2022 (9) TMI 1593 - AT - Income Tax

TP adjustment - interest paid on Non-convertible Debentures (NCDs) issued by the assessee to its Associated Enterprise (AE) - TPO not considering the effective rate of interest taking into account the moratorium period - assessee benchmarked the said transactions using CUP method - TPO did not accept the effective rate considered by the assessee and made the TP adjustment by applying the coupon rate of 15% as interest on Tranche I II of NCDs - DRP rejected the objections raised by the assessee on the ground that there is an option available to the assessee to pre-pay the interest and therefore the effective rate of interest cannot be compared for computing the ALP. HELD THAT - As in Goodyear South Asia Tyres P. Ltd. 2014 (12) TMI 349 - ITAT PUNE clearly laid out the ratio that it would be appropriate to compute effective rate of interest in respect of international transaction of loan entered into with the associated enterprise before carrying out the exercise of benchmarking such international transactions vis- -vis the arm's length price/interest of the comparable uncontrolled transactions. In assessee s case, though the coupon rate agreed is at 15% and 14.25%, there is a moratorium clause whereby assessee is having a moratorium period of 60 months for Tranche-I, 58 months 11 days for Tranche-II and 24 months for Tranche-III. The assessee in the TP study has also given a detailed working for arriving at effective rate of interest (Annexure 3.1 to 3.3 of TP study) after considering the said moratorium period. Lower authorities have not considered the said working and have rejected the same on the ground that assessee has debited the Profit Loss account with interest accrued at 15% / 14.25% and also on the ground that there is a pre-payment of interest clause in the agreement. This, in our considered view, is not the correct approach since the time value of money needs to be considered and debit to the Profit Loss account is not the relevant factor for determination of ALP. Assessee has not paid any amount towards interest to the AE till date and as per the submissions of the ld AR, the assessee is in talks with the AE for extension of the moratorium period. This factual position has not been considered by the TPO/DRP. Thus we remit the issue back to the TPO to analyse the transfer pricing study done by the assessee afresh. considering case of Goodyear South Asia Tyres P. Ltd. (supra) and the comparables chosen by the assessee. Assessee s appeal is allowed for statistical purposes.

Summary

Issues Involved:
1. Transfer pricing adjustment on account of interest paid on Non-convertible Debentures (NCDs) issued to Associated Enterprise (AE).
2. Consideration of moratorium period in determining the effective rate of interest for arm's length price (ALP).

Summary:

Issue 1: Transfer Pricing Adjustment on Interest Paid on NCDs
The appeal concerns the transfer pricing adjustment made by the TPO on the interest paid by the assessee on NCDs issued to its AE. The assessee, engaged in real estate development, issued NCDs in three tranches with accrued interest rates of 15% p.a. for the first two tranches and 14.25% p.a. for the third tranche. The total interest accrued amounted to INR 23,03,62,501. The assessee used the Comparable Uncontrolled Price (CUP) method to benchmark these transactions, concluding that the interest rates were within the arm's length price. However, the TPO did not accept the effective rate of interest considered by the assessee and made a TP adjustment of INR 4,97,51,100 by applying the coupon rate of 15% as interest on Tranche I & II of NCDs. The DRP upheld this adjustment, rejecting the assessee's objections.

Issue 2: Consideration of Moratorium Period in Determining Effective Rate of Interest
The primary contention was whether the moratorium period should be factored in while determining the effective rate of interest for ALP. The assessee argued that the effective rate of interest, considering the moratorium period, was lower than the agreed coupon rate due to savings in cash outflow and the time value of money. The Pune Bench of the Tribunal in Goodyear South Asia Tyres P. Ltd. held that it is appropriate to compute the effective rate of interest considering the moratorium period before benchmarking such international transactions. The Tribunal noted that the lower authorities did not consider the detailed working provided by the assessee for arriving at the effective rate of interest and rejected it based on the interest accrued in the Profit & Loss account and the pre-payment clause in the agreement. The Tribunal found this approach incorrect, emphasizing the need to consider the time value of money and the factual position that no interest was paid to the AE till date.

Conclusion:
The Tribunal remitted the issue back to the TPO to re-analyze the transfer pricing study done by the assessee afresh, directing the TPO to consider the ratio laid down in the Goodyear South Asia Tyres P. Ltd. case and the comparables chosen by the assessee. The assessee's appeal was allowed for statistical purposes, and the rest of the grounds raised by the assessee regarding the TP adjustment were left open.