2017 (9) TMI 1649 - AT - Income Tax

Invalid transfer pricing proceedings - Reference to TPO - Held that - reference to the TPO as per the CBDT guidelines is part of the scheme of verification of certain aspects of the Returns filed by the assessee for scrutiny/TP ALP verification to cross check the accuracy of the contents. This cannot be assumed to be hurting the assessee or adversarial. Therefore, the very reference to the TPO per se has no harm or damage to the assessee. Further, the DRP observed that the sovereign Government as a matter of scheme of filing of Returns is duty bound to verify and ensure that the IT Returns filed by the citizens are proper and as per the Law. However, considering the shortage of resources and to ease some hardship to tax payers in attending to the requirement of tax audit/TP Proceedings, the Government over the period of time, have brought down the percentage of scrutiny of IT Returns from 100%(pre-1990) to lesser percentage of the total Returns filed over a period of time. Therefore, the DRP held that the mere fact of initiating scrutiny of returns/ ALP by the TPO/AO cannot be considered as illegal and denial of the natural justice. Accordingly, the objection raised by the assessee is rejected. DRP observed that as per Rule 10B(4) financial data relating to the financial year in which international transactions were undertaken has to be used as per Rule 10B(4) of the Income Tax Rules, unless it is established that the use of data of the earlier financial years will result in more reliable results, which the assessee failed to establish. Arm s length price adjustment towards corporate guarantee - Held that - When there is no internal benchmark and also considering the fact that the judicial pronouncements confirmed the fee in the range of 0.25% to 3.0% year on year, we are of the view, that for the current FY, the SBI rate which is 1.8% per annum for the relevant year is reasonable and accordingly, direct the TPO/AO to adopt the same, in place of 2% Addition towards charging interest @ 14.75% on advances - Held that - We are not in agreement with the request of the assessee that on the above said advances, the AE s had allotted Shares to the assessee company on 30.09.2012, hence no interest can be charged. The allotment of shares was not completed in time before 31-03-2012. The shares were allotted during the subsequent FY on 30.09.2012. Hence, the same cannot come to the rescue of the assessee. DRP held that the TPO is justified in making the adjustment on this account and confirmed the action of the TPO in charging the interest on advances. ALP adjustment towards outstanding receivables - Held that - As noticed by us that the TPO, in the order passed under section 92CA(3), has charged for the delay in receipt of amounts from AEs in respect of the amount outstanding for the period 01.04.2011 to 30.09.2012 stating that the assessee had not provided the details of date of invoice and actual date of realisation. Accordingly, we direct the Assessing Officer to restrict the adjustment for delay in payment till the end of the financial year in respect of the entire receivable, provided the assessee furnishes the complete details of amount due date wise in respect of each invoice raised during the current year including the balance amount due in respect of invoices raised during the earlier years, if the assessee furnishes the necessary details within 15 days of receipt of this order. However, if the assessee .fails to furnish such information and the information relating to the interest cost discussed above, within the specified time, the objection may be treated as rejected We reject the treatment of corporate guarantee as international transaction and consequently, ALP adjustment is not warranted on this aspect. Unabsorbed depreciation loss - Held that - We admit the additional grounds raised by the assessee due to the fact that assessee was not given proper opportunity by the AO before completing the final assessment order. It is the duty of the AO to consider the outstanding unabsorbed depreciation before completing the final assessment. It is the lawful right of the assessee. Hence, we remit this matter back to the AO to verify the lawful claim of the assessee.

Issues Involved:
1. Validity of Transfer Pricing Proceedings
2. Validity of Draft Assessment Order
3. Addition of ?1,22,27,058/- in respect of Corporate Guarantee provided to Associate Enterprise
4. Addition of ?48,10,26,558/- towards Interest on Advances given to AE
5. Addition of ?7,05,11,490/- towards Interest on Receivables
6. Initiation of Penalty Proceedings
7. Set-off of Unabsorbed Depreciation Loss

Issue-wise Detailed Analysis:

1. Validity of Transfer Pricing Proceedings:
The assessee contested the validity of the transfer pricing proceedings, arguing that the reference to the Transfer Pricing Officer (TPO) was made without recording reasons as required under section 92CA(1) of the Income Tax Act. The Dispute Resolution Panel (DRP) rejected this contention, stating that the reference to the TPO is part of the verification process and does not harm the assessee. The DRP emphasized that the scrutiny of returns is a duty of the sovereign government to ensure compliance with tax laws.

2. Validity of Draft Assessment Order:
The assessee argued that the draft assessment order was invalid as it was accompanied by a notice of demand and penalty notices, which should only accompany a final assessment order. The tribunal found that while issuing such notices with the draft assessment order was a procedural mistake, it did not amount to passing a final assessment order. Therefore, the ground was dismissed.

3. Addition of ?1,22,27,058/- in respect of Corporate Guarantee provided to Associate Enterprise:
The assessee argued that the corporate guarantee provided to its AE should not be considered an international transaction under section 92B, as the amendment to include guarantees was effective from AY 2013-14. The tribunal agreed with the assessee, citing the decision in Dr. Reddy’s Laboratories and other cases, and held that the amendment should not be applied retrospectively. Consequently, the addition was deleted.

4. Addition of ?48,10,26,558/- towards Interest on Advances given to AE:
The assessee contended that the advances given to its AE were for investment purposes and should not be recharacterized as loans. The tribunal noted that the advances were classified as loans in the books but were subsequently converted into share capital. It held that the transaction should be treated as an investment, not an international transaction, and thus, no interest adjustment was warranted. This ground was allowed in favor of the assessee.

5. Addition of ?7,05,11,490/- towards Interest on Receivables:
The assessee argued that no interest should be charged on outstanding receivables as it did not charge interest on delayed payments from either AE or non-AE customers. The tribunal, following decisions in similar cases, held that no interest adjustment was warranted as the assessee did not charge interest on any receivables. This ground was also allowed in favor of the assessee.

6. Initiation of Penalty Proceedings:
The tribunal found that this ground was premature and did not require adjudication at this stage.

7. Set-off of Unabsorbed Depreciation Loss:
The assessee raised additional grounds regarding the set-off of unabsorbed depreciation loss, arguing that it was not given an opportunity to contest this issue before the AO. The tribunal admitted the additional grounds and remitted the matter back to the AO to verify the claim and allow the set-off if found proper.

Conclusion:
The appeal was partly allowed, with the tribunal ruling in favor of the assessee on several key issues, including the treatment of corporate guarantees and advances to AE, and the non-charging of interest on receivables. The matter of unabsorbed depreciation loss was remitted back to the AO for verification.

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