Tribunal deletes transfer pricing adjustment on notional interest for share application money due to lack of proof of default

ITAT Mumbai ruled in favor of appellant regarding transfer pricing adjustment on notional interest for share application money. TPO treated share application money as interest-free loan to AE due to alleged inordinate delay in share allotment. Tribunal held revenue failed to prove appellant's default caused the delay, accepting appellant's contention that delay resulted from non-receipt of SAIF Zone Authority approval despite proper application. Transfer pricing addition was deleted. Additionally, tribunal directed AO to re-compute income considering rectification order under Section 154, allowing all grounds raised by appellant.

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Issues Involved:

1. Transfer Pricing Adjustment on Notional Interest on Share Application Money.
2. Consideration of Rectification Order under Section 154.
3. Opportunity of Being Heard in the Assessment Process.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment on Notional Interest on Share Application Money:

The primary issue in this appeal concerns the upward revision of INR 1,03,26,939/- to the Appellant's income due to the notional interest on share application monies invested in an overseas subsidiary. The Transfer Pricing Officer (TPO) treated the share application money as an interest-free loan to the Associated Enterprise (AE), citing an inordinate delay in the allotment of shares. The Appellant contended that the delay was due to regulatory requirements in the UAE's Free Trade Zone, which necessitated approval for share capital amounts. The Appellant argued that similar issues in previous assessment years (2012-13 to 2014-15) were resolved in their favor by the Tribunal, and no transfer pricing adjustments were made for subsequent years when returns were scrutinized. The Tribunal found that the Appellant had consistently maintained that the delay was due to the non-receipt of approval from the SAIF Zone Authority, and the Revenue failed to provide evidence to the contrary. Consequently, the Tribunal held that the transaction was not a loan and deleted the transfer pricing addition of INR 1,03,26,939/-, allowing Ground No. 1 of the appeal.

2. Consideration of Rectification Order under Section 154:

The second issue involved the failure of the Assessing Officer to consider a rectification order under Section 154, which revised the total income to INR 22,01,32,774/-. The Tribunal directed the Assessing Officer to re-compute the income and tax liability of the Appellant in light of this rectification order. Therefore, Grounds No. 2 and 3 were allowed for statistical purposes, requiring the income to be reassessed according to the rectified figures.

3. Opportunity of Being Heard in the Assessment Process:

The Appellant claimed that the Assessing Officer did not provide a proper opportunity to be heard before making the additions to income. The Tribunal acknowledged this procedural lapse and directed that the rectification order be considered, which implicitly addressed the concern of adequate hearing. This issue was subsumed under the directions given for Grounds No. 2 and 3.

Conclusion:

The Tribunal concluded by allowing the appeal in favor of the Assessee. The transfer pricing adjustment was deleted, and the Assessing Officer was instructed to re-compute the income considering the rectification order. Grounds No. 4 and 5 were dismissed as they were general in nature and did not require separate adjudication. The order was pronounced on 07.10.2024.

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