2022 (10) TMI 1170 - AT - Income Tax

TP Adjustment - management service charges - TPO alleged that no services were received by the assessee - HELD THAT - The present assessee has submitted evidences in support of rendering of services which have been held to be routine activities in nature. Finally, considering the facts of the case, the impugned adjustment confirmed by ld. DRP could not be sustained. AO is directed to re-compute the income of the assessee. TP Adjustment on FCCD - assessee issued debentures to its AE M/s Flakt Woods Cyprus Ltd. and paid interest @12% - HELD THAT - The term debentures, in its ordinary sense, denote one of the modes for borrowing money by any company in exercise of its borrowing powers. The instrument imports an obligation or a covenant to pay. It is a repayment of the loans of the money borrowed by issue of debentures. Thus, the debentures are essential borrowing of money against interest with a certain other rights. Benchmarking interest rate as applicable to lending of money may be applied to determine ALP of these transactions. Considering the same, the adjudication of Ld. DRP determining the ALP as Nil could not be upheld. The convertible debentures may give ownership rights to the holders but the rights accrue only at a future date and till such time, the holder is entitled to receive interest on such holding. Since the debentures are denominated in Indian Rupees, the same, in our considered opinion, could be benchmarked at SBI Prime Lending Rate with mark-up of 2% considering the fact that the assessee has credit rating of BB (S P). AO / Ld. TPO is directed to re-compute TP adjustment accordingly.

Summary

Issues Involved:
1. Transfer Pricing (TP) Adjustment on Management Service Charges
2. TP Adjustment on Fully & Compulsorily Convertible Debentures (FCCD)
3. Disallowance of unpaid leave encashment under Section 43B
4. Levy of interest under Section 234B and 234D

Detailed Analysis:

1. Transfer Pricing (TP) Adjustment on Management Service Charges
The assessee paid Rs. 898.30 Lacs to its Associated Enterprises (AE) under a management service agreement dated 15.12.2002, which included varied services like international marketing, product support, administrative services, etc. The assessee used the Transactional Net Margin Method (TNMM) and offered no TP adjustment. The Transfer Pricing Officer (TPO) rejected TNMM and adopted the Comparable Uncontrolled Price (CUP) method, determining the Arm's Length Price (ALP) to be NIL. The TPO questioned the necessity and actual receipt of services, alleging duplication of services. The Dispute Resolution Panel (DRP) upheld the application of the CUP method and confirmed ALP at NIL, primarily applying the need and benefit test. However, the Tribunal found that the assessee had been receiving these services since 2002 and had provided sufficient evidence of rendering services, including email correspondences. The Tribunal noted that the TPO's role was to determine the ALP, not to judge the business needs of the assessee. The Tribunal concluded that the TP adjustment confirmed by the DRP could not be sustained and directed the AO to re-compute the income.

2. TP Adjustment on Fully & Compulsorily Convertible Debentures (FCCD)
The assessee issued FCCDs to its AE and paid interest at 12%. The TPO, using data from public domain for unsecured CCDs, computed the average ALP rate at 3.4%. The TPO observed that FCCDs carry an inherent option to convert, which is not the case in typical loan transactions, and thus, the interest rate should be lower. The DRP held that FCCDs should be considered either as equity or advance for share capital, treating the funds as FDI and not ECB. Consequently, the ALP rate was considered NIL. The Tribunal, however, referred to the Supreme Court's ruling in R.D. Goyal v. Reliance Industries Ltd., which held that debentures are instruments of debt and not share capital. The Tribunal concluded that the benchmarking interest rate applicable to lending of money should be applied to determine the ALP of these transactions. The Tribunal directed the AO/TPO to re-compute the TP adjustment using the SBI Prime Lending Rate with a mark-up of 2%, considering the assessee's credit rating.

3. Disallowance of Unpaid Leave Encashment under Section 43B
The issue of disallowance of unpaid leave encashment amounting to Rs. 17,51,000/- under Section 43B was not pressed before the Tribunal and therefore, did not require specific adjudication.

4. Levy of Interest under Section 234B and 234D
The grounds related to the levy of interest under Sections 234B and 234D were considered consequential in nature and did not require specific adjudication.

Conclusion
The assessee's appeal was partly allowed. The Tribunal directed the AO to re-compute the income and TP adjustments as per the Tribunal's findings. The order was pronounced on 31st October 2022 at Chennai.