TaxTMI 
TaxTMI 
TaxTMI 
2025 (10) TMI 648
X X X X Extracts X X X X
X X X X Extracts X X X X
....e facts and circumstances of the case and in law, the Hon'ble CIT(A) has erred in relying on the Hon'ble ITAT's decision in assessee's own case for AY 2014-15 wherein reliance is placed on decision of Bombay High Court in the case of India Debt Management in ITA.No.7518/Mum/2014 order dated 10.03.2016, the facts of which are distinguishable in the case of the assessee. In this case of India Debt Management, the high court has observed that Bloomberg data has no INR denominated instrument; whereas in the case of the assessee Bloomberg data in INR are available and which were duly intimated to the Assessee in the show-cause notice by TPO? Ground 4 Whether on the facts and ciroumstances of the case and in law, the Hon'ble CIT(A) has erred in restricting the disallowance of Legal & Professional expenses to the amount of Rs. 1,80,78,800/- and also erred in holding the balance Legal & Professional expenses as Revenue Expenditure in nature and deleting the disallowance made by the AO, without appreciating the fact that the said expense has not contributed in earning any income during the year under consideration and have multiyear effect on the business of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in his order dated 29.12.2018 proposed transfer pricing adjustment amounting to Rs. 28,94,33,680/- to the transaction of interest on CCDs. The value of the remaining specified domestic transaction however was considered as at arm's length. The Assessing Officer also made disallowance u/s 57 of the Act in respect of 'legal and professional expenses' (Rs.1,90,57,834); 'advertisement and sales expenses' (Rs.5,50,69,726/-) ; and 'commission and brokerage expenses' (Rs.4,47,50,455/-) totaling to Rs. 1,26,33,412/-. The Ld. Assessing Officer also adjusted the work- in-progress at value of Rs. 3,49,59,30,826/- as against inventory or work-in-progress value of Rs. 368,40,06,222/- as reported by the assessee. 2.2 On appeal, the Ld. CIT(A) deleted the transfer pricing adjustment, following the decision of the Co-ordinate Bench of the Tribunal in the assessee's own case for A.Ys. 2014-15, 2016-17, and 2017-18, wherein similar additions had been deleted. The CIT(A) relied upon the judgment of the Hon'ble Bombay High Court in the case of Pr. CIT v. India Debt Management (P.) Ltd. [2019] 106 taxmann.com 55 (Bom), which had affirmed the Tribunal's view that benchmarking based on Bloomberg/Thom....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ts AE on CCDs issued at a coupon rate of 17.65% (gross of tax). The facts in brief qua the issue-indispute are that the assessee reported international transaction of interest on CCDs amounting to Rs. 56.51 crores to its Associated Enterprise namely SCM Real Estate, Singapore. Before the Ld. TPO, the assessee explained that the assessee issued CCDs to SCM Real Estate Singapore Pvt. Ltd. on 25.07.2013, which carried a coupon rate of 17.65% (gross of the tax). It was further submitted that those CCDs shall be automatically and mandatorily converted into equity shares upon expiry of 12 years from the date of allotment. However, those CCDs could also be voluntarily converted based on an agreed conversion price before the expiry of 12 years period. It was submitted that CCDs had faced value of Rs. 100 and were issued to SCM Real Estate Pvt. Ltd. at par without charting any premium. It was further submitted that CCD issued carried out coupon rate of 17.65% (gross of tax per annum) and the interest of CCDs issued was payable quarterly. 5.1 For the purpose of benchmarking the arm's length price of international transaction, the assessee carried out analysis for indentifying comparables ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....IMITED INE882N07013 28 March 2014 20.00% 35th percentile 17.50% Median 18.00% 65th percentile 18.40% 5.3 Based on the above analysis the assessee worked out the arm's length rate of interest to an average of 18%. It was submitted by the assessee that as per the terms of subscription, the interest rate on CCD issued by the assessee to its AE was 17.65% (gross of tax), hence, the interest paid on CCDs by the assessee to its AE was considered to be at arm's length price under the Indian Transfer Pricing Guidelines. 5.4 The assessee also supported its transaction at arm's length following a secondary analysis relied upon RBI published lending rates offered by various commercial banks in India as published by the RBI at quarterly basis in respect of advances other than export credits. The term loan lending rates published by RBI on its website are considered as indicative rates at which banks in India lend money to its credit worthy customers. The assessee worked out median of 35th percentile and ending on the 65th percentile of the term loan rates offered by banks in India for the quarter ended September, 2013 which was worked out to 17.25%. It was expl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e'. It was contended that industry risk and terms of issue made the transaction non-comparable. The assessee also argued that reliance on only two and three Bloomberg comparable was strictly insufficient for benchmarking. 5.5 The Ld. TPO however maintained that CCDs are till conversion, debt instrument and therefore, benchmarking of loan yields on Bloomberg database was the correct approach. It was held by Ld. TPO that industry filter was of limited relevance since Bloomberg provides reliable corporate bond yield. The assessee's reliance on RBI data and sector specific risk was also not accepted by the Ld. TPO. 5.6 The Ld. TPO noted that the Ld. DRP in assessee's own case for assessment year 2014-15 had upheld the action of benchmarking interest rate on CCD using Bloomberg database. Based on the above, the Ld. TPO concluded that ALP of the interest on CCDs should be computed at rate of 8.61% per annum. The assessee's payment of interest at the rate of 17.65% was considered as excessive, resulting into transfer pricing adjustment of Rs. 28.94 crores. 6. The Ld. CIT(A) following the finding of the Co-ordinate Bench of the Tribunal in the case of the assessee for assessment y....
X X X X Extracts X X X X
X X X X Extracts X X X X
....125 and the order of the Tribunal has been affirmed by the Hon'ble Bombay High Court in the case of Pr. CIT v. India Debt Management (P.) Ltd. [2019] 106 taxmann.com 55/264 Taxman 42/417 ITR 103 wherin the Hon'ble Court observed that as far as the benchmarking done by the lower authorities based on external data using Thomson Reuters, DealScan and Bloomberg Database is not correct. The relevant observations of Hon'ble Jurisdictional High Court is reproduced as under : "15. The last leg of the controversy is, whether the benchmarking analysis done by the assesses is correct or not and whether the average rate of interest of 11.30% paid by the assessee to its AE is at ALP or not. So far as the assessees's benchmarking analysis as done in TP Study report based on external data using Thomson Reuters' Deal Scan, and Bloomberg Database, we find that such an approach is not correct, firstly, there are no INR denominated debt issuance available on such databases and; secondly, in absence of such a data the assessee has to carry out huge adjustments on account of country risk, currency risk and tenor risk. With all these factors of adjustments, it would be diffi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....7.1 In the TP study the assessee had taken the comparables in CUP method related to database used NSE, BSE and NSDL database margin of the appellant is 17.65% gross or 15% net of tax system whereas the rate or merging as per database 18.13%. The assessee in secondary analysis calculated the rate at the rate of 17.89% on basis of the term loan lending rates offered by various banks in India as published in the Reserve Bank of India. the learned TPO undertook a fresh search using Bloomberg database to benchmark the international transaction without appreciating that the circumstances necessitating determination of price by the TPO as mentioned in sub-section (3) of section 92C of the Act did not exist in the instant case. The arm's length rate of interest in CCDs was arrived @ 8.58% as per Bloomberg database. The assessee applied the same rate of interest both in foreign AE and domestic AE. No other uncontrolled comparable is determined during the TP study under CUP method. The application of CUP method as MAM without taking care the risk adjustment in terms of rule 10B(1)(e)(iii) of the Rules, which are generally involved in a third-party transaction vis-à-vis between AEs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Ld. counsel further submitted that the Ld. TPO erred in not adopting proper filters such as debt instruments industry etc. while undertaking a search of Bloomberg Database and erred in selection of non-comparable dataset. The Ld. counsel submitted that the dataset adopted by the Ld. TPO was erroneous for following reasons: i. Comparables selected by the TPO operate in the Oil & Gas and Infrastructure sectors, which are entirely unrelated to the Respondent's business in the residential real estate sector. ii. The real estate industry, is an inherently highly risky sector and during AY 2015- 16, real estate developers faced high borrowing costs, rising input prices and shrinking profit margins owing to the high rise in real estate inventory. On the contrary, in the Oil & Gas industry, for example, there are ready buyers for the products and hence there is rarely any unsold inventory thereby lowering the inventory risk for companies operating in the Oil & Gas sector. iii. Out of the 6 loan transactions selected by learned TPO, 5 transactions pertained to secured loans taken SOMA Enterprises. However, in the case of the Appellant, the CCDs have been iss....
X X X X Extracts X X X X
X X X X Extracts X X X X
....thod. The Rule 10B(2) explicitly lays down that for determining comparability, regard shall be had to: (i) the specific characteristics of the property transferred or services provided; (ii) the functions performed, assets employed and risks assumed (FAR analysis); (iii) the contractual terms of the transaction; and (iv) the economic circumstances of the parties and the markets in which they operate. 9.1 The Rule 10B(3) further provides that an uncontrolled transaction shall be considered comparable only if none of the differences between the transactions materially affect the price, or if reasonably accurate adjustments can be made to eliminate such differences. 9.2 Further, the Hon'ble Bombay High Court in Pr. CIT v. India Debt Management (P.) Ltd. [2019] 106 taxmann.com 55 categorically held that CUP demands a high degree of comparability, and where databases (Bloomberg/Thomson Reuters) lacked INR-denominated transactions, benchmarking could not be sustained without suitable adjustments for country risk, currency risk, and tenor risk. 9.3 The CCDs, by their very nature, are hybrid instruments. Unlike plain NCDs, they carry an embedded....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... differences in the year under consideration as compared to the assessment year 2014-15. The Tribunal has relied on the decision in the case Data Management (supra) wherein the Hon'ble High court observed that the data set used of the Bloomberg used by the TPO was not having INR denominated data set. Further, Hon'ble High Court observed that since the CCDs in question were used and utilized in India, the 'Bloomberg' data set without INR transactions was not accurate for comparison and if at all same was to be used then same would required a lot of adjustment for country risk, currency risk and tenor risk and therefore, said data set may not be appropriate for comparison. But in the instant assessment year, the Ld. TPO used Bloomberg INR interest rate data set and therefore, decision in the assessment year 2014-15 is distinguishable on facts. 9.7 We are of the opinion that the comparison carried out by the assessee as well as the Ld. TPO, both are not meeting the requirement of the comparison with the CCD issued by the assessee. It is admittedly clear that no CUP transaction of the CCD has been cited either by the assessee or by the Ld. TPO. The assessee has compared with the dat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he matter must be reconsidered with appropriate adjustments. 9.8 In light of the foregoing discussion, we are of the considered view that the issue cannot be resolved on the present record. Both sets of comparables are deficient in terms of Rule 10B(2)/(3). The fundamental comparability differences in respect of equity conversion option, subordination, security, industry risk, and coupon structure remain unaddressed. As approach of both the assessee as well as of TPO is not meeting the comparability standards required under the method of CUP, no alternative left with us except to set aside the order of the lower authorities and restore the matter back to the file of the Ld. AO/TPO for carrying out appropriate adjustment to cover the convertibility (option value factor) to minimize the difference between the comparable transaction either of the NCD or Bloomberg INR denominated loan interest transaction or SBI base/CLR credit tenor spread interest on loan transaction. Accordingly, in the interest of justice, we set aside the order of the CIT(A) and restore the matter to the file of the AO/TPO with a direction to re-examine the issue de novo. We make it clear that our observations ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t is not in dispute that the expenditures incurred by the assessee were incurred wholly and exclusively for the purpose of business only. What is required to be analysed here is as to whether they are connected with the project or to be allowed as general administrative and selling costs. In any event, allowing revenue expenditure to the extent of 42.08% of relevant expenditure is grossly incorrect. There is absolutely no basis for the Id. AO for doing this. All said and done, the relevant expenditure has already been incurred by the assessee. Restricting the business expenditure to the extent of business income is certainly not provided in the entire scheme of the Act. Considering the totality of facts circumstances of the case, we deem it fit and appropriate, in the interest of justice and fair play, to remand this entire issue to the file of Ld. AO for adjudication In the light of the following directions:- a) Restricting the allowability of expenses to the extent of 42.08% is wrong. b) Expenses directly attributable to Pre-construction and construction period should be identified and added to the Inventory/ cost of work in progress. c) Other expenses ....