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2017 (1) TMI 1096 - AT - Income TaxWaiver of principal amount of loan - taxable in this year either u/s 28(iv) or u/s 41(1) - Held that - If the loan amount have taken for the purpose of acquisition of capital asset, then it remains in the capital field even at the time of remission and such a capital receipt cannot be taxed wither u/s 28(iv) or u/s 41(1). Accordingly, the order of the ld. CIT(A) is reversed and the grounds raised by the assessee are allowed.
Issues Involved:
1. Transfer Pricing Adjustment on account of international transactions. 2. Addition made under section 28(iv) read with section 41(1) on account of waiver of principal loan. 3. Disallowance of interest under section 36(1)(iii) attributable to capital work-in-progress. 4. Amount under section 14A while calculating the book profit under section 115JB. Issue-Wise Detailed Analysis: 1. Transfer Pricing Adjustment: The assessee's appeal involved a transfer pricing adjustment of ?1,34,84,283/- related to the sale of Polyester film products to Associated Enterprises (AEs) in the US and UK. The assessee used the Comparable Uncontrolled Price (CUP) method for benchmarking, comparing the average price charged to AEs with the price charged to local customers. The Transfer Pricing Officer (TPO) rejected this approach due to geographical differences and instead compared the average non-AE export price with the AE price, resulting in an adjustment of ?2,76,45,771/-. The CIT(A) confirmed the adjustment but allowed a standard deduction of (+/-) 5%. The Tribunal noted that in previous years (A.Y. 2005-06 and 2006-07), similar issues were remanded to the TPO/AO to apply the Transactional Net Margin Method (TNMM) as the most appropriate method. Following this precedent, the Tribunal set aside the current transfer pricing adjustment back to the TPO/AO for fresh analysis using TNMM. 2. Addition under Section 28(iv) read with Section 41(1): The assessee had availed a loan from IDBI Bank for setting up a manufacturing facility and later took a loan from Vijaya Bank to repay the IDBI loan. During A.Y. 2007-08, the assessee negotiated a one-time settlement with Vijaya Bank, resulting in a waiver of ?5,81,12,110/-, including a principal amount of ?3,52,78,000/- and interest of ?2,28,33,410/-. The assessee treated the waiver of the principal amount as a capital receipt, not chargeable to tax. The AO, however, added the waiver to the income under sections 28(iv) and 41(1), relying on the decision in T.V. Sundaram Iyengar & Sons Ltd. The CIT(A) confirmed the AO's decision, distinguishing the case from Mahindra & Mahindra Ltd. The Tribunal, however, found that the loan was for the acquisition of a capital asset, and the waiver of such a loan is not taxable under sections 28(iv) or 41(1), following the precedent set by Mahindra & Mahindra Ltd. and Softworks Computers Pvt. Ltd. Consequently, the Tribunal reversed the CIT(A)'s order and allowed the assessee's appeal on this ground. 3. Disallowance of Interest under Section 36(1)(iii): The assessee did not press the ground related to the disallowance of interest amounting to ?17,57,732/- under section 36(1)(iii) attributable to capital work-in-progress. Consequently, this ground was treated as dismissed. 4. Amount under Section 14A while calculating Book Profit under Section 115JB: Similarly, the assessee did not press the ground related to the amount of ?2,71,000/- under section 14A while calculating the book profit under section 115JB. This ground was also treated as dismissed. Revenue’s Appeal: The Revenue challenged the CIT(A)'s decision to restrict the transfer pricing adjustment to ?1,34,84,283/- and allow a relief of ?1,41,61,488/-. The Tribunal noted that the CIT(A)'s observation regarding a standard deduction of (+/-) 5% was incorrect as the statute does not provide for such a deduction. Since the Tribunal had already remanded the transfer pricing issue to the TPO/AO, the Revenue's appeal was allowed, enabling the AO to make a fresh ALP determination using TNMM. Conclusion: The appeal filed by the assessee was partly allowed, and the appeal filed by the Revenue was allowed. The Tribunal directed the TPO/AO to re-examine the transfer pricing adjustment using TNMM and carry out a fresh comparability analysis. The waiver of the principal loan amount was held not taxable under sections 28(iv) or 41(1), following the precedent set by higher judicial authorities.
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