TaxTMI 
TaxTMI 
2026 (9) TMI 515
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....he transfer pricing adjustment made on account of interest on Masala Bonds amounting to Rs. 68,71,32,368/-. 5. We have heard the rival submissions and perused the material available on record. The assessee company was incorporated on 08.01.2008 with the main objective of power generation and transmission as a public limited company. The Assessee was a joint venture between Gayatri Energy Ventures Private limited (Gayatri India) and Singapore based Sembcorp Utilities Pte Ltd (Sembcorp Singapore). The shareholding pattern of the Assessee company as on 31-3-2021 is as under:- Sembcorp Utilities Pte Ltd: 100 % shareholding. 6. The Assessee entered into several international transactions with its Associated Enterprise (AE) which are tabulated in para 3 of the order of the ld TPO. During the FY 2021-22, the Assessee company has issued 12 % and 10% INR denominated notes (unsecured) on which interest is payable on half yearly basis. The details of the same are tabulated as under:- Tranches Amount (INR in Millions) Date of Receipt Interest rate Maturity Period 1 7,893.90 09/12/2016 12% 5 Years 2 9,000.00 27/03/2017 10% 10 Yea....
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....iv. Rupee loan from PTC India Financial Services Limited (PFS) carries an interest rate of 13.25% p.a. and is repayable in 48 equal quarterly installments of 414 lakhs. 12. It is pertinent to note that bank borrowings are secured loans as they are secured by assets of the borrower. Masala bonds issued are unsecured loans but SGPL had paid lesser rate of interest on unsecured loans when compared to interest on secured loans. 13. It is also pertinent to understand the shareholding pattern of various entities together with their credit ratings as under:- Sembcorp Singapore holds 100% stake in SCIL India (the Assessee herein) and in SGPL. 14. SGPL is amalgamated with SEIL India on 31-10-2018. Credit rating of SGPL in AY-2017-18 was 'BBB- 'and in AY-2018-19 was 'A'. The credit rating of SCIL India in AY 17-18 and AY 18-19 was 'A'. 15. The ld TPO applied external benchmarking lending rate which is a floating interest rate which is for primary benchmarking for RBI repo rate purpose. The ld TPO gave credit risk premium at the rate of 0.1% based on credit rating of assessee. It is to be noted that SGPL had taken the loan in AY 2017-18 and not the assessee herein. 16.....
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....it rating adopted by the assessee i.e. credit rating of the borrower for the relevant year. However, the ld DRP itself accepted the fundamental principle advocated by the assessee i.e. the use of borrowers credit rating for the relevant year in which the bonds were issued. Accordingly, it was argued that having accepted this underlying principle, the rejection of benchmarking of the assessee was unsustainable. 19. Per contra, the ld DR submitted that usually the spread is between 0.1% or 2 %. In the instant case, SGPL merged with assessee after the issuance of bonds. Hence, the ld DRP had picked up the credit rating of the whole group instead of standalone SGPL. The ld DR vehemently supported the order of the ld DRP. 20. At the outset, we find the deficiencies pointed out by the ld DRP in para 5.3 to 5.12 of its order are actually incorrect inasmuch as all the relevant details were duly filed by the assessee before both ld TPO and the ld DRP. All the details are available in the annual report of SGPL itself, enclosed in pages 665 to 696 of the paper book itself. We find that the ld DRP had held that adoption of fixed rate or floating rate is not material. The ld DRP practical....
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....net profit margin realised ....by an uncontrolled enterprise from a comparable uncontrolled transaction'. It transpires that whereas the first part refers to the profit margin from internal comparable uncontrolled transactions, the second part refers to profit margin from an external comparable uncontrolled transaction. Thus it is discernible that what is to be compared under this method is profit from a comparable uncontrolled transaction. The word 'comparable' may encompass internal comparable or external comparable. There is cue in the rule itself as to preference to be given to internal comparable uncontrolled transactions vis-à-vis externally comparable uncontrolled transactions. It is because the delegated legislature has firstly referred to the net profit margin realized by the enterprise (internal) from a comparable uncontrolled transaction and, thereafter, it points towards net profit margin realized by an unrelated enterprise (external) from a comparable uncontrolled transaction. Thus where potential comparable is available in the shape of an uncontrolled transaction of the same assessee, it is likely to have higher degree of comparability vis-à-....
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....nt dated 01-01-2021 were placed before the lower authorities. On perusal of the same, it is noted that the AE possesses relevant technical knowledge pertaining to thermal power plants and is capable of being a technical advisor for assessee. The breakup of cost and markup details of the AE with respect to the above services are tabulated here under:- Particulars (55 mn)* Technical consultancy services Group shared services Net Margin earned by the Assessee Technical Service Fees 6,599,759 364,174,702 97.273,696 461,448,398 Less: Cost of sales 5.913,294 326,295,563 88.430,633 414,726.196 Less: G&A expenses 141,742 7,821,324 7,821,324 Profit 544,723 30,057,815 8,843,063 38,900,878 NCP 9.00% 9.00% 10.00% 9.21% Pursuant to the technical services agreement, the AE has provided various technical services to the assessee in relation to operation and maintenance of thermal power plants situated in India. The assessee is engaged in the business of generation of power through 2 thermal power plants having operating capacity of 1320 MW each. The AE is engaged in developing, owning and operation....
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....nd government applications. The Sembcorp Singapore Group also owns and operates power generation plants; and provides electricity for industrial, commercial, and domestic customers. In addition, it operates as an importer, transporter, and retailer of natural gas in Singapore, as well as provides chemical feedstock for chemical, pharmaceutical, and petrochemical industries. The following aspects pertaining to the Sembcorp Singapore Group are relevant to note: • The Sembcorp Singapore Group is responsible for Singapore's first privately developed independent power plant, which is also the country's largest cogeneration facility at 815 megawatts. In July 2014, the Sembcorp Singapore Group completed its second combined-cycle gas turbine cogeneration plant in Singapore. It has a power capacity of 400 megawatts and a steam production capacity of 200 tons per hour, • In China, the Sembcorp Singapore Group co-owns the largest co-generation plant in Shanghai, the Shanghai Cao Jing Cogeneration Plant, located in the Shanghai Chemical Industrial Park; • In Vietnam, the Sembcorp Singapore Group co-owns the 746 megawatt combined-....
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....cating GCoE's participation and review of vendor and method for chemical cleaning to address equipment (stator) clogging issues with third party specialists (SvoBatech & Tri-State) to improve performance of assets and resolve issues • Email dated Jul 21 indicating SCU GCoE team hosted a technical forum on operations and maintenance highlights and technical knowledge sharing pertaining to plant related issues with SEIL • Email dated Jul 21 providing project status updates on support delivered from SCU GCOE team to SEIL for implementation of Gensuite project, root cause analysis system to prevent recurrence of incidents through use of system • Please note that the employees of SCU made visit to India in past various year wherein similar services were rendered by SCU to SEIL. However, during the relevant financial year INDIA Le., FY 2021-22, largely visits were through video calls since this was a covid year. Further, the Assessee has submitted the cost plus working of the AE which shows the actual cost incurred by the AE in providing the technical services to the Assessee on which a markup of 9 percent has been charged. Please refer....
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.... 30. However, despite the provision of aforesaid details furnished before the ld TPO, the ld TPO noted that assessee had not furnished the comprehensive breakup of each of the services actually received by the assessee along with documentary evidences; specific amount of payment made for each of such services; documentary evidence of cost incurred by the AE for rendering each type of services purportedly received by the assessee company and markup applied thereon by the AE; audited cost allocation certificate in respect of cost incurred by the AE and cost benefit analysis for the assessee herein out of availing of services. Accordingly, the ld TPO proceeded to determine the arm's length price at Rs. Nil by applying CUP method as the payment of cost for such services is not based on any documentary evidence and no independent party would pay for such services in an independent situation and made an upward adjustment of Rs. 17,86,72,806/- on account of intragroup services. 31. The ld DRP in para 7.7 and 7.8 of its directions had stated that the two comparables used by the assessee for benchmarking purposes are to be excluded for the following reasons:- a. Mahindra Consu....
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....e assessee and upheld the remaining adjustment made by the ld TPO and granted partial relief in the transfer pricing adjustment. 33. At the outset, we find the assessee had furnished all the relevant details in support of its benchmarking carried out. The assessee has also furnished, on without prejudice basis, the collaborative benchmarking exercise which are enclosed in pages 1 to 11 of the supplementary paper book by applying cost plus method by considering foreign AE as a tested party by giving the actual cost incurred by the AE with margins thereon together with comparables thereon. However, the ld DRP had said that the services rendered by the AE to the assessee are shareholder activities. In this regard, the ld AR placed on record, the OECD guidelines in respect of intra group services wherein the examples of costs associated with shareholder activities are listed which are as under:- "a) Costs relating to the juridical structure of the parent company itself, such as meetings of shareholders of the parent, issuing of shares in the parent company, stock exchange listing of the parent company and costs of the supervisory board; b) Costs relating to reporti....
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....payment for services made by the assessee to its AE do not fall under the ambit of shareholder activity. 35. It is pertinent to note that the ld TPO had applied CUP and had determined the ALP of the subject mentioned transaction at Rs. Nil. Having applied CUP, it is the duty of the ld TPO to bring on record comparables to justify the determination of ALP at Rs. Nil. This is conspicuously absent in the instant case. Strangely, the ld DRP accepts the fact of rendition of services by the AE to the assessee and receipt of services by the assessee from its AE to the extent of expenses that are subjected to GST and TDS alone. We are unable to comprehend ourselves to accept to this proposition of the ld DRP that to the extent of GST and TDS, the expenses are required to be paid by the assessee to the AE for availing the services and for the remaining expenses, the AE has not rendered any services to the assessee. As stated earlier, this is a very strange scenario adopted by the ld DRP. How can there arise a situation wherein, only to the extent of expenses that are subjected to GST and TDS, AE has rendered services to the assessee and for remaining, they have not rendered the services ....
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....only seeking credit of TDS, which requires factual verification by the ld AO. The same is hereby restored to ld AO to grant TDS credit in accordance with law and the ground is allowed for statistical purposes. 38. With regard to interest u/s. 234B of the Act, the same is consequential in nature. With regard to interest u/s. 234C of the Act, the law is very well settled that the same shall be charged only on the returned income and not on the assessed income. The Ground No. 7 is disposed of in these terms. 39. Ground No. 8 is challenging the initiation of penalty proceedings u/s. 270A of the Act, which is premature for adjudication at this stage and hence, dismissed. 40. In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 31st August, 2026. ============= Document 1 Sembcorp Energy India Limited Appendix - 2 Applicable Interest Rate an External Borrowing Trache INR (ME) Date of Tranche Interest Rate (%) Range of Interest Rate (2%) PFC PIC Indis ICICIBANK 1 7893 90 69 Dec 2016 12.00% 13.40% to 14.40% 13.00% 12. 75% to 14.10% 8 4000 06 21 Mar/201 7 16 00% 3 9000 00 06 A/ 2017 10 00% 4....