2019 (4) TMI 1021 - AT - Income Tax

Transfer pricing adjustment - benchmarking the interests on the loans - applying LIBOR rate of currency of invoice raised plus suitable basis points - HELD THAT - Hon ble Jurisdictional High Court in the case of CIT Vs. Cotton Naturals (I) Pvt. Ltd. 2015 (3) TMI 1031 - DELHI HIGH COURT has clearly held that while benchmarking the interests on the loans, the LIBOR rate of currency in which the loan has been raised, should be applied. We direct Ld. AO/TPO to benchmark the transaction applying LIBOR rate of currency of invoice raised plus suitable basis points. Since, we have adjudicated the alternative prayer of the assessee, we are not deciding the other argument of the learned counsel challenging the international transaction of interest on overdue receivables. Accordingly, grounds no. 1 to 3 of the appeal are partly allowed. Disallowance under Section 14A read with Rule 8D(2)(iii) - HELD THAT - As relying on VIREET INVESTMENT (P.) LTD. 2017 (6) TMI 1124 - ITAT DELHI we direct the Assessing Officer to accordingly restrict the disallowance under Section 14A read with Rule 8D(2)(iii) of the Rules to average value of investment which yield exempt income during the year. The ground of the appeal is partly allowed.

Summary

Issues Involved:
1. Transfer Pricing Adjustment on Delayed Payments
2. Jurisdictional Error in Reference to Transfer Pricing Officer (TPO)
3. Disallowance under Section 14A of the Income Tax Act

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment on Delayed Payments:
The assessee contested the transfer pricing adjustment of ?5,95,999/- related to delayed payments from its Associated Enterprises (AEs). The core argument was that interest on overdue receivables, being incidental to the main transaction of sale of goods, should not be treated as a separate international transaction. The assessee argued that the working capital adjusted margins already accounted for the delay in receivables, referencing the judgment in Principal CIT Vs. Kusum Health Care Pvt. Ltd. The Tribunal, following the Delhi High Court’s ruling in CIT Vs. Cotton Naturals (I) Pvt. Ltd., directed the Assessing Officer (AO) and TPO to benchmark the transaction using the LIBOR rate plus suitable basis points instead of the SBI PLR rate. Consequently, grounds no. 1 to 3 of the appeal were partly allowed.

2. Jurisdictional Error in Reference to TPO:
The assessee claimed a jurisdictional error, arguing that the AO did not record reasons in the draft assessment order for referring the matter to the TPO for computation of Arm’s Length Price (ALP) as required under section 92CA(1) of the Income Tax Act. However, this issue was not separately adjudicated as the Tribunal resolved the transfer pricing adjustment by directing the use of the LIBOR rate.

3. Disallowance under Section 14A of the Income Tax Act:
The assessee challenged the disallowance of ?16,11,000/- under Section 14A read with Rule 8D of the Income Tax Rules. The AO had computed the disallowance considering the average value of the investment, which was contested by the assessee. The Tribunal, referencing the Special Bench decision in Vireet Investment Pvt. Ltd., directed that only investments yielding exempt income should be considered for disallowance under Rule 8D(2)(iii). Consequently, the Tribunal instructed the AO to restrict the disallowance accordingly, partly allowing ground no. 4 of the appeal.

Conclusion:
The appeal was partly allowed, with the Tribunal directing adjustments in the transfer pricing calculation using the LIBOR rate and restricting the disallowance under Section 14A to investments yielding exempt income. The judgment emphasized adherence to judicial precedents and pragmatic application of interest rates in transfer pricing cases.