2025 (9) TMI 297 - AT - Income Tax

No 115BAB tax benefit if manufacturing not commenced and no taxable income; no concessional adjustment allowed

Avaada Mhkhamgaon Private Ltd., Avaada Sustainable RJProject Private Ltd., Avaada Sataramh Private Ltd. Versus ITO 5 (1) (1), Gautam Budh Nagar. Noida (UP).

Avaada Mhkhamgaon Private Ltd., Avaada Sustainable RJProject Private Ltd., Avaada Sataramh Private Ltd. Versus ITO 5 (1) (1), Gautam Budh Nagar. Noida ... ISSUES PRESENTED AND CONSIDERED 1. Whether provisions of section 115BAB (concessional tax regime for new manufacturing domestic companies) and related concepts of 'shifting of profit' can be invoked to justify transfer-pricing adjustments where the assessee has not commenced business and has no taxable income for the year. 2. Whether transfer-pricing adjustments to impute arm's-length interest on loans received from related parties (including application of an interest rate derived from marginal cost of funds plus a markup and Safe Harbour Rules) are sustainable where the tested entity has no operating income and the transactions relate to a company that has not commenced commercial operations. 3. Whether the assessing authorities/Transfer Pricing Officer (TPO)/Dispute Resolution Panel (DRP) erred in referring the matter to the TPO and in confirming TPO's adjustments, given the assessee's factual position (project under construction, all expenditure in capital WIP, no sales/profits) - including related procedural/contention issues raised but not pressed (limitation; penalty; jurisdictional objections). ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of section 115BAB where assessee has not commenced business and has no taxable income Legal framework: Section 115BAB provides a concessional tax rate for domestic manufacturing companies on their total income, subject to provisos dealing with income unconnected with main activity and deemed incomes under sub-section (6). Other provisions of the Income-tax Act that affect computation of taxable income and carry forward of losses continue to apply. Precedent treatment: The TPO/DRP applied the concept of tax arbitrage/'shifting of profit' and invoked section 115BAB to justify treating absence of return on associated enterprise capital as producing 'less than ordinary profit', thereby taxing the 'over and above ordinary profit'. The Tribunal distinguished this approach in the factual matrix. Interpretation and reasoning: The Tribunal reasoned that section 115BAB is operative where there is taxable income to which the concessional regime can apply; if the assessee has not commenced business and recorded no income (loss shown; all expenditure in capital work-in-progress), there is no scope to claim the concessional rate and no basis to treat absence of interest as 'shifting of profit' in the sense of creating additional taxable income. The Tribunal further observed that provisos (First and Second) to section 115BAB similarly presuppose existence of income to be characterized/charged at different rates. Ratio vs. Obiter: Ratio - where a domestic company has not commenced business and has no taxable income for the year, section 115BAB and its provisos cannot be operationally invoked to justify creating additional taxable income via transfer-pricing adjustments premised on 'profit shifting'. Obiter - general remarks that other provisions of the Act normally apply; specific interplay with particular provisos beyond the factual matrix is not exhaustively decided. Conclusion: The Tribunal held that section 115BAB is not applicable in the factual scenario of no profits/no commencement of business; the concept of profit shifting under that provision does not justify the impugned adjustments. Ground(s) challenging application of section 115BAB are allowed (applies mutatis mutandis to the connected appeals). Issue 2: Validity of transfer-pricing adjustments imputing arm's-length interest on intra-group loans when the tested entity has no operating income Legal framework: Transfer-pricing provisions require determination of arm's-length price (ALP) for international/associated enterprise transactions; TPO may impute ALP based on appropriate bench-marks, including cost of funds plus margins, and may apply Safe Harbour guidelines where relevant. Precedent treatment: The TPO determined an ALP interest rate (MCLR/marginal cost + 425 bps ? 11.311%) and imputed interest on loans where either no interest was charged (AEPL) or interest paid was lower than ALP (VSMPL), resulting in adjustments. The DRP upheld the TPO. The Tribunal examined these adjustments in light of the factual position. Interpretation and reasoning: The Tribunal emphasized that TP adjustments must be anchored to commercial and economic realities of the tested party. Where the tested entity has not commenced operations, has no sales or profits, and records expenditure as capital WIP, imputing interest to reverse a purported 'profit shifting' is impermissible if premised on an assumed operation/profit base that does not exist for the year. The Tribunal found that the concept of inflated losses/ tax arbitrage relied upon by the TPO presupposes an ongoing profit-generating activity; absent commencement and income, such inference is not tenable. Consequently, applying an imputed interest rate and making ALP additions on that basis was unsustainable in the circumstances. Ratio vs. Obiter: Ratio - transfer-pricing adjustments that impute arm's-length interest to create taxable income are not sustainable where the tested entity has not commenced business and has no taxable income in the year; benchmarking/ALP must be applied in context of the tested party's actual commercial circumstances. Obiter - remarks on appropriateness of particular benchmarking methods (e.g., MCLR + markup; Safe Harbour) are contextual and not adopted as general prohibition or endorsement beyond the facts. Conclusion: The Tribunal allowed the appeals (or relevant grounds) insofar as they challenged the ALP interest adjustments (including amounts imputed for loans from AEPL and difference in interest for VSMPL), holding such adjustments unjustified on the facts of non-commencement/no income. Issue 3: Procedural/referral and other grounds (reference to TPO, limitation, penalty, unpressed or premature grounds) Legal framework: Jurisdictional and procedural rules (including CBDT instructions governing referrals to TPO, assessment under sections 143(3)/144C, and penalty provisions such as section 270A) regulate assessments, referrals, and penalties; limitation periods under section 153 read with 144C may constrain assessment actions. Precedent treatment: The assessee raised jurisdictional objection (CBDT Instruction No.3 of 2016), limitation, and penalty-related grounds; some grounds were not pressed at hearing or were held premature. Interpretation and reasoning: The Tribunal noted which grounds were pressed: the primary contested issues were the TP adjustments and the applicability of section 115BAB. Ground on limitation (ground no.4) was not pressed; ground on penalty (ground no.5) was considered premature; general/amendment grounds were allowed to be adjusted/withdrawn. Where facts and issues were identical across connected appeals, the Tribunal applied its findings mutatis mutandis to those appeals. Ratio vs. Obiter: Ratio - findings on relief are confined to contested substantive TP and section 115BAB issues; procedural/jurisdictional objections not pressed were not adjudicated on merits. Obiter - procedural observations on non-pressing/prematurity of certain grounds do not constitute ruling on jurisdiction or penalty applicability. Conclusion: Procedural/jurisdictional and penalty grounds not pressed or premature were not upheld; the Tribunal applied the substantive findings across connected appeals and allowed or partly allowed the appeals accordingly. Cross-references The Tribunal's conclusions on Issues 1 and 2 are interrelated: the non-applicability of section 115BAB in the absence of taxable income (Issue 1) underpins the rejection of transfer-pricing adjustments premised on profit-shifting and imputed arm's-length interest (Issue 2). Findings in the lead appeal were applied mutatis mutandis to connected appeals with identical facts and grounds.