2025 (7) TMI 1805 - AT - Income Tax

TP Adjustment on Royalty Remand Allowed; Interest on ECB Disallowed; Leasehold Amortization Allowed as Revenue Expense

Teejay India Private Limited Versus Deputy Commissioner of Income Tax, Circle-5 (1), Visakhapatnam.

The ITAT Visakhapatnam allowed the assessee's plea to remit the TP adjustment issue concerning royalty disallowance back to the TPO for reconsideration, ... TP Adjustment - Disallowance of royalty paid - grievance of the assessee that the TPO benchmarked the ALP at Nil without considering any comparables as detailed in the T.P. Study report - HELD THAT:- Plea of the AR to remit back the issue to the file of the TPO to decide the issue subject to the final outcome of the Advance Pricing Agreement with CBDT is acceptable. We therefore allow the Ground No.2 and its sub-grounds raised by the assessee for statistical purposes. Payment of interest on ECB - We find from the Master Circular relied on by AR, that RBI prescribed the maximum cap interest on ECBs with different tenures. Therefore, the Ld. DRP has rightly determined the ALP as LIBOR + 200 basis points considering it rational based on several judicial decisions while directing the TPO to adopt the interest rate @ LIBOR + 200 basis points. We are therefore not inclined to interfere with the order of the Ld. DRP and hence this ground raised by the assessee is dismissed. Disallowance of leasehold amortization charges - There are various judicial pronouncements as submitted by AR, with respect to amortization of the leasehold charges over the lease period, and therefore we are of the considered view that the leasehold charges paid by the assessee shall be proportionately claimed as revenue expenditure, over the lease period and hence the amortization of leasehold charges claimed by the assessee for the relevant assessment year shall be allowed as revenue expenditure during the impugned assessment year. ISSUES: Whether overdue receivables from Associated Enterprises (AEs) constitute an international transaction under section 92B of the Income Tax Act, 1961.Whether notional interest can be imputed on outstanding receivables from AEs for transfer pricing adjustment.Whether the disallowance of royalty payments made to AEs is justified, including the determination of Arm's Length Price (ALP) and application of prescribed methods under section 92C(1) of the Act.Whether the use of the Reserve Bank of India (RBI) master circular as a valid Comparable Uncontrolled Price (CUP) for benchmarking interest on External Commercial Borrowings (ECB) is appropriate.Whether the interest rate applied for benchmarking payment of interest on ECB (LIBOR + 200 basis points vs. LIBOR + 450 basis points) is in accordance with the ALP principle.Whether amortization of leasehold rights can be allowed as revenue expenditure over the lease period or is to be disallowed as prior period expenditure under the Income Tax Act. RULINGS / HOLDINGS: The Tribunal held that receivables are included under the definition of international transaction as per the amendments made by the Finance Act, 2012 w.e.f 1/4/2002, and dismissed the contention that overdue receivables are not international transactions.The imputation of notional interest on outstanding receivables from AEs is upheld, and the adjustment of Rs. 5,57,443/- to the income on this account is sustained following prior consistent decisions.The disallowance of royalty payments and the determination of ALP at NIL by the Transfer Pricing Officer (TPO) were set aside; the matter was remitted to the TPO to decide on merits subject to the outcome of the Advance Pricing Agreement (APA) application, observing that the TPO failed to apply any of the prescribed methods under section 92C(1) and did not bring on record any comparable uncontrolled transactions.The use of the RBI master circular as a valid CUP was rejected by the Revenue without cogent reasons, and the adjustment based on LIBOR + 200 basis points was upheld as reasonable, dismissing the appellant's contention for LIBOR + 450 basis points.The adjustment of Rs. 40,49,995/- on account of interest on ECB was upheld, following judicial precedents and the rationale of the RBI master circular prescribing maximum caps on interest rates.The amortization of leasehold charges amounting to Rs. 23,47,826/- was allowed as revenue expenditure over the lease period, rejecting the Revenue's view that it was a prior period expenditure not allowable under the Income Tax Act. RATIONALE: The Tribunal applied the statutory definitions under section 92B of the Income Tax Act, 1961, as amended by the Finance Act, 2012, which includes receivables as international transactions, relying on precedent decisions affirming this interpretation.Consistency with prior Tribunal decisions in the appellant's own cases for earlier assessment years was maintained, applying the principle of consistency in transfer pricing adjustments and notional interest imputation.For royalty payments, the Tribunal emphasized adherence to section 92C(1) and Rule 10AB of the Income Tax Rules, 1962, requiring determination of ALP by prescribed methods and comparables, and recognized the ongoing APA application as a relevant factor for remand.Regarding interest on ECB, the Tribunal relied on RBI master circulars prescribing maximum interest rates and judicial decisions to determine the ALP, rejecting arbitrary higher interest rates claimed by the assessee without sufficient basis.The Tribunal recognized the mercantile system of accounting for amortization of leasehold rights, allowing proportionate revenue expenditure over the lease period, consistent with judicial precedents permitting amortization of prepaid lease charges despite the absence of deferred revenue expenditure concept under the Income Tax Act.No dissenting or concurring opinions were recorded; the Tribunal's approach reflects a doctrinal consistency in transfer pricing and expenditure allowance principles aligned with statutory provisions and judicial precedents.