2024 (4) TMI 451 - AT - Income Tax

Transfer Pricing Adjustments - Purchase of Development Rights - capital transactions and their treatment - Right to Protest - Applicability of clause (i) of section 92BA as omitted from 01.04.2017 - validity of transfer pricing reference of a specified domestic transaction - Assesee had claimed that in view of the omission of clause (1) of section 92BA with effect from 01.04.2017 action taken under that clause is invalid and bad in law - HELD THAT - We find no force in the contention of the ld. DR that as the assessee had prepared a transfer pricing report and had disclosed specified domestic transaction in Form 3CEB which is to be furnished u/s 92E of the Act disclosing international transactions and specified domestic transaction, therefore, the assessee cannot now escape from the liability to get this transaction benchmarked and so the TPO was justified to make the adjustments. DR has himself admitted that the assessee while filing the transfer pricing study report had mentioned that as a matter of abundant caution the transaction is being reported for the purpose of section 92E of the Act. We are of the considered view that when the law had provided for penalty in case of non-compliance of a provision of the Act and the assessee reserving a right to protest at appropriate stage, makes the compliance, the assessee cannot be estopped by own act and conduct to dispute the applicability of the said provisions during the assessment. Without much indulgence on our part, we would like to rely on the order of the Mumbai Bench of the Tribunal in the case of Siro Slimpharma Pvt. Ltd. 2021 (10) TMI 754 - ITAT MUMBAI wherein while dealing with somewhat similar question of law, the Mumbai Tribunal has indicated that in the absence of judgment of Jurisdictional High Court, the non-jurisdictional High Court judgment has persuasive value and should be generally followed. We have also taken into consideration the order relied by ld. DR in the case of Firemenich Aromatics (India) Pvt. Ltd. 2020 (7) TMI 658 - ITAT MUMBAI and the order of Yorkn Tech Pvt, Ltd. 2021 (8) TMI 1374 - ITAT DELHI relied by ld. AR and there is no doubt the coordinate Bench at Delhi has distinguished the Mumbai Bench order in the case of Firemenich Aromatics (India) Pvt. Ltd. (supra) and held that even after the judgement of the Hon ble Supreme Court in the case of Shree Bhagwati Steel Rolling Mills 2015 (11) TMI 1172 - SUPREME COURT and Fiber Boards Pvt. Ltd. 2015 (8) TMI 482 - SUPREME COURT clause (i) of section 92BA which has been omitted from 01.04.2017 has to be considered to have never been part of the statute and, accordingly, no transfer pricing adjustment can be made on a domestic transaction. We will also like to distinguish the Mumbai Tribunal order in Firemenich Aromatics (India) Pvt. Ltd. (supra) by observing that in that case the issue was with regard to omission of sub-section (2A) of section 253 of the Act which was initially inserted by Finance Act, 2014 with retrospective effect from 01.06.2013 and which was then omitted by Finance Act, 2016 from 01.06.2016. The said provisions related to right to file appeal and in that case, the AO had filed the appeal during the currency of section 253(2A) of the Act and for that reason, the Mumbai Bench had considered the issue of repeal/omission made in a statute and the consequences thereof. Since right to appeal is a substantive and, certainly, if it was there in the statute when the appeal was filed and, subsequently, if the statute had omitted the provision, the substantive right of appeal vested in a party would not be taken away by holding the repeal to be retrospective. However, in the case in hand, a substantive provision, being infact a charging provision, has been omitted/deleted and consequently benefit of the same has to be given to the assessee. Thus, we are inclined to follow the Hon ble Karnataka High Court judgement and, on that basis, the additional ground raised by the assessee deserves to be allowed and consequently the whole exercise done by ld. AO to bench mark the transaction of purchase of development right, stands being void. Most appropriate method for benchmarking the transaction - Assessee has claimed that it has chosen the Other method being average of Sales Comparable Method and Discounted Cash Flow Method. Ld. TPO has discarded the two methods applied for arriving the average for valuation of transaction and instead the Ld. TPO adopted Circle rate as most appropriate method of valuation - principles applicable to land acquisition matters where market value is determined on the bases of certain parameters peculiar to the parties and property - HELD THAT - We find no fault in valuation arrived using the relevant parameters and adding premium or discounting, the value, on those parameters. The Valuer s Report is quite in conformity with the principles and method by which market value of a real estate property should generally be arrived at Discounted cash flow (DCF) refers to a valuation method that estimates the value of an investment using its expected future cash flows. DCF analysis attempts to determine the value of an investment today, based on projections of how much money that investment will generate in the future. In case of real estate project, initial cost, annual cost, estimated income, and holding period of a property are some of the variables used in a DCF analysis. We are of considered view that more than to determine the profitability, but to atleast ensure the viability, of an investment, DCF method is often used in real estate sector. DCF method is not only applicable where the assets-based approach is applied and the value of a business is derived from the FMV of the assets (tangible and intangible) less the liabilities. But in case of real estate development projects the income-based approach of the DCF method, is more appropriate method, as rightly applied by the valuer. Thus absence of tangibles could not have been basis to discard the DCF method. Now coming to the wisdom of TPO to apply circle rates to make adjustment we are in agreement with Ld. AR that certainly the circle rates never are correct reflection of the market rates. Circle rates are merely fair market value of the land for fiscal purposes but cannot be considered to be market value. When a transaction involving land is to be benchmarked, then the market value is more realistic parameter for making the adjustment and not the circle rates. Thus at one end, the Ld. CIT(A) and Ld. TPO have fallen in error in invoking the provisions of Section 92CA of the Act and on the other hand in discarding the valuation report and to substitute it with circle rate. Disallowance of claim of expense - disallowance is primarily on basis that no business income has been earned by the assessee during the year - HELD THAT - It seems that Ld. AO completely blind folded himself to the nature of business activity of the assessee and as to in what mode the revenue will be generated over the years. As we examine the break-up of claim of expenses aggregating to Rs. 77.56,593/- coupled with audited financial statement, we find that the expenses appears to be of routine business expenses. However, as Ld. AO was not given relevant details and same require verification, we deem it justified to restore this issue back to the files of Ld. AO, and accordingly the ground no. 6 is allowed for statistical purposes. TP Adjustment u/s 92CA - interest paid to AE on CCD/OCD - assessee company has benchmarked the transaction based on CUP method and the ALP of interest was determined at 15% based on 47 comparables - TPO rejected the comparables so selected by the assessee company and coupon rate of 10.25% was treated as ALP based on 2 separate comparable - HELD THAT - We are of considered view that Ld. CIT(A) has thoughtfully taken into consideration the facts in wholesome manner and has adopted a judicious approach by considering median @16% based on 49 comparables i.e. 47 comparables selected by assessee company as well as 2 by TPO. Even if the 2 comparables were not of same industry but as the assessee does not object to their inclusion, the order of Ld. CIT(A) cannot be faulted. There is no apparent infirmity requiring our indulgence. Accordingly, the grounds so raised have no substance.

Summary

Issues Involved:

1. Purchase of Development Rights
2. Disallowance of Business Expenditure
3. Transfer Pricing Adjustment on Interest on CCDs/OCDs

Summary:

1. Purchase of Development Rights:

Non-Applicability of Transfer Pricing Provisions u/s 92BA(i):
The assessee argued that the omission of clause (i) to Section 92BA by Finance Act 2017 should apply retrospectively, making the transfer pricing provisions inapplicable for AY 2016-17. The Ld. CIT(A) dismissed this, citing that the omission is effective from 01.04.2017 and does not apply retrospectively.

Capitalization of Development Rights:
The assessee contended that since the payment for development rights was capitalized and not debited to the Profit & Loss Account, transfer pricing provisions should not apply. The Ld. CIT(A) rejected this, stating that the nature of the transaction remains revenue in nature for a real estate developer, irrespective of capitalization.

Valuation Report by Cushman & Wakefield:
The Ld. CIT(A) upheld the TPO's rejection of the valuation report, noting that the comparables used were not appropriate and the DCF method was not suitable for land valuation.

Application of Circle Rates:
The Ld. CIT(A) agreed with the TPO that circle rates serve as the most appropriate benchmark for determining the arm's length price of the transaction, despite the assessee's argument that circle rates are only indicative for stamp duty purposes.

Benefit of Tolerance/Safe Harbour Limit:
The Ld. CIT(A) did not allow the benefit of the tolerance limit of 5%/10%, as the amended provisions of section 92C are of clarificatory and retrospective nature.

2. Disallowance of Business Expenditure:

The Ld. CIT(A) upheld the disallowance of Rs. 75,48,006, stating that these expenses were not incurred wholly and exclusively for the purpose of the business. The assessee argued that the expenses were fully supported by relevant bills and vouchers.

3. Transfer Pricing Adjustment on Interest on CCDs/OCDs:

The Revenue argued that the Ld. CIT(A) erred in deleting the transfer pricing addition on the issue of interest on CCDs/OCDs. The Ld. CIT(A) found that the TPO did not apply the correct industry filter and that the comparables selected by the TPO were not similar to the assessee's company. The Ld. CIT(A) directed to consider the 47 comparables selected by the assessee and added the two comparables chosen by the TPO, resulting in a median interest rate higher than the 15% paid by the assessee, thus deleting the adjustment.

Conclusion:

The Tribunal allowed the appeal of the assessee regarding the non-applicability of transfer pricing provisions u/s 92BA(i) and the valuation method for development rights. The disallowance of business expenditure was remanded back to the AO for verification. The Tribunal dismissed the Revenue's appeal on the transfer pricing adjustment on interest on CCDs/OCDs.