ITAT upholds transfer pricing adjustment on External Commercial Borrowing interest rate using SBI base rate plus 25 basis points

ITAT Pune dismissed the assessee's appeal regarding transfer pricing adjustment on External Commercial Borrowing interest. The tribunal held that the assessee's benchmarking analysis was defective, failing to conduct proper credit rating analysis and using an unauthorized "Other Method." The TPO correctly applied SBI base rate plus 25 basis points as arm's length interest rate, finding the assessee's 10-10.5% compound interest rate excessive. The tribunal confirmed the jurisdictional Assessing Officer had proper authority under Section 144B(8) to pass the final assessment order after obtaining CBDT permission for case transfer.

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Issues Involved:
1. Jurisdiction of the Assessing Officer as per Section 144B.
2. Transfer Pricing adjustment related to the interest on External Commercial Borrowing (ECB).
3. Rejection of the alternate benchmarking analysis.
4. Initiation of penalty proceedings under Section 274 r.w.s. 270.

Detailed Analysis:

Issue 1: Jurisdiction of the Assessing Officer as per Section 144B
- Ground Raised: The assessee challenged the validity of the final assessment order, arguing that it was passed without proper jurisdiction as per the provisions of Section 144B, rendering it null and void.
- Submission by Ld. AR: The Ld. AR argued that the final assessment order was not passed by the National Faceless Assessment Centre (NFAC) but by the Jurisdictional Assessing Officer (JAO), and no approval from the CBDT for transferring the case to the JAO was on record.
- Submission by Ld. DR: The Ld. DR countered that the case was transferred to the JAO with the approval of the CBDT as per CBDT circular 225/97/2021/ITA-II dated 06/09/2021.
- Findings and Analysis: The Tribunal found that the case was indeed transferred to the JAO with the approval of CBDT as per Section 144B(8) of the Act. The order sheet noting confirmed this transfer. Therefore, the JAO had the authority to pass the final assessment order, and the ground raised by the assessee was dismissed.

Issue 2: Transfer Pricing Adjustment Related to the Interest on ECB
- Ground Raised: The assessee contested the TP adjustment of INR 75,00,000, arguing that the international transactions pertaining to interest on ECB were at arm's length.
- Submission by Ld. AR: The Ld. AR explained that the assessee used the Weighted Average Lending Rate (WALR) of various banks to benchmark the interest rate and insisted that there should be an appropriate markup over the SBI base rate. The Ld. AR also cited the Safe Harbour Rules and relevant case laws.
- Submission by Ld. DR: The Ld. DR argued that the TPO used the Comparable Uncontrolled Price (CUP) method, applying the SBI base rate without any markup, as the loan was from an AE with minimal credit risk.
- Findings and Analysis: The Tribunal noted that the assessee did not conduct a proper credit rating analysis and used an "Other Method" not recognized under the Income Tax Act. The TPO's application of the SBI base rate plus 25 basis points was deemed appropriate given the minimal risk involved. The Tribunal confirmed that the interest paid by the assessee was not at arm's length and upheld the TP adjustment.

Issue 3: Rejection of the Alternate Benchmarking Analysis
- Ground Raised: The assessee argued that the Ld. DRP, Ld. ACIT, and Ld. TPO erred in rejecting the alternate benchmarking analysis using the range of normal lending rates of various banks.
- Findings and Analysis: The Tribunal found that the alternate benchmarking analysis was flawed due to the lack of a proper credit rating analysis and reliance on an unrecognized method. The Tribunal upheld the rejection of the alternate benchmarking analysis.

Issue 4: Initiation of Penalty Proceedings under Section 274 r.w.s. 270
- Ground Raised: The assessee challenged the initiation of penalty proceedings.
- Findings and Analysis: The Tribunal deemed the issue of penalty proceedings as premature and did not adjudicate on it. The ground was rejected as unadjudicated.

Conclusion:
The appeal of the assessee was dismissed, and the Tribunal upheld the final assessment order, confirming the TP adjustment and rejecting the grounds related to jurisdiction and alternate benchmarking analysis. The issue of penalty proceedings was considered premature and not adjudicated. The order was pronounced in the open court on 14th Dec, 2023.

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