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2018 (5) TMI 1633 - AT - Income TaxInitiation of revision proceedings u/s 263 - transfer pricing - interest free loans to associate companies out of borrowed capital - international transaction - Held that - assessee is a firm which is engaged in the business of providing infrastructure facilities to educational institutions - assessee had advanced an interest free loan being transaction of lending of money to its associate enterprise as per Sec. 92B(1) - thus the assessee who is under a statutory obligation to have filed the report in Form 3CEB has failed to do so - since assessee has advanced loan to its associated enterprise but had in blatant violation of the statutory obligation of form 3CEB - thus a reference shall be made to the TPO for determining the ALP. - Decided in favor of revenue. Disallowance of interest on borrowed capital u/s 36(1)(iii) - Held that - determining of ALP relates to the income to be charged including allowance for any expense or interest arising from any international transaction while for the disallowance under Sec. 36(1)(iii) relates to the claim of deduction from income - Decided in favor of assessee.
Issues Involved:
1. Legitimacy of the Principal Commissioner's revision of the assessment order under Section 263 of the Income Tax Act, 1961. 2. Applicability of Transfer Pricing provisions and the necessity of referring the transaction to the Transfer Pricing Officer (TPO). 3. The impact of the previous appellate order on the Principal Commissioner’s jurisdiction to revise the assessment order. Issue-Wise Detailed Analysis: 1. Legitimacy of the Principal Commissioner's Revision under Section 263: The assessee contested the revision of the assessment order by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263 of the Income Tax Act, 1961. The Pr. CIT observed that the assessee had advanced interest-free loans to its wholly owned subsidiary (WOS) while borrowing funds from banks, which should have been referred to the TPO for determining the arm’s length price (ALP). The failure to make such a reference rendered the assessment order erroneous and prejudicial to the interests of the revenue. The Pr. CIT issued a notice under Section 263, leading to the present appeal. 2. Applicability of Transfer Pricing Provisions and Necessity of Referring the Transaction to the TPO: The Pr. CIT noted that the assessee had entered into an international transaction by advancing interest-free loans to its WOS, which should have been referred to the TPO under Section 92CA(1) of the Act. The Pr. CIT held that the failure to refer the transaction to the TPO violated the CBDT Instruction No. 3/2003 and Instruction No. 3/2016, which mandated such references for international transactions. The assessee argued that the transaction was a shareholder function and not subject to transfer pricing provisions, and that the A.O. had considered the TP Study Report before making a disallowance under Section 36(1)(iii). However, the Tribunal upheld the Pr. CIT’s view that the order was erroneous due to the lack of reference to the TPO. 3. Impact of the Previous Appellate Order on the Principal Commissioner’s Jurisdiction: The assessee argued that the assessment order had already been subject to an appellate order by the Commissioner (Appeals), and hence, the Pr. CIT was not competent to revise it. The Pr. CIT countered that the appellate order did not address the issue of referring the international transaction to the TPO, and thus, the matter was still open for revision. The Tribunal agreed with the Pr. CIT, stating that the issue of determining the ALP of the interest on the loan to the WOS was distinct from the disallowance under Section 36(1)(iii) and had not been considered by the appellate authority. Therefore, the Pr. CIT retained the jurisdiction to revise the order under Section 263. Conclusion: The Tribunal found no merit in the assessee’s arguments and upheld the Pr. CIT’s order under Section 263. The Tribunal concluded that the assessment order was indeed erroneous and prejudicial to the interests of the revenue due to the A.O.’s failure to refer the international transaction to the TPO. Consequently, the appeal filed by the assessee was dismissed.
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