directing use of balance sheet dated closest to transfer date for valuation. Section 14A disallowance was deleted as no exempt income was received. TDS credit issue was remanded to AO for verification.

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Issues Involved:
1. Transfer Pricing Adjustment
2. Addition under Section 56(2)(viia) of the Income-tax Act
3. Disallowance under Section 14A of the Income-tax Act
4. TDS Credit

Summary:

1. Transfer Pricing Adjustment:
The assessee contested the transfer pricing adjustments made by the AO/DRP, arguing that DB International (Asia) Limited was not an associated enterprise (AE) and that the transactions were conducted on a principal-to-principal basis. The Tribunal upheld the application of transfer pricing regulations, stating that the relationship between the entities must be assessed at any time during the previous year, not just at the time of entering into the transaction. The Tribunal also found errors in the rejection of the TP study by the TPO/DRP, particularly in the application of the real estate filter and the selection of comparables. The Tribunal concluded that the interest rate on NCDs should be benchmarked at SBI base rate plus 300 basis points, resulting in an ALP of 12.275%, and partly allowed the grounds raised by the assessee.

2. Addition under Section 56(2)(viia) of the Income-tax Act:
The assessee challenged the addition made under Section 56(2)(viia) based on the valuation of shares of TTPL. The Tribunal held that the balance sheet as on the valuation date (04.10.2016) should be considered for determining the fair market value (FMV) of the shares. The Tribunal found that the DRP had erred in directing the AO to use the balance sheet as on 31.03.2016 and in not considering the impairment loss recorded in the books. The Tribunal set aside the addition made by the AO and directed the AO to delete the addition of Rs. 57,92,15,385.

3. Disallowance under Section 14A of the Income-tax Act:
The assessee contested the disallowance made under Section 14A, arguing that no exempt income was earned during the year. The Tribunal agreed with the assessee, citing various judicial precedents, including the Delhi High Court's decision in Cheminvest Ltd. v. CIT, which held that Section 14A does not apply if no exempt income is received or receivable during the relevant previous year. The Tribunal directed the AO to delete the disallowance of Rs. 37,86,302 for A.Y. 2017-18 and Rs. 37,75,415 for A.Y. 2018-19.

4. TDS Credit:
The assessee argued that the AO had not granted TDS credit of Rs. 3,11,17,286 without verifying the facts. The Tribunal remanded the issue to the AO for verification of the correctness of the TDS credits claimed by the assessee in its income tax return and directed the AO to give a categorical finding in its order.

Conclusion:
The appeals were partly allowed, with the Tribunal providing relief on the issues of transfer pricing adjustment, addition under Section 56(2)(viia), and disallowance under Section 14A, while remanding the issue of TDS credit for further verification.

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