2017 (5) TMI 636 - AT - Income Tax

Arm s length compensation paid @2.5% on account of corporate guarantees - Held that - AO had made the addition purely on ad-hoc basis without making any study of comparables whereas assessee has carried out proper transfer pricing study and had arrived at the benchmarking value at Nil. Our attention was also drawn on the transfer pricing study report submitted by the assessee before the lower authorities. According to the Ld. Counsel, no addition was required to be made as per the transfer pricing study report. Thus, the addition @1% has been made by the assessee voluntarily with a view to curtail the litigation. Under these circumstances, Hon ble ITAT has accepted the claim o the assessee in right spirit and as a matter of consistency; the same view should be allowed to be adopted in this year also. We agree with the submissions of the Ld. Counsel since a view has already been taken by the Tribunal after proper deliberations and analysis of facts of this case. Thus, as a matter of consistency, we hereby follow the view taken by the Tribunal for AYs 2009-10 2010-11 and direct the AO to accept the addition @1% as has been proposed by the assessee. Determining the arm s length price pertaining to subscription and redemption of preference share capital by re-characterising the same as interest from loan and thereby computing notional interest thereon - Held that - In this ground assessee is aggrieved by the action of the lower authorities in denying the benefit of carry forward of current year s capital loss on account of preference shares. This ground is consequential to the issue of characterization of preferential shares as interest free loans. Therefore, this ground is restored back to the file of the AO with the direction to verify the facts and follow the aforesaid order of the Tribunal for AYs 2009-10 & 2010-11. This ground may be treated as allowed, for statistical purpose. Disallowance of interest u/s 36(1)(iii) - Held that - Tribunal decided this issue in favour of the assessee for AYs 2009-10 & 2010-11 wherein held where the assessee has substantial own funds, then presumption is that assessee has given advance to its sister concern from its own funds. The view taken by the Tribunal is applicable on the facts of this year as well. Therefore, respectfully following the order of the Tribunal, this ground is allowed in favour of the assessee and the AO is directed to delete the disallowance on account of interest. Short credit of TDS - as submitted by assessee that the AO should be directed to grant additional TDS credit of the said amount as per form 26-AS filed by the assessee along with rectification application date 23-03-2017 - Held that - We find force in the request of the assessee and, therefore, direct the AO to verify the facts and grant the benefit of TDS, as per law. The AO should also dispose of the rectification application pending in this regard.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Corporate Guarantee Adjustment
3. Subscription and Redemption of Preference Shares
4. Disallowance of Interest Expense
5. Consequential Adjustments and Carry Forward of Capital Loss
6. Charging of Interest under Sections 234B, 234D, and 244A
7. Initiation of Penalty Proceedings under Section 271(1)(c)
8. Short Credit of TDS

Detailed Analysis:

1. Transfer Pricing Adjustments:
The appellant challenged the adjustments made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO) to the total income, alleging that the AO/DRP violated judicial discipline by disregarding previous Tribunal decisions in similar cases. The Tribunal dismissed the general grounds 1 to 4.

2. Corporate Guarantee Adjustment:
The AO/TPO had determined an arm’s length compensation of 2.5% for corporate guarantees extended by the appellant, resulting in an adjustment of ?31,03,25,000. The appellant argued that previous Tribunal decisions for AY 2009-10 and 2010-11 had accepted a 1% rate. The Tribunal agreed with the appellant, directing the AO to accept the 1% rate for consistency and reduce the adjustment accordingly.

3. Subscription and Redemption of Preference Shares:
The AO/TPO re-characterized the subscription and redemption of preference shares as interest-free loans, imputing notional interest. The appellant contended that this issue was already decided in their favor for AYs 2009-10 and 2010-11. The Tribunal agreed, stating that the TPO cannot re-characterize share subscriptions as loans without exceptional circumstances. The AO was directed to follow the Tribunal’s previous orders and delete the adjustment.

4. Disallowance of Interest Expense:
The AO disallowed interest expenses under Section 36(1)(iii), claiming the appellant had not established commercial expediency for advancing interest-free loans to subsidiaries. The appellant argued that no fresh loans were received during the year and that advances were made from surplus funds, not borrowed funds. The Tribunal, referencing its decision for AYs 2009-10 and 2010-11, agreed with the appellant and directed the AO to delete the disallowance.

5. Consequential Adjustments and Carry Forward of Capital Loss:
The AO denied the carry forward of capital loss on account of preference shares, which was consequential to the re-characterization issue. The Tribunal restored this matter to the AO for verification and directed adherence to the Tribunal’s previous orders.

6. Charging of Interest under Sections 234B, 234D, and 244A:
The appellant contested the charging of interest under Sections 234B, 234D, and 244A. The Tribunal dismissed these grounds as consequential.

7. Initiation of Penalty Proceedings under Section 271(1)(c):
The appellant challenged the initiation of penalty proceedings under Section 271(1)(c). The Tribunal did not provide a specific ruling on this issue, implying it was dismissed or deemed consequential.

8. Short Credit of TDS:
For AY 2012-13, the appellant raised an issue regarding short credit of TDS amounting to ?85,51,088. The Tribunal directed the AO to verify the facts and grant the TDS credit as per law, also instructing the AO to dispose of the pending rectification application.

Conclusion:
Both appeals were partly allowed, with the Tribunal directing the AO to follow its previous orders for AYs 2009-10 and 2010-11 on several issues, thereby reducing the adjustments and disallowances made by the AO/TPO. The Tribunal emphasized consistency and adherence to judicial discipline in transfer pricing matters and other related issues.