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2024 (7) TMI 493 - AT - Income TaxTP Adjustment - interest on External Commercial Borrowing (ECB) - TPO has benchmarked the transaction using CUP method and has used the SBI base rate as the CUP - as submitted since the AE has given the loan to its group concern there is no risk of non-recovery of the loan, therefore, no mark up is required - OECD Guidelines on the issue of determination of Arm s length Interest on the Loan taken from the AE - HELD THAT - When we read the OECD Guidelines on the issue of determination of Arm s length Interest on the Loan taken from the AE, one needs to consider and analyze many factors. In this case the Loan was provided by an AE situated in Netherland which is one of the holding companies. However, in the Transfer Pricing Study Report submitted by the assessee the Assessee has not carried out proper analysis of the transaction. No reason has been given by the assessee in the TPSR while considering the Weighted Average Lending Rate. The assessee has not carried out Credit rating analysis of the assessee. In any Loan the Credit rating of borrower is the most important factor. However, in this case the Assessee has not tried to understand its Credit rating. In the TPSR the assessee has mentioned that it has used Other Method for benchmarking the transaction. However, as per the Income tax Act no such other method is allowed. Thus, the Benchmarking Analysis of the impugned Interest claimed to have been carried out by the assessee suffers from many defects. TPO has applied State bank of India base rate. It is also a fact that normally no bank gives corporate loan at the Base rate of Interest. The exact dates of the Loan disbursements are also not mentioned in the Transfer Pricing Study Report of the assessee or Form 3CD. There is an Advance of Rs. 10294,00,000/- by the Assessee to Air Products and Chemicals Inc USA. In the TPSR it is merely mentioned that the said advance is for supply of capital goods for Phase 2 of Kochi Project, however no specific schedule for delivery of the capital goods is mentioned. An independent third party while giving Loan will analyse all such advances given by the assessee. Interest Rates in other Countries - Interest expenses are mainly on account of this impugned ECB. When we have analysed these Financials, it is observed that Revenue has grown 3.5 times, the profit before Interest and Depreciation has also grown almost 12 times. Any Financial Corporations/Banks considers projected Future Revenue and Projected Future Profit of the company before deciding the rate of interest to be charged on the Loan. In this case we have already analysed that the Assessee s Revenue has increased 3.5 times and its Phase 2 was to commence .There are no earlier Loans in the Balance Sheet. Therefore, as per FAR analysis the Risk involved in the Loan given to the assessee seems to be minimal. Therefore, we agree with the DRP that the Arm s Length Interest should be SBI base rate plus 25 basis points. Assessee had paid Interest at 10% and 10.5% pa at compounded rate. In the Agreement it is mentioned that if Assessee fails to pay any of the Instalment of Interest, the same will be added to the Principal amount, this results in Interest on Interest(the relevant terms of the loan agreement we have already reproduced). As per the Terms of the Loan the tax if any in India is to-be paid by the Assessee who is borrower and not the Lender. However, in India, the tax on Interest paid by the borrower is always the responsibility of the Lender, the borrower do not have to pay the tax on the interest paid. In India Banks do not calculate Interest on Loan in this way. Therefore, the Interest paid by the Assessee to its AE on the impugned ECB is not at Arm s Length. Accordingly, we confirm that the Arm s Length Interest in this case should be SBI base rate plus 25 basis points for the impugned Loan, which will be simple interest. Validity of the Final Assessment Order - ACIT jurisdiction as per the provisions of Section 144B to pass final assessment order u/s 144B - HELD THAT - As per Section 144B(8) of the Act the ld.Pr.Chief Commissioner of Income Tax may transfer any case to the jurisdictional Assessing Officer after obtaining permission from the CBDT. In this case the Ld.DR filed copy of the report of the Assessing Officer. Copy of this report was also provided to the ld.AR. The said report contains reproduction of the order sheet, which is maintained on the Income tax system called ITBA. As per the Order sheet the case of the assessee was transferred to the Jurisdictional Assessing Officer after obtaining permission from the CBDT. AR has not produced any documentary evidence to rebut the facts recorded in the order sheet. Therefore, the Case of the assessee was duly transferred to the Jurisdictional Assessing Officer after obtaining due permission of the CBDT as per the Section 144B(8) of the Act. Therefore, the Jurisdictional Assessing Officer (JAO) had due authority of the law to pass the Final Assessment Order as per the Act once he has received the case on transfer as section 144B(8) of the Act. Accordingly, the Jurisdictional Assessing Officer, passed the final Assessment order. Hence, we do not find any illegality in the impugned Final Assessment Order. Assessee appeal dismissed.
Issues Involved:
1. Jurisdiction of the Assessing Officer as per Section 144B. 2. Transfer Pricing adjustment related to the interest on External Commercial Borrowing (ECB). 3. Rejection of the alternate benchmarking analysis. 4. Initiation of penalty proceedings under Section 274 r.w.s. 270. Detailed Analysis: Issue 1: Jurisdiction of the Assessing Officer as per Section 144B - Ground Raised: The assessee challenged the validity of the final assessment order, arguing that it was passed without proper jurisdiction as per the provisions of Section 144B, rendering it null and void. - Submission by Ld. AR: The Ld. AR argued that the final assessment order was not passed by the National Faceless Assessment Centre (NFAC) but by the Jurisdictional Assessing Officer (JAO), and no approval from the CBDT for transferring the case to the JAO was on record. - Submission by Ld. DR: The Ld. DR countered that the case was transferred to the JAO with the approval of the CBDT as per CBDT circular 225/97/2021/ITA-II dated 06/09/2021. - Findings and Analysis: The Tribunal found that the case was indeed transferred to the JAO with the approval of CBDT as per Section 144B(8) of the Act. The order sheet noting confirmed this transfer. Therefore, the JAO had the authority to pass the final assessment order, and the ground raised by the assessee was dismissed. Issue 2: Transfer Pricing Adjustment Related to the Interest on ECB - Ground Raised: The assessee contested the TP adjustment of INR 75,00,000, arguing that the international transactions pertaining to interest on ECB were at arm's length. - Submission by Ld. AR: The Ld. AR explained that the assessee used the Weighted Average Lending Rate (WALR) of various banks to benchmark the interest rate and insisted that there should be an appropriate markup over the SBI base rate. The Ld. AR also cited the Safe Harbour Rules and relevant case laws. - Submission by Ld. DR: The Ld. DR argued that the TPO used the Comparable Uncontrolled Price (CUP) method, applying the SBI base rate without any markup, as the loan was from an AE with minimal credit risk. - Findings and Analysis: The Tribunal noted that the assessee did not conduct a proper credit rating analysis and used an "Other Method" not recognized under the Income Tax Act. The TPO's application of the SBI base rate plus 25 basis points was deemed appropriate given the minimal risk involved. The Tribunal confirmed that the interest paid by the assessee was not at arm's length and upheld the TP adjustment. Issue 3: Rejection of the Alternate Benchmarking Analysis - Ground Raised: The assessee argued that the Ld. DRP, Ld. ACIT, and Ld. TPO erred in rejecting the alternate benchmarking analysis using the range of normal lending rates of various banks. - Findings and Analysis: The Tribunal found that the alternate benchmarking analysis was flawed due to the lack of a proper credit rating analysis and reliance on an unrecognized method. The Tribunal upheld the rejection of the alternate benchmarking analysis. Issue 4: Initiation of Penalty Proceedings under Section 274 r.w.s. 270 - Ground Raised: The assessee challenged the initiation of penalty proceedings. - Findings and Analysis: The Tribunal deemed the issue of penalty proceedings as premature and did not adjudicate on it. The ground was rejected as unadjudicated. Conclusion: The appeal of the assessee was dismissed, and the Tribunal upheld the final assessment order, confirming the TP adjustment and rejecting the grounds related to jurisdiction and alternate benchmarking analysis. The issue of penalty proceedings was considered premature and not adjudicated. The order was pronounced in the open court on 14th Dec, 2023.
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