2021 (5) TMI 356 - AT - Income Tax

TP Adjustment - ALP Adjustment towards notional interest on receivables from Associated Enterprises - HELD THAT - Since, the transactions are cross-border, it would be appropriate to adopt LIBOR rate of interest while computing the notional interest on receivables from the AEs. This Bench of the Tribunal has held so on various earlier occasions with respect to the same issue. Further, it will also be appropriate for netting off the notional interest with respect to the debit and credit transaction with the assessee's AEs because when notional interest is charged on receivables the same should also be charged on payables. Therefore, in the case of the assessee we hereby hold that LIBOR rate of interest shall be adopted while computing the notional interest on receivables and payables for the transaction with AEs. Further, on considering the nature of trade of the assessee, we find it appropriate to fix the grace period of 30 days while computing the notional interest towards the debit and credit transaction with the AEs. It is ordered accordingly. Disallowance of club expenditure - AO made the addition stating same was not justified as business expenditure by the assessee in the Form-3CD - HELD THAT - As before us, the assessee has not substantiated that the expenditure was incurred for the purpose of the assessee's business. Hence, we hereby confirm the addition made by the ld. AO. Adhoc disallowance towards expenditure incurred on freight and towards expenditure incurred on repairs - HELD THAT - AO observed that there were several self-made vouchers which were not accessible for verification. Therefore, the Ld. AO estimated the disallowance of freight/transport expenses and with respect to repairs and other expenditure. Considering the facts and circumstances of the case, we do not find it necessary to interfere with the order of the ld. AO on the issue because it is an admitted fact that several Bills and Vouchers were not verifiable. - Decided against assessee.

Summary

Issues:
1. Arm's Length Price Adjustment towards notional interest on receivables from Associated Enterprises
2. Disallowance of club expenditure
3. Adhoc disallowance of expenditure on freight and repairs

Arm's Length Price Adjustment of ?99,626 towards notional interest on receivables from Associated Enterprises:
The appeal raised concerns about the addition of notional interest on receivables from the assessee's AEs while determining the Arm's Length Adjustment. The argument centered on the adoption of the LIBOR rate for cross-border transactions instead of the PLR rate of the State Bank of India. The Tribunal acknowledged the previous rulings favoring the use of LIBOR for similar issues. It was decided that the notional interest should be computed by netting off transactions with the same AEs, considering both debit and credit transactions. The Tribunal ruled in favor of adopting the LIBOR rate for interest calculations and allowed a grace period of 30 days for computing notional interest, aligning with the nature of the assessee's business.

Disallowance of club expenditure of ?2,41,139:
The dispute arose from the disallowance of club expenditure amounting to ?2,41,139 by the ld. AO, who deemed it unjustified as a business expense. The Tribunal upheld the disallowance as the assessee failed to substantiate that the expenditure was incurred for business purposes, as required by Form-3CD. Consequently, the addition made by the ld. AO for the club expenditure was confirmed.

Adhoc disallowance of ?10 lakh towards expenditure on freight and ?2 lakhs towards expenditure on repairs:
The ld. AO disallowed ?10 lakh for freight/transportation charges and ?2 lakhs for repairs and other expenses due to unverifiable self-made vouchers. The Tribunal, upon review, found no grounds to interfere with the ld. AO's decision, given the lack of verifiable bills and vouchers. The Tribunal upheld the adhoc disallowance based on the unverifiable nature of the expenses, leading to the partial allowance of the assessee's appeal.

In conclusion, the Tribunal partially allowed the appeal, addressing the issues related to the Arm's Length Price Adjustment, club expenditure disallowance, and adhoc disallowance of expenditure on freight and repairs. The judgment emphasized the importance of substantiating business expenses and adhering to appropriate interest rate calculations for cross-border transactions, ensuring a fair and justified assessment process.