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2016 (8) TMI 415 - AT - Income TaxAddition on account of non-charging of interest on advance given towards supply of equipment by the assessee to its AE - Held that - The assessee has made advance of 10% of the contract price to its AE for offshore supply contract. The TPO was of the view that interest should be charged on such advances to AE. The TPO charged interest on advance paid by the assessee against supply of machinery as if such advance is loan to its AE, therefore interest is to be charged on such advance. The TPO has not brought any material on record to suggest that this is only a loan and therefore interest is to be charged. The TPO re-characterized the whole transaction and this is not permissible without any materials or evidence suggesting that such advance is only a loan. The assessee has made advance of 10% of the contract price to its AE for offshore supply contract. The TPO was of the view that interest should be charged on such advances to AE. The TPO charged interest on advance paid by the assessee against supply of machinery as if such advance is loan to its AE, therefore interest is to be charged on such advance. The TPO has not brought any material on record to suggest that this is only a loan and therefore interest is to be charged. The TPO re-characterized the whole transaction and this is not permissible without any materials or evidence suggesting that such advance is only a loan. - Decided in favour of assessee.
Issues Involved:
- Whether the Ld. CIT(A) erred in upholding the adjustments made by the Assessing Officer on account of non-charging of interest on advance given towards the supply of equipment by the assessee to its AE. Detailed Analysis: 1. Background and Facts: The assessee-company, a wholly owned subsidiary of Essar Steel India Ltd, was in the process of setting up an 8.0 MTPA integrated Iron Ore Pellet plant. For the assessment year 2008-09, the assessee filed a return declaring a total income of ?91,88,612/-. The case was referred to the TPO due to international transactions exceeding ?15 crores. The TPO proposed an adjustment of ?1,24,30,054/- on account of Arm’s Length Pricing of the International Transactions. This adjustment was based on the non-charging of interest on a trade advance given to the assessee's AE, Global Supplies (UAE) FZE. 2. Issue of Non-Charging of Interest: The core issue was whether the assessee should have charged interest on the trade advance made to its AE. The TPO argued that interest should be charged and determined an interest rate of 18.81% using the CUP method, resulting in an adjustment of ?1,24,30,054/-. The assessee contended that the advance was purely for the supply of equipment and not a loan, thus no interest was required. The Ld. CIT(A) upheld the TPO's view. 3. Assessee's Arguments: The assessee argued that the payment was a trade advance and not a loan. It was supported by a bank guarantee and was made for the procurement of machinery. The assessee provided evidence of the transaction and cited several case laws to argue that the TPO cannot re-characterize a transaction without material evidence. The assessee also contended that if interest were to be charged, it should be based on LIBOR rates, not the prime lending rate used by the TPO. 4. Departmental Representative's Position: The Ld. Departmental Representative supported the orders of the lower authorities, maintaining that the interest should be charged on the advance. 5. Tribunal's Findings: The Tribunal noted that the TPO had not provided any material evidence to suggest that the advance was a loan. The Tribunal referred to several case laws where it was held that the TPO cannot re-characterize a transaction without evidence of it being a sham or bogus. The Tribunal found that the advance was for the supply of machinery and thus, no interest was chargeable. The Tribunal directed the Assessing Officer to delete the addition made towards interest on the advances. 6. Conclusion: The Tribunal allowed the appeal of the assessee, concluding that the advance was for the supply of machinery and not a loan, and therefore, no interest should be charged. The addition made by the Assessing Officer was directed to be deleted. Order: The appeal of the assessee was allowed, and the order was pronounced in the open court on 22nd June 2016.
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