2023 (10) TMI 1051 - AT - Income Tax

TP Adjustment - deemed to be associated enterprises - international transaction involving payment of interest on non-convertible debentures to DB International (Asia) Ltd - As submitted that assessee and M/s. DB International (Asia) Limited are not the AE and, therefore, the transfer pricing adjustment done by the TPO/DRP are without any merit - HELD THAT - Section 92A(2) provides that two enterprises shall be deemed to be associated enterprises if at any time during the previous year any condition mentioned in sub-clause (2) is fulfilled. The legislature had deliberately used at any time during the previous year for the purpose of determining the status of an enterprise as AE, if at any time either prior to or thereafter of entering into transactions, the condition is fulfilled. Thus, the contention of the assessee that the status of the enterprise should be examined before entering into the transaction is contrary to the literal meaning of section 92A(2) of the Act which has not restricted the application of the provision, based on prior or subsequent transaction. In view of the above, we are of the opinion that it makes no difference whether the condition of 51% of the book value of total assets is not fulfilled prior to advancing the loan or subsequent thereto. In view of the above, this objection of the assessee is also without any basis and accordingly dismissed. TPO had applied the real estate filter for selecting the comparables - From the reading of the TP study of the assessee (executive summary) and also the submissions made by the assessee before the DRP it is clear that the assessee is in the business of developing building and leasing of life sciences and bio- technological parks which in our view is nothing but a real estate activity and, therefore, the authorities below have committed no error in taking the real estate filter as an appropriate filter for selecting the comparables. In view of the above, this issue is also decided against the assessee. Credit Rating Filter and Tenor Filter - The credit rating of the enterprise like the assessee is an important criteria/factor which determines the eligibility of the borrower and will also impact the interest rate and terms of the funding. The credit rating of GRICL which was AAA/Stable cannot be compared with that of the assessee having credit rating of BB- SO. Therefore, in our view the learned DRP as well as the TP. We find in the case DCIT v JSW Energy Ltd 2019 (11) TMI 800 - ITAT MUMBAI it was held that credit rating is an important factor for quantifying the spread and benchmarking the interest on loan from AE's. The GRICL in our opinion cannot be said to be the comparable with the assessee company on both the counts, namely, on the credit rating and term of the NCD. In view of above, we are of the opinion that the rate of interest paid on the NCD by GRICL cannot be compared with the rate of interest paid by the assessee to M/s. DB International (Asia) Limited. Having held that the interest paid by the GRICL cannot be compared with the interest paid by the assessee on the NCD to M/s. DB International (Asia) Limited, now the question that remained un- answered is at what would be the appropriate interest rate on NCD. Undoubtedly, strictly speaking, Safe Harbour Rules are only applicable if a person exercises a valid option for application of safe harbour rule in accordance with Rule 10TE. Though, in the present case, the assessee had not opted for Safe Harbour Rule, however, Rule 10TD(5) provides that in case the advancing of intra group loans referred to in item No.IV of Rule 10TC exceeds Rs.50,00,00.000/- (fifty crore), then the interest rate declared in relation to the eligible international transaction is not less than base rate of State Bank of India as on 30th June of the relevant previous year 300 basis points. The assessee is engaged in the business of developing, building and leasing of life-sciences and bio- technology parks in India and these activities of the assessee are essentially in the nature of real estate business and, therefore, the RBI circular dt. 01/01/2016 bearing No. RBI/FED/2015-16/2 is not applicable to the activities of the assessee. The finding recorded by the DRP that SBI base rate plus a nominal premium of 50 basis points as ALP, is incorrect as no basis of 50 nominal basis wih was given by the DRP. In fact, the comparable selected by the Assessing Officer namely, Mahua Bharatpur Express Ltd., was paying the interest @ 18% (SBI PLR 400 basis points). Similarly, Assetz Premium Holdings Pvt. Limited was paying the interest @ 14%. These two comparables selected by the Assessing Officer were excluded by the DRP on the pretext that the NCDs were subscribed by the related parties. As held hereinabove, Gujarat Road Infrastructure Company Limited cannot be compared with the assessee for the reasons mentioned hereinabove and therefore, there is no comparable available with which the rate of the assessee can be compared as DRP has also not relied upon TP Study of TPO as well as assessee for the reasons in conclusive . In this scenario, we deem it appropriate to take a guidance from the Safe Harbour Rule and Section194 LD and hold that 12.275% interest rate (SBI base rate 300 basis points) would be the appropriate ALP for the purposes of benchmarking the interest paid by the assessee on NCD to M/s. DB International as against 13.13%. Thus, the ground nos. 2 to 8 of the assessee are partly allowed. ALP of international transaction involving payment of debenture issue expenses by the Assessee to Deutsche Bank AG (Mumbai Branch) - HELD THAT - Admittedly, the assessee has benchmarked the expenses paid to its deemed AE as international transaction and therefore, had mentioned in its TP Study. The assessee has paid the interest @ 2.5% to Deutsche Bank, AG, Mumbai Branch for facilitating the issuance of NCD to DB International (Asia) Limited. TPO / DRP both have determined the ALP at 0.5% as against 2.5% on the pretext that the assessee being AE of Deutsche Bank, Mumbai and further, the assessee has not provided any comparable instance of debenture issue for the purposes of benchmarking the expenses / bank charges. Assessee had claimed 2.5% on actual basis whereas the DRP has restricted it to 0.5% on estimate basis. In our view, both the views cannot be approved by us as no person can earn the profit from himself . This principle applies to the fact to the present case as DB International had been held to be AE of the assessee for the reasons mentioned hereinabove, and therefore, to issue the NCD by the branch of DB International, it is highly improbable that they will charge 2.5% as expenses for issuing the debenture / bank charges. In view of the above and also on the account of the fact that the DRP has estimated it at 0.5%, we are of the opinion that a balance is required to be drawn between the rights of the assessee and as well as the Revenue, and therefore, we restrict the determination of ALP by the TPO at 1.5% as against 2.5% paid by the assessee. Addition u/s 56(2)(viia) - TPO rejected the valuation report on the pretext that the terminal value of the cash flow is less than the net wort and benchmarked the transaction as deemed international transaction under Rule 11U and 11UA of Income Tax Rules r.w.s. 56(2)(viia) - HELD THAT - For the purposes of determining the fair market value, the guiding principle has been provided by the Act for the benefit of the assessing authority i.e., to adopt the valuation as per the balance sheet drawn on the date of transfer subject to it being audited. This should be the basis of making the valuation by the assessing officer for making the addition under section 56(2)(viia) of the Act. Further the law does not expect the assessee to perform the impossible act. It is unimaginable that the assessee will get its accounts audited on the date of drawing up of the balance sheet itself. The accounting standard provides that the accounts of the assessee are required to be audited after the finalization of balance sheet and even it has provided that the subsequent events occurring after the balance sheet date can also be factored in while finalizing the audited accounts. Our above said view is fortified in Electra Paper and Board Private Ltd 2022 (1) TMI 1316 - ITAT CHANDIGARH held that it is justifiable to accept the unaudited balance sheet as on the valuation date when the same has been audited at a later date with no material variance in the financials. In the present case, the audit of balance sheet drawn as on 31.08.2016 was completed on 31.03.2018 after taking into account financials as on 31.08.2016. In view of the above, we hold that the balance sheet as drawn on 31.08.2016 being the closest approximation to the balance sheet on valuation date (date of transfer) should be considered under Rule 11U(b)(ii) read with Rule 11UA(1)(c)(b). The finding of DRP recorded in paragraphs 2.7.2 and 2.7.3 are not in accordance with law and, therefore, we set aside the same. The assessing officer is duty-bound to calculate the fair market value of the shares as per the balance sheet drawn on 31.08.2016. Therefore, the addition made in the hands of the assessee based on the balance sheet as on 31 March 2016, is held to be without any basis and therefore, we quash the same. Value of the land, which is the subject matter of the present dispute, has not been higher as compared to the guidance value. In the present case, the financial statement was drawn up on 30.09.2016 and the audit took place on 31.03.2018. Therefore, as per SA 700, the audit date would be 30.09.2016. In our considered opinion, the impairment of assets has taken place prior to the drawing of the balance-sheet and after the end of the financial year 31.03.2016, therefore, the auditor was obliged to take into account this event while auditing the balance sheet as on 30.09.2016 as per SA-560. Therefore, the valuation arrived by the assessee on the basis of the working and determining the Fair Market Value cannot be faulted with. As on December 12, 2017, the Hon ble National Company Law Tribunal, Hyderabad Bench, sanctioned a scheme of demerger between Takshila Tech Parks and Incubators (India) Private Limited (Demerged Company) and MN Takshshila Industries Private Limited ( Resulting Company ). Pursuant to the scheme, all assets and liabilities pertaining to the demerged business of the Demerged company have been transferred and vested with Resultant company with retrospective effect from October 1 2016. The consideration for the demerger to the equity shareholders of the demerged company has been discharged by issuance of equity shares of the Resulting Company. Pursuant to the provisions of the scheme, the value of investment in the demerged company in the books of the resulting company is to be suitably adjusted considering the net assets transferred pursuant to demerger. In the said scheme of merger, the valuation of the assets were also considered and no objections were raised as to the valuation of the fixed assets acquired by the assessee. The scheme of amalgamation was statutory and therefore, it also shows that the valuation adopted by the assessee was appropriate. For the reasons stated hereinabove, the ground raised by the assessee with respect to Section 56(ii)(via) are allowed. Addition u/s 14A r.w.s. Rule 8D - DRP confirmed the disallowance made by AO on the pretext that 14A is applicable even if there is no exempt income received by the assessee - HELD THAT - The present case is covered by the decision of Cheminvest Ltd 2015 (9) TMI 238 - DELHI HIGH COURT wherein the Court has held that the expression 'does not form part of the total income' in section 14A of the Act means that there should be an actual receipt of income which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year. In the present case, no exempt income has been earned by the assessee from the investment made by it and therefore, no disallowance can be made by the Assessing Officer. Therefore we are of the considered opinion that the ground raised by the assessee is required to be allowed as there is no exempt income for the year under consideration. Disallowance of TDS Credit - assessee submitted that as per Section 199 TDS deducted on the income assessed in the hands of the assessee should be considered as the taxes paid by the assessee and TDS credit should be allowed to the assessee to offer the corresponding income, when the genuineness of TDS credit was not in dispute - HELD THAT - On perusal of the draft assessment order, we find that during the course of assessment proceedings, though the Assessing Officer had not raised any doubts on the correctness / legitimacy of the TDS credits claimed in the ITR filed by the assessee but however, allowed only the TDS credit appearing in form 26AS of the assessee. In view of the above circumstances, we deem it appropriate to remand this issue to the file of Assessing Officer for the limited purpose of verification of the correctness of the TDS credits claimed by the assessee in its income tax return and thereafter, give a categorical finding in its order. In the light of the above, we remand the issue of TDS claim for re-adjudication to the jurisdictional Assessing Officer. Needless to say that the assessee shall file all the documents as and when called for by the Assessing Officer / TPO. Thus, this ground of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Addition under Section 56(2)(viia) of the Income-tax Act
3. Disallowance under Section 14A of the Income-tax Act
4. TDS Credit

Summary:

1. Transfer Pricing Adjustment:
The assessee contested the transfer pricing adjustments made by the AO/DRP, arguing that DB International (Asia) Limited was not an associated enterprise (AE) and that the transactions were conducted on a principal-to-principal basis. The Tribunal upheld the application of transfer pricing regulations, stating that the relationship between the entities must be assessed at any time during the previous year, not just at the time of entering into the transaction. The Tribunal also found errors in the rejection of the TP study by the TPO/DRP, particularly in the application of the real estate filter and the selection of comparables. The Tribunal concluded that the interest rate on NCDs should be benchmarked at SBI base rate plus 300 basis points, resulting in an ALP of 12.275%, and partly allowed the grounds raised by the assessee.

2. Addition under Section 56(2)(viia) of the Income-tax Act:
The assessee challenged the addition made under Section 56(2)(viia) based on the valuation of shares of TTPL. The Tribunal held that the balance sheet as on the valuation date (04.10.2016) should be considered for determining the fair market value (FMV) of the shares. The Tribunal found that the DRP had erred in directing the AO to use the balance sheet as on 31.03.2016 and in not considering the impairment loss recorded in the books. The Tribunal set aside the addition made by the AO and directed the AO to delete the addition of Rs. 57,92,15,385.

3. Disallowance under Section 14A of the Income-tax Act:
The assessee contested the disallowance made under Section 14A, arguing that no exempt income was earned during the year. The Tribunal agreed with the assessee, citing various judicial precedents, including the Delhi High Court's decision in Cheminvest Ltd. v. CIT, which held that Section 14A does not apply if no exempt income is received or receivable during the relevant previous year. The Tribunal directed the AO to delete the disallowance of Rs. 37,86,302 for A.Y. 2017-18 and Rs. 37,75,415 for A.Y. 2018-19.

4. TDS Credit:
The assessee argued that the AO had not granted TDS credit of Rs. 3,11,17,286 without verifying the facts. The Tribunal remanded the issue to the AO for verification of the correctness of the TDS credits claimed by the assessee in its income tax return and directed the AO to give a categorical finding in its order.

Conclusion:
The appeals were partly allowed, with the Tribunal providing relief on the issues of transfer pricing adjustment, addition under Section 56(2)(viia), and disallowance under Section 14A, while remanding the issue of TDS credit for further verification.