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2023 (7) TMI 899 - AT - Income TaxTP upward adjustment on account of interest free loan to AE - Assessee has provided interest-free advances to its associated enterprises - HELD THAT - Question whether any adjustment is required under TP provision on account of such interest erosion advances is in negative because the assessee got such huge business from its associated enterprises, which would not have been possible until the assessee had not incorporated a company in UAE and DRC. Transaction for advancing the interest-free loans to the associated enterprises has to be seen in the context of the benefit received by it from such associated enterprises. Transaction of interest free loans/ advances viz a viz the benefit received by the assessee are intrinsic ably linked which has to be evaluated after aggregating both the transactions. Transaction of interest free advances cannot be viewed without considering the benefit derived by the assessee from the associated enterprises. On analyzing the notional interest added by the TPO under the transfer pricing adjustment with the benefit derived by the assessee, the interest cost appears to be negligible. The amount of interest cost as compared amount of gross import of material and export generated by the assessee is far more than the interest expenses after converting in India rupees. No adjustment under the transfer pricing provisions is required to be made with respect to the interest free loans and advances by the assessee to its associated enterprises in the given facts and circumstances. Hence, the ground of appeal of the assessee is allowed.
Issues Involved:
1. Upward adjustment of Rs. 28,33,393/- under Section 92CA of the Income Tax Act, 1961. 2. Determination of Arm's Length Price (ALP) for international transactions. 3. Application of Comparable Uncontrolled Price (CUP) method versus Transaction Net Margin Method (TNMM). 4. Segregation of transactions for ALP determination. 5. Charging of interest under Sections 234A, 234B, 234C, and 234D. 6. Initiation of penalty proceedings under Section 271(1)(c). 7. Timeliness of the assessment order under Section 143(3) read with Section 254. Summary: 1. Upward Adjustment of Rs. 28,33,393/-: The primary issue raised by the assessee was the confirmation of an upward adjustment of Rs. 28,33,393/- by the CIT(A) on account of interest-free loans to its Associated Enterprise (AE). The assessee argued that the loan was for commercial expediency to ensure the seamless supply of raw materials, and thus, no adjustment should be made. However, the AO/TPO rejected this contention and applied the LIBOR + 2% rate, resulting in the upward adjustment. 2. Determination of ALP: The assessee contended that the ALP of the interest-free loan should be determined using the TNMM method, as all transactions with the AE were interlinked. The AO/TPO, however, applied the CUP method, which the CIT(A) upheld, citing the ITAT Delhi decision in Perot Systems TSI (India) Ltd. 3. CUP vs. TNMM: The CIT(A) held that the CUP method was the most appropriate for determining the ALP of the interest-free loan. The assessee's argument that the TNMM method should be used was rejected on the grounds that interest income/expenses do not form part of operating profit unless the principal business is giving loans. 4. Segregation of Transactions: The assessee argued that the interest-free loan transaction should not be viewed in isolation but aggregated with other transactions with the AE. The Tribunal agreed, stating that the transactions were interlinked and should be evaluated in aggregate for working out the ALP. Consequently, no adjustment was required. 5. Charging of Interest under Sections 234A, 234B, 234C, and 234D: The assessee raised grounds against the charging of interest under Sections 234A, 234B, 234C, and 234D. However, these grounds were not specifically addressed in the Tribunal's decision. 6. Penalty Proceedings under Section 271(1)(c): The assessee also contested the initiation of penalty proceedings under Section 271(1)(c), but this issue was not elaborated upon in the judgment. 7. Timeliness of the Assessment Order: The assessee filed additional grounds claiming that the assessment order passed under Section 143(3) read with Section 254 was barred by limitation. However, these additional grounds were dismissed as not pressed by the assessee. Conclusion: The Tribunal held that no adjustment under the transfer pricing provisions was required for the interest-free loans and advances given by the assessee to its AE, considering the transactions in aggregate. The appeals for the assessment years 2006-07, 2007-08, and 2008-09 were partly allowed. The additional grounds of appeal regarding the timeliness of the assessment order were dismissed as not pressed.
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