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2018 (5) TMI 1774 - AT - Income TaxAddition of interest payable/paid by the Appellant on Fully & Compulsorily Convertible Debentures (FCCD s) as issued by it to its Associated Enterprise (AE) - addition u/s 153A on account of interest on FCCDs - Held that - In the present case it is an admitted fact that the assessee filed the original return of income for the year under consideration on 30.09.2009 which was processed u/s 143(1) on 05.09.2010 and the time period to issue the notice u/s 143(2) had already expired before the search took place on 29.10.2013. During the course of search no incriminating material was found relating to the FCCDs which were already shown by the assessee in its regular books of accounts. AO/TPO made the addition on account of differential interest on FCCDs undertaken with the AE in our opinion no such adjustment could have been made to the income which was already assessed prior to the date of search. Although the assessment was not framed u/s 143(3) but an intimation was issued u/s 143(1) of the Act however the time to issue the notice u/s 143(2) of the Act has already expired before the search. Therefore for the purposes of Section 153A r.w.s. 153C an intimation u/s 143(1) of the Act was also an order of assessment. Since no incriminating material was found during the course of search. The addition made by the AO u/s 153A on account of interest on FCCDs was not justified. Addition on account of differential rate of interest on FCCD - assessee applied the interest rate on the basis of SBI PLR rate plus 300 basis points for the reasons that the FCCDs being unsecured and hybrid/quasi equity instrument as compared to plain vanilla loan instrument - AO/TPO restricted the interest rate to 12.25% - Held that - The variance in the rate of interest as per TPO/AO to be adjusted and added was 3.75% which was within the permissible range of 5% as permitted by second proviso to Section 92C(2). It is also relevant to point out that the percentage of 3% in the aforesaid proviso has been inserted by the Finance Act 2012 w.e.f. 01.04.2013 and prior to that amendment this percentage was at 5%. Since the difference is less than 5% therefore no addition on account of arm s length price could have been made by the AO/TPO. As such on merit also no addition could have been made. - Decided in favour of assessee
Issues Involved:
1. Legality of Transfer Pricing Adjustment on Interest Paid on Fully & Compulsorily Convertible Debentures (FCCDs). 2. Validity of Assessment under Section 153A in the Absence of Incriminating Material. 3. Appropriateness of the Interest Rate Applied on FCCDs. 4. Non-speaking Orders by the Authorities. 5. Penalty Proceedings under Section 271(1)(c). Detailed Analysis: 1. Legality of Transfer Pricing Adjustment on Interest Paid on FCCDs: The assessee challenged the addition of Rs. 1,27,76,315/- made by the AO, TPO, and DRP on the interest payable on FCCDs issued to its Associated Enterprise (AE). The authorities had restricted the interest rate to 12.25% per annum, whereas the assessee had applied a 16% rate based on the Security Holders Agreement. The assessee argued that the interest rate was at arm's length and justified through a detailed transfer pricing study and economic analysis. The authorities, however, did not accept this justification, leading to the adjustment. 2. Validity of Assessment under Section 153A in the Absence of Incriminating Material: The assessee contended that the assessment under Section 153A was invalid as no incriminating material was found during the search conducted on 29.10.2013. The original return of income was filed on 30.09.2009 and processed under Section 143(1) on 05.09.2010, with no pending assessment at the time of the search. The Tribunal agreed with the assessee, citing various judicial precedents, including the Supreme Court's decision in CIT Vs Sinhgad Technical Education Society, which emphasized that in the absence of incriminating material, no addition could be made under Section 153A. 3. Appropriateness of the Interest Rate Applied on FCCDs: The TPO had considered the interest rate of 12.25% at arm's length instead of the 16% applied by the assessee, leading to an adjustment of Rs. 1,27,76,315/-. The assessee argued that the interest rate of 16% was justified based on the SBI PLR plus 300 basis points, which was permissible under Foreign Exchange Control Regulations. The Tribunal noted that the differential interest rate of 3.75% was within the permissible range of 5% as per the proviso to Section 92C(2) of the Act, thus no adjustment was warranted. 4. Non-speaking Orders by the Authorities: The assessee argued that the orders passed by the DRP and other authorities were non-speaking as they did not record any reasons for rejecting the submissions made by the assessee. The Tribunal found merit in this argument, noting that the DRP had upheld the TPO's decision without providing any detailed reasoning. 5. Penalty Proceedings under Section 271(1)(c): The assessee contended that the penalty proceedings initiated under Section 271(1)(c) based on the TP adjustment were illegal. Given the Tribunal's findings that the adjustments themselves were unwarranted, the basis for the penalty proceedings was also invalid. Conclusion: The Tribunal allowed the appeals of the assessee, holding that the assessment under Section 153A was invalid in the absence of incriminating material. Additionally, the Tribunal found that the interest rate applied by the assessee was within the permissible range, and no adjustment was warranted. The orders by the authorities were also found to be non-speaking and thus invalid. Consequently, the penalty proceedings under Section 271(1)(c) were deemed illegal.
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