2024 (5) TMI 101 - AT - Income Tax

Penalty levied u/s 271(1)(c) - Transfer pricing adjustment - assessee advanced interest free loan to its AE - Assessee has not charged interest on such loan and therefore till the stage of Tribunal adjustment on account of interest has been confirmed which has been reduced by applying LIBOR 300 bps - HELD THAT - We find that it is not in dispute that assessee had advanced loan to its AE out of which part has been repaid to the assessee. When this was pointed out assessee has explained that the entire working capital loan was extended out of own funds of the assessee company and these were in the nature of investment in the form of equity / quasi-equity as part of investment so as to promote business in Asian region to support international customers for aircraft sales. Apart from that assessee has disclosed all the particulars of income including ALP of interest in the TP study report by claiming that no interest is chargeable on this transaction. Though assessee has given explanation before the ld. TPO / ld. AO however the same has not been accepted. The assessee has explained all the reasons for not charging of interest due to various reasons and also one of the important explanations was that these investments were in the form of equity / quasi equity then in that case there could not have been any issue of imputing any interest even under TP provisions. What was the extent of the investment in equity / quasi equity has not been elaborated however the contention of the assessee is that it has given partly that capital loan out of its own funds and has also justified the reasons for not imputing interest then such explanation can be said to be not bonafide and does not lead to inference that assessee has furnished inaccurate particulars. Accordingly penalty levied by the ld. AO in both the years are deleted. Appeals of the assessee allowed.

Summary

Issues:
The judgment involves penalty proceedings u/s. 271(1)(c) for A.Yrs. 2009-10 and 2010-11 based on international transactions with an associated enterprise (AE) regarding an interest-free working capital loan.

Issue 1: Proper Satisfaction and Charge Specification for Penalty Proceedings

The assessee contested the penalty imposed u/s. 271(1)(c) citing lack of proper satisfaction and charge specification by the AO. The counsel argued that the loan extended to the AE was from the assessee's own funds and constituted an investment in equity/quasi-equity to promote business in the Asian region, justifying the absence of interest charges. The AO's penalty levy on both charges was deemed unsustainable. The Tribunal found that the explanations provided by the assessee regarding the nature of the loan and the absence of interest charges were reasonable, leading to the deletion of the penalties for both years.

Issue 2: Adjustment on Interest Amount and Deemed Concealment of Income

Explanation 7 to Section 271(1)(c) was invoked to levy penalties for inaccurate particulars of income due to the interest-free loan. The AO considered the adjustment made by the TPO as deemed income concealment, as the assessee did not charge interest on the loan. The Tribunal noted that the assessee had disclosed all relevant details, including the arm's length price of interest, in the TP study report. Despite the explanations provided by the assessee for not levying interest, the AO's decision to impose penalties was overturned due to the lack of bonafide intent and inaccurate particulars.

Conclusion:
The Tribunal ruled in favor of the assessee, deleting the penalties imposed u/s. 271(1)(c) for both A.Yrs. 2009-10 and 2010-11, based on the explanations provided regarding the interest-free working capital loan extended to the associated enterprise. The judgment emphasized the importance of bonafide intent and reasonable justifications in determining the accuracy of particulars furnished in such cases.