2023 (6) TMI 1385 - AT - Income Tax

TP adjustment in respect of payment of royalty - assessee had benchmarked the transaction of payment of royalty by using Comparable Uncontrolled Price (CUP) method to justify the arm s length of the transaction - HELD THAT - TPO rejected the methods adopted by the assessee and determined the ALP transaction at 1%. TPO had relied on earlier Assessment Orders which was upheld by the DRP. In earlier Assessment Years, the ALP of payment of royalty was restricted to 1%. The DRP rejected the objections of the assessee by relying on the directions issued in assessee s own case for Assessment Years 2011-12 to 2014-15 and 2016-17 2023 (3) TMI 1296 - ITAT BANGALORE We find that the Tribunal on identical issue in assessee s own case for Assessment Years 2009-10 to 2016-17 and Assessment Year 2018-19 2023 (2) TMI 1306 - ITAT BENGALURU had held that the payment of royalty is to be accepted as being at arm s length. Thus we hold that the payment of royalty by the assessee is to be treated at arm s length. It is ordered accordingly. In the result, grounds are allowed. Payment of interest on CCDs, premium expenditure on repayment of CCDs and interest on RDBs - TPO treated the CCDs as equity and held that the payments made to the AEs are not in the nature of interest - TPO, upon holding the arm s length price of interest payment on CCDs to be NIL - HELD THAT - As in assessee s own case for Assessment Years 2014-15 and 2015-16 2022 (12) TMI 534 - ITAT BANGALORE had restored the matter to the files of the AO/TPO wherein as admittedly held that finding of TPO is not by invoking Thin Capitalisation principle and therefore, it has to be decided independently. We find that the decision of TPO is bases on RBI policy of FDI. We all know that RBI policy of FDI is governed by this that what will be future repayment obligation in convertible foreign currency and since, CCDs does not have any repayment obligation, the same was considered by RBI as equity for FDI policy. Now the question is that such treatment given by RBI for FDI policy can be applied in every aspect of CCDs. Whether the holder of CCDs before ins conversion can have voting rights? Whether dividend can be paid on CCDs before its conversion? In our considered opinion, the reply to these questions is a BIG NO. On the same logic, in our considered opinion, till the date of conversion, for allowability of interest u/s 36 (1) (iii) of Income tax Act also, such CCDs are to be considered as Debt only and interest thereon has to be allowed and it cannot be disallowed by saying that CCDs are equity and not debt. Admittedly, the CCDs are issued in INR, interest is paid in INR and CCD s are repaid also in INR. Therefore, placing reliance on the judgment of Cotton Naturals (I) Pvt. Ltd. 2015 (3) TMI 1031 - DELHI HIGH COURT , we hold that the TP study of the assessee to justify the interest rate by arriving at average rupee cost and comparing the same with SBI prime lending rate is correct. It is ordered accordingly. Short deduction of TDS - As contended that assessee is eligible for credit of tax deducted at source - HELD THAT - AO is directed to examine whether the assessee is entitled to the entire credit claimed and pass order after affording a reasonable opportunity of being heard to the assessee. In the result, ground No.5 is allowed for statistical purposes

Summary

Issues Involved:
1. TP adjustment of Rs. 51,76,98,493/- in respect of payment of royalty.
2. TP adjustment of Rs. 326,04,19,415/- in respect of payment of interest on CCDs, premium expenditure on repayment of CCDs, and interest on RDBs.
3. Short credit of tax deducted at source.

Summary:

1. TP Adjustment of Rs. 51,76,98,493/- (Payment of Royalty):
The Tribunal addressed the issue of TP adjustment of Rs. 51,76,98,493/- for royalty payment by the assessee to its AE. The assessee argued that this issue had been previously decided in its favor for earlier assessment years, where the payment of royalty was held to be at arm's length. The Tribunal noted that the assessee had benchmarked the transaction using the Comparable Uncontrolled Price (CUP) method and the Transactional Net Margin Method (TNMM), both concluding the transaction to be at arm's length. However, the TPO had restricted the ALP transaction to 1%, relying on earlier assessment orders. The Tribunal found that in earlier years, the payment of royalty at 4% was accepted as at arm's length. Therefore, following the precedent, the Tribunal held that the payment of royalty by the assessee for the current year should also be treated as at arm's length and allowed the grounds in favor of the assessee.

2. TP Adjustment of Rs. 326,04,19,415/- (Interest on CCDs, Premium Expenditure on Repayment of CCDs, and Interest on RDBs):
The assessee contested the TP adjustment of Rs. 326,04,19,415/- related to interest on CCDs, premium expenditure on repayment of CCDs, and interest on RDBs. The TPO had recharacterized CCDs as equity and held the payments as non-interest in nature, determining the arm's length price of interest payment on CCDs to be NIL. The DRP upheld the TPO's order. The assessee argued that the TPO and DRP erred in treating CCDs as equity and cited previous Tribunal decisions, including its own case, where CCDs were considered debt until conversion. The Tribunal, referencing its earlier decisions and the case of CAE Flight Training (India) Pvt. Ltd., reiterated that CCDs are debt until conversion and recharacterization is impermissible. The Tribunal restored the matter to the files of the AO/TPO to pass fresh orders, complying with the Tribunal's direction for earlier assessment years. Thus, the grounds were partly allowed for statistical purposes.

3. Short Credit of Tax Deducted at Source:
The assessee claimed a short credit of TDS amounting to Rs. 6,39,26,468/-, whereas the AO had granted credit for Rs. 6,33,49,371/-. The Tribunal directed the AO to examine the entitlement of the entire credit claimed by the assessee and pass an order after providing a reasonable opportunity of being heard. Consequently, this ground was allowed for statistical purposes.

Conclusion:
The appeal filed by the assessee was partly allowed, with specific directions for fresh orders on TP adjustments and examination of TDS credit.