2019 (12) TMI 370 - AT - Income Tax

Transfer Pricing (TP) adjustment - payment of corporate charges - assessee was receiving the intra group services from its AEs, which were allocated among the group companies - benchmarking of international transaction with AEs - The margin of the assessee worked out to 25.54% as against the mean margins of comparables selected by the assessee, at 14.79%. The TPO however, was of the view that the assessee had failed to establish its case of receipt of economic and commercial benefits from such payment - Held that - where the assessee had demonstrated the need for the services and had also produced evidence of availment of such services and had also established the benefit derived from the said services, and where those services were neither deliberative in nature nor were shareholder activities, then the said availment of the intra-group services being inter linked with the other international transaction, then the same should be benchmarked on aggregate basis by adopting the Transactional Net Margin Method as the most appropriate method. - Upward additions deleted. Interest on foreign currency loan extended to the AE. - TPO applied the Comparable Uncontrolled Price method to benchmark the aforesaid international transaction - Held that - where the transaction is in foreign currency, then the rate of interest is to be applied is LIBOR plus. In the present case, it may also be pointed out that the loan was advanced after taking permission of the RBI and even the rate of interest was approved. - no transfer pricing adjustment needs to be made in the hands of the assessee on account of interest on foreign currency loan wherein the assessee himself had charged interest @ LIBOR 150 basis points. - Additions deleted. Re-characterizing the inter-company receivables as unsecured loan extended by the assessee to its AEs. - Held that - where the operating profit margin shown by the assessee from its transactions with its AEs was higher than the mean margins of the comparable companies, then no separate adjustment could be made on account of imputing interest on outstanding receivables. In any case, the aforesaid receivables have been received by the assessee as and when due and the same could not be re-characterized as unsecured loan. - Adjustments deleted. Depreciation of goodwill arising out of amalgamation - methodology approved as part of scheme of amalgamation - Held that - the assessee to be entitled to claim depreciation on goodwill, as per the rates applicable for the year under consideration. Claim of deduction u/s 43B of the Act in respect of leave encashment and gratuity paid - Amount was paid before due date of filing of return - Held that - inadvertently, the assessee did not claim the said deduction in the return of income filed for the year under consideration. We hold that the assessee is entitled to the aforesaid claim subject to verification by the Assessing Officer. Sundry credit balances outstanding from past three years - addition u/s 41(1) - According to AO, the liability had seized to exist. - Held that - where the creditors are outstanding in the books of accounts of the assessee and they have not been reversed, then such outstanding balance of creditors cannot be treated as income of the assessee. - Additions deleted. Capital loss - Computation of capital gain on sale of shares - The Assessing Officer has disallowed the loss claimed by the assessee on the ground that the method adopted by the assessee for valuing its shares on the date of sale suffers from ambiguity. - Held that - Assessing Officer cannot make any adjustment/addition by not accepting the sale consideration received by the assessee. The reference to the valuation report which was filed by the Assessing Officer before the RBI cannot be the basis for reworking the capital gains in the hands of the assessee, where the assessee had entered into equity purchase agreement dated 25.08.2011, wherein 800 shares were sold by the assessee at a price of JPY 35 million. - Claim of loss is allowed.

Issues Involved:
1. Transfer Pricing Adjustment on Corporate Charges
2. Interest on Foreign Currency Loan
3. Re-characterization of Inter-Company Receivables
4. Depreciation on Goodwill
5. Credit of Tax Deducted at Source (TDS)
6. Levy of Interest under Section 234A, 234B, and 234C of the Income Tax Act
7. ESOP Expenses
8. Interest on Receivables

Detailed Analysis:

1. Transfer Pricing Adjustment on Corporate Charges:
The assessee contested the transfer pricing adjustment made on account of payment of corporate charges to its associated enterprises (AE). The Transfer Pricing Officer (TPO) determined the arms-length price (ALP) of the corporate charges at NIL, citing lack of evidence of services received and benefits derived. The Dispute Resolution Panel (DRP) upheld the TPO's decision. The Tribunal, however, found that the assessee had demonstrated the need for services, produced evidence of availment, and established benefits derived. The Tribunal concluded that the Transactional Net Margin Method (TNMM) was the most appropriate method and directed the deletion of the upward adjustment of ?3.66 crores.

2. Interest on Foreign Currency Loan:
The TPO applied a higher interest rate to benchmark the interest on foreign currency loans extended to the AE, resulting in an adjustment. The DRP upheld the adjustment but reduced the interest rate. The Tribunal held that the transaction being in foreign currency should be benchmarked using LIBOR plus basis points, not the prime lending rate. The Tribunal directed the deletion of the adjustment, aligning with the assessee's practice of charging interest at LIBOR + 150 basis points.

3. Re-characterization of Inter-Company Receivables:
The TPO re-characterized outstanding receivables as unsecured loans and imputed notional interest, leading to an adjustment. The Tribunal found no merit in the deeming adjustment and held that where the operating profit margin from transactions with AEs was higher than the mean margins of comparable companies, no separate adjustment was warranted. The Tribunal directed the deletion of the adjustment.

4. Depreciation on Goodwill:
The assessee claimed depreciation on goodwill arising from the amalgamation of two companies. The DRP and Assessing Officer disallowed the claim, citing lack of proper valuation of assets. The Tribunal, referencing its earlier decision and the Supreme Court's ruling in CIT vs. Smifs Securities Ltd., allowed the claim, holding that goodwill is an intangible asset eligible for depreciation under section 32 of the Act.

5. Credit of Tax Deducted at Source (TDS):
The assessee claimed that the Assessing Officer failed to allow credit for TDS on subsequent certificates received. The Tribunal directed the Assessing Officer to verify and allow the credit of TDS claimed by the assessee.

6. Levy of Interest under Section 234A, 234B, and 234C of the Income Tax Act:
The assessee contested the levy of interest under sections 234A, 234B, and 234C. The Tribunal directed the Assessing Officer to verify the timely filing of the return and adjust the interest charges accordingly, noting that interest under section 234A is chargeable only if the return is filed late.

7. ESOP Expenses:
The assessee claimed deduction for reimbursement of ESOP expenses to the parent company, which the Assessing Officer disallowed. The Tribunal held that ESOP expenses are deductible as business expenditure under section 37(1) of the Act, referencing judicial precedents. The Tribunal also clarified that tax deduction at source is required when the employee exercises the option, not at the time of reimbursement.

8. Interest on Receivables:
The TPO made an adjustment for notional interest on delayed receivables. The Tribunal held that such receivables could not be re-characterized as unsecured loans and deleted the adjustment, aligning with the decision in the assessee's own case for the previous assessment year.

Conclusion:
The Tribunal provided detailed rulings on each issue, often referencing judicial precedents and earlier decisions in the assessee's own cases. The Tribunal's decisions favored the assessee on most counts, directing deletions of various adjustments and disallowances made by the TPO and DRP.

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