Transfer Pricing: internal CUP must be examined and specific ALP adjustments remitted for re-benchmarking.

Transfer pricing adjustment challenged: the TPO must examine the assessee's internal comparable uncontrolled price (CUP) method where the DRP directed its consideration, and two opening NCDs excluded by the TPO's own filters cannot sustain adjustment; the disputed NCD at 13.20% is to be re-benchmarked using the internal CUP. A fresh deduction claim for customer incentives, though not in the original return, is admissible for quantification and remitted to the assessing officer for fresh adjudication. Correct statutory interest on any refund under the refund provision is to be calculated and allowed. Challenge to initiation of penalty proceedings is premature and dismissed.

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Issues: (i) Whether the Transfer Pricing Officer's arm's length price adjustment in respect of interest on non-convertible debentures (NCDs) is sustainable and whether the specific NCD issued at 13.20% is at arm's length; (ii) Whether the additional claim of deduction of Rs. 7,50,05,325/- for incentives paid to customers is admissible though not claimed in the original return; (iii) Whether correct interest under law is payable under section 244A on any refund; (iv) Whether initiation of penalty proceedings under section 270A is maintainable at this stage.

Issue (i): Whether the TPO's ALP adjustment on interest paid on NCDs (including the instrument at 13.20%) is justified and what benchmarking method should be applied.

Analysis: The TPO applied filters accepting only instruments issued in FY 2017-18 and arrived at an ALP of 12.13% based on selected comparables, proposing an overall adjustment. The DRP deleted one of the adjustments but sustained others. The assessee had submitted an alternative internal CUP benchmarking and an external CUP benchmarking before the TPO; the DRP had directed the TPO to examine the internal CUP analysis and pass a speaking order. The record shows the internal CUP analysis was filed before the TPO and was considered in a later year's order for the assessee. Two opening NCDs do not meet the TPO's own filter and therefore fall outside the ambit of adjustment. For the remaining disputed instrument at 13.20%, the Tribunal found that the TPO did not comply with DRP's direction and that the internal CUP method must be examined as the most appropriate method for that instrument.

Conclusion: The arm's length adjustment is not sustained in respect of the two opening NCDs; the TPO is directed to benchmark the Rs.4,00,00,00,000 NCD at 13.20% using the internal CUP as the most appropriate method. Issue decided partly in favour of the assessee.

Issue (ii): Whether the assessee's additional claim of deduction of Rs.7,50,05,325/- for incentives paid to customers, made during assessment proceedings though not in the original return, should be admitted and adjudicated.

Analysis: The assessee, an NBFC, created a provision and subsequently incurred actual expenditure on customer incentives. The AO rejected the fresh claim relying on precedent that claims not in the return are not entertainable. The DRP directed the AO to consider the claim and pass a speaking order. The Tribunal noted that appellate authorities may entertain a fresh claim for quantification even if not in the return and that the AO's action contradicted the DRP's binding direction.

Conclusion: The fresh claim is admitted for the limited purpose of quantification and the matter is restored to the AO for de novo adjudication on merits. Issue decided in favour of the assessee for statistical purposes.

Issue (iii): Whether correct interest under law is payable under section 244A on any refund.

Analysis: The assessee sought correct interest under the statutory provision governing interest on refunds. No factual dispute prevents recalculation of interest by the AO.

Conclusion: The AO is directed to grant correct interest under the statute as per law. Issue decided in favour of the assessee.

Issue (iv): Whether initiation of penalty under section 270A is ripe for adjudication.

Analysis: The challenge to initiation of penalty proceedings was raised at this stage; the Tribunal considered it premature to adjudicate penalty initiation in the present appeal.

Conclusion: Ground challenging initiation of penalty under section 270A is dismissed as premature. Issue decided against the assessee.

Final Conclusion: The Tribunal has partly allowed the assessee's contentions: transfer pricing adjustments are modified directing reconsideration for one instrument and deletion for two instruments, the fresh deduction claim is admitted and remitted for quantification, interest on refund is to be granted correctly, and the penalty challenge is dismissed as premature.

Ratio Decidendi: Where the Dispute Resolution Panel directs consideration of an alternative transfer pricing methodology filed by the assessee, the TPO must examine that methodology and pass a speaking order; opening instruments excluded by a TPO's own filter cannot be subjected to adjustment, and appellate authorities may admit and remit fresh claims for quantification even if not included in the original return.

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