2019 (9) TMI 1694 - AT - Income Tax

TP Adjustment in respect of the payment of interest to related parties - interest paid to the related parties is at 15% per annum whereas the interest paid to the unrelated parties varies from 13.20% to 15.60% - assessee claimed that the Specified Domestic Transaction interest to the related parties at 15% is at Arm s Length - HELD THAT - We find that for rejecting the Internal CUP as most appropriate method by the TPO no plausible reason have been given except the statement that for the purpose of benchmarking he proposed External CUP as most appropriate method. Once the transaction of interest paid to the unrelated parties is available on record then the Internal CUP should be preferred as against the External CUP as most appropriate method for determination of Arm s Length Price. Assessee has paid interest to 16 related parties and 15 unrelated parties. Therefore almost equal numbers of transactions of payment of interest to related parties as well as unrelated parties have been entered into by the assessee during the year under consideration. Once the average effective rate of interest paid to the unrelated parties is not in dispute at 15.36% then the Specified Domestic Transactions of payment of interest to the related parties have to be tested with the Internal CUP being average rate of interest paid to the unrelated parties. The assessee has also taken a plea before the authorities below that the payment of interest to the unrelated parties is bi-monthly/quarterly as against annually to the related parties. This is also a cost adding factor in respect to the unrelated party payment of interest. Assessee has paid the effective average rate of interest inclusive of brokerage at 15.36% then the payment of interest to related parties at 15% is at Arm s Length. It is also pertinent to note that even by applying the Arm s Length Interest at 14.50% based on the Internal CUP which is an average of 15 transactions then the tolerance range provided under second proviso to section 92C(2) is also applicable in the case of the assessee and therefore in any case the Specified Domestic Transactions price falls in the tolerance range of ( )(-) 3%. Accordingly the addition sustained by the ld. CIT (A) is deleted. Disallowance of Employees Contribution to PF ESI paid after the due date as provided under the relevant Acts. However it was paid before the due date of filing the return of income under section 139(1) - HELD THAT - As this issue is decided in favour of the assessee and the addition made by the AO on account of payment of employees contribution to PF and ESI before the due date of filing the return under section 139(1) is deleted.

Summary

Issues Involved:
1. Disallowance of interest on loan from related parties.
2. Disallowance of employees' contribution to PF & ESI paid after the due date under relevant Acts but before the due date of filing the return of income under section 139(1) of the IT Act.

Issue-wise Detailed Analysis:

1. Disallowance of Interest on Loan from Related Parties:
The assessee challenged the disallowance of Rs. 1,50,528/- made on account of interest on loans from related parties. The assessee argued that the transactions of payment of interest to related parties were at Arm's Length Price (ALP) when compared using the Internal Comparable Uncontrolled Price (CUP) method. The assessee's Transfer Pricing Study Analysis showed that the average effective interest rate paid to unrelated parties, including brokerage, was 15.36%, whereas the interest paid to related parties was 15%. The Transfer Pricing Officer (TPO) rejected the Internal CUP method and applied the External CUP method, using the average SBI Base Rate plus 300 basis points, resulting in an ALP of 12.83%. This led to an adjustment of Rs. 6,53,288/-. The CIT (A) accepted the Internal CUP method but excluded brokerage, arriving at an ALP of 14.5%.

The Tribunal found no plausible reason for the TPO's rejection of the Internal CUP method. The assessee had almost equal numbers of transactions with related and unrelated parties, and the average effective interest rate paid to unrelated parties, including brokerage, was 15.36%. The Tribunal concluded that the payment of interest to related parties at 15% was at Arm's Length and within the tolerance range of (+)(-) 3% as per section 92C(2). Therefore, the addition sustained by the CIT (A) was deleted.

2. Disallowance of Employees' Contribution to PF & ESI:
The assessee contested the disallowance of Rs. 1,03,508/- for employees' contribution to PF & ESI, which was paid after the due date under the relevant Acts but before the due date of filing the return of income under section 139(1). The CIT (A) upheld the disallowance based on the decision of the Hon'ble Rajasthan High Court in the case of M/s. Rajasthan Renewable Energy Corporation Limited, where the issue was pending before the Supreme Court.

The Tribunal noted that the CIT (A) misunderstood the decision of the Hon'ble Rajasthan High Court. The Tribunal referred to its consistent view, including the case of Rajasthan Cottage Industries vs. ITO, where it was held that employees' contribution to PF & ESI paid before the due date of filing the return under section 139(1) should be allowed. The Tribunal cited the Hon'ble Supreme Court's dismissal of the Revenue's SLP against the decision in the case of PCIT vs. Rajasthan State Beverages Corporation Ltd., which supported the assessee's claim. Therefore, the disallowance made by the AO was deleted.

Conclusion:
The Tribunal allowed the appeal of the assessee, deleting the disallowance of interest on loans from related parties and the disallowance of employees' contribution to PF & ESI paid before the due date of filing the return of income under section 139(1). The order was pronounced in the open court on 04/09/2019.