2025 (9) TMI 648 - AT - Income Tax

Transfer pricing remitted to AO; benchmark receivables by invoice currency; LIBOR+350bps upheld; apply s.92CA; allow s.80G

Lowe’s Services India Pvt. Ltd. Versus The Deputy Commissioner of Income Tax, Circle 4 (1) (1), Bangalore.

ITAT restores the transfer-pricing issue to the AO, directing the assessee to benchmark outstanding receivables by the invoice currency; the DRP's ... TP adjustment - interest on outstanding receivables - as submitted that as assessee has not benchmarked this transaction, now assessee cannot question the benchmarking of the same. With respect to LIBOR+350 Basis Points computed by the DRP, the same is appropriate and should be upheld - HELD THAT:- We restore the whole issue back to the file of the AO with directions to the assessee to benchmark the outstanding receivable based on currency in which invoices are prepared. Appropriate mark-up thereon or reduction from that interest bank rate would depend upon the risk factors involved in the above transaction which is between the holding company/AE and its subsidiary. AO thereafter may examine in accordance with the provisions of section 92CA for the determination of ALP of the international transaction and then decided the issue afresh. The assessee is also entitled to raise an issue that if in the international transaction of Software Development Services segment and ITeS segment, working capital adjustment is granted to the assessee, no separate addition is required to be made. Therefore, this aspect is also left to be adjudicated by the AO. In view of these facts, ground No.3 of the appeal is restored back to the file of the ld. AO. Double addition - We direct the AO that if there is a double addition once in the proceedings u/s. 143(1) of the Act and then in the final assessment order, it deserves to be deleted, we direct to delete the disallowance. Ground No.4 is allowed. Incorrect amount of book profit computed while computing the income tax liability u/s. 115JB - While looking at the final assessment order, we find that in the tax computation sheet, the deemed income computed u/s. 115JB. First of all, if there is adjustment to the book profit of the assessee, it was not made in the draft assessment order. As the assessee says that the correct book profit AO could not have made any adjustment to the book profit in the final assessment order without first putting it into the draft assessment order. As there is no adjustment to the book profit in the draft assessment order, AO is directed to take the book profit of Rs. 118,10,19,785 only for computing the tax liability of the assessee. Accordingly ground No.5 is allowed. Disallowing deduction u/s. 80G - CSR expenditure, donations given to other charitable trusts - HELD THAT:- It is an admitted fact that donation was not given to Swachh Bharat Abhiyan Kosh and Clean Ganga Fund. If donation is given to these two organisations, then only assessee can be denied deduction u/s. 80G. This issue is squarely covered in favour of assessee by the decision of FNF India Pvt. Ltd. [2021 (1) TMI 205 - ITAT BANGALORE] and Axis Securities [2025 (7) TMI 953 - ITAT MUMBAI]. Accordingly we allow ground of the assessee and direct the ld. AO to grant donation u/s. 80G of the act. ISSUES PRESENTED AND CONSIDERED 1. Whether the notional interest adjustment on outstanding inter-company receivables should be determined by applying the LIBOR+350 bps ceiling (as directed by the Dispute Resolution Panel) or by benchmarking the receivable/loan based on currency of invoicing and commercial risk, and whether the matter requires remand for fresh determination under section 92CA. 2. Whether interest on receivables may be computed beyond the relevant assessment year (i.e., until actual collection) or must be restricted to the year-end date (31 March) for transfer-pricing purposes. 3. Whether an addition under section 36(1)(va) (late PF payment) made earlier in intimation under section 143(1) can be repeated in the final assessment order (i.e., whether a double addition occurred and, if so, remedy). 4. Whether the Assessing Officer could alter book profit for Minimum Alternate Tax (section 115JB) in the final assessment without proposing such adjustment in the draft assessment order (i.e., procedural fairness and validity of the final computation). 5. Whether MAT credit and TDS credit claims were incorrectly denied and require verification/grant in accordance with law. 6. Whether donations classified as CSR expenditure are eligible for deduction under section 80G where donor produced donation receipts and 80G approval certificates, and whether prior coordinate Bench decisions affect the outcome. 7. Whether interest under sections 234B and 234C being consequential on substantive adjustments should be disturbed independently. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Benchmarking notional interest on outstanding inter-company receivables (legal framework) Legal framework: Transfer-pricing adjustments for international transactions are governed by the arm's length principle and the statutory scheme (including section 92CA), requiring determination of ALP by reference to appropriate methods and comparables; benchmarking of financial transactions (loans/receivables) typically uses CUP/CAP or external market rates with adjustments for currency, maturity and credit risk. Precedent Treatment: The DRP directed application of a ceiling from an RBI Master Circular (6-month LIBOR + 350 bps) as a CUP-proxy; the Court noted that DRP/TPO did not explain why that RBI ceiling equates to ALP for the instant inter-company short-term receivable. Interpretation and reasoning: The Court found the DRP's direction to apply LIBOR+350 bps arbitrary and inadequately reasoned. It observed that (a) LIBOR was being phased out and not an appropriate reference without explanation; (b) RBI ceilings for ECBs are not ipso facto ALP for intra-group short-term receivables; and (c) no credit-rating or risk-factor analysis was undertaken to justify the mark-up. The Court further reasoned that the transaction resembles short-term intra-group financing and therefore should be benchmarked as a loan/receivable transaction based on the currency of invoicing, applicable market rate (e.g., SOFR or other appropriate benchmark), and risk adjustments including a possible mark-up or discount for related-party, low-risk context (holding/subsidiary/JV relationship). Ratio vs. Obiter: Ratio - DRP's adoption of RBI LIBOR ceiling without evidentiary or reasoned link to ALP is impermissible; remand to AO/TPO under section 92CA is warranted for proper benchmarking. Obiter - reference to SOFR and commentary on LIBOR phase-out as preferable benchmarks is persuasive guidance. Conclusion: The Court set aside the DRP/TPO fixation of LIBOR+350 bps and restored the issue to the Assessing Officer for fresh determination under section 92CA, directing the assessee to benchmark receivables based on invoicing currency and risk profile and allowing the AO to examine working-capital adjustments and whether a separate overdue interest addition is precluded if a working-capital adjustment is granted. Issue 2 - Scope of period for computing notional interest (legal framework) Legal framework: Transfer pricing adjustments must relate to the relevant assessment year and the period of the international transaction under consideration; quantification ordinarily pertains to the year-end position unless a different approach is justified and within statutory parameters. Precedent Treatment: The assessee contended that interest should be restricted to receivable status as at 31 March 2020; the TPO had computed interest until actual collection and the DRP's directions did not adequately circumscribe period application. Interpretation and reasoning: The Court accepted that interest computed beyond the relevant year may include amounts not pertaining to the assessment year and noted irregular computations in the TPO's annexure where interest for amounts outside the year was charged. The Court directed that the AO re-examine the period of computation in the fresh benchmarking exercise, implicitly endorsing restriction to year-end unless adequately justified. Ratio vs. Obiter: Ratio - interest quantification must correspond to the assessment year; computations extending beyond the year without justification are unsustainable. Obiter - none stated beyond procedural direction. Conclusion: Matter remitted to AO to determine period and quantify interest consistent with year-end position and section 92CA analysis. Issue 3 - Double addition under section 36(1)(va) Legal framework: Assessing Officer must avoid double counting of disallowances; intimation under section 143(1) and final assessment must be reconciled to prevent duplication. Precedent Treatment: The assessee alleged duplication of Rs. 132,825; the DRP left verification to AO. Interpretation and reasoning: The Court found prima facie that the disallowance appeared to be doubled (once in 143(1) intimation and again in final order) and directed AO to verify and delete any duplicated disallowance. Ratio vs. Obiter: Ratio - where an item has already been reflected in 143(1) processing, AO must not re-disallow it again in final assessment; duplication must be corrected. Obiter - none beyond direction. Conclusion: Ground allowed; AO directed to delete duplicate disallowance if established. Issue 4 - Alteration of book profit for MAT (section 115JB) without inclusion in draft assessment Legal framework: Principles of natural justice and assessment procedure require that material adjustments be proposed in draft assessment so that objections and DRP directions may be framed on them; substantive changes in final order without prior proposal are procedurally impermissible. Precedent Treatment: No adjustment to book profit was present in draft order or DRP directions, yet AO used a higher book profit in final computation. Interpretation and reasoning: The Court held that AO could not alter book profit in final order without first proposing such adjustment in draft; in absence of any draft or DRP direction, the AO must adopt the book profit claimed in the return. Ratio vs. Obiter: Ratio - final assessment cannot incorporate substantive adjustments not put in draft; where draft silent, AO must adopt return figures or follow due procedure. Obiter - procedural fairness imperative emphasized. Conclusion: Ground allowed; AO directed to use book profit as declared in the return (Rs. 118,10,19,785) for computing tax liability under section 115JB. Issue 5 - MAT credit and TDS credit Legal framework: Statutory entitlement to MAT credit and TDS credit must be given where records support claim and statutory conditions are met. Precedent Treatment: Assessee claimed MAT credit and TDS credit which AO did not grant. Interpretation and reasoning: The Court did not adjudicate the merits but directed AO to verify documentation and grant MAT credit and TDS credit in accordance with law if substantiated. Ratio vs. Obiter: Direction is remedial and procedural rather than substantive adjudication of entitlement. Conclusion: AO directed to verify and grant credits as per law. Issue 6 - Deduction under section 80G for donations classified as CSR Legal framework: Deduction under section 80G requires donation to eligible institution and requisite certification; CSR obligations under corporate law do not per se preclude 80G deduction unless donation is to specifically excluded funds. Precedent Treatment: Coordinate Bench decisions relied upon favored allowance of 80G deductions for donations (excluding Swachh Bharat Abhiyan Kosh and Clean Ganga Fund) where certificates/receipts produced. Interpretation and reasoning: The Court examined facts - donations to four trusts, receipts and 80G certificates produced, donations not to Swachh Bharat/ Clean Ganga - and followed coordinate Bench precedent to hold that denial was unsustainable. The Court rejected AO/DRP stance that treating CSR expenditure as 80G defeats legislative intent, finding no bar where statutory requirements of 80G satisfied. Ratio vs. Obiter: Ratio - where donations are to eligible institutions (not specifically excluded) and requisite documentation produced, deduction under section 80G must be allowed despite CSR classification. Obiter - legislative intent argument rejecting 80G for CSR donations does not override statutory eligibility criteria. Conclusion: Ground allowed; AO directed to grant deduction of Rs. 76,48,794 under section 80G. Issue 7 - Interest under sections 234B and 234C Legal framework: Interest under sections 234B/234C is consequential upon determination of tax liability; if substantive adjustments are altered, interest claims adjust accordingly. Precedent Treatment: Parties treated these grounds as consequential. Interpretation and reasoning: The Court dismissed separate challenge to these interest charges as consequential, indicating that interest will stand or fall with substantive tax adjustments remitted or allowed. Ratio vs. Obiter: Ratio - no independent adjudication of interest where principal adjustments remitted/modified; consequential computation to follow final tax outcome. Conclusion: Grounds dismissed as consequential; interest to be recalculated in light of final assessment outcome.