2021 (5) TMI 862 - AT - Income Tax

Penalty u/s 271(1)(C) - transfer pricing adjustment/arms length price adjustment of International Transaction relation to quasi-capital - HELD THAT - Since the quantum additions have been deleted, by Tribunal for A.Y. 2009-10 and 2010-11 2020 (4) TMI 522 - ITAT AHMEDABAD therefore, penalty would not survive, hence we delete the penalty for A.Y. 2009-10 and 2010-11.- Decided in favour of assessee.

Summary

Issues Involved:
1. Imposition of penalty under Section 271(1)(c) of the Income Tax Act, 1961.
2. Determination of Arm’s Length Price (ALP) for international transactions.
3. Treatment of interest-free loans as quasi-equity.
4. Validity of penalty in light of deleted quantum additions.

Detailed Analysis:

1. Imposition of Penalty under Section 271(1)(c):
The assessee contested the penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961, arguing that there was neither concealment of income nor submission of inaccurate particulars of income. The penalty was initially levied by the Assessing Officer (AO) for the assessment years 2009-10 and 2010-11, amounting to ?41,81,930/- for each year. The CIT(A) confirmed the penalty, stating the assessee failed to benchmark its international transactions as required by Section 92C of the Act.

2. Determination of Arm’s Length Price (ALP) for International Transactions:
The case involved international transactions exceeding ?15 crore with a foreign associate. The Transfer Pricing Officer (TPO) made an upward adjustment of ?1,94,15,214/- to the total income, which was partially upheld by the CIT(A). The TPO did not accept the assessee's contention that the interest-free loans to its AE should be considered quasi-equity, instead treating them as loans requiring benchmarking at an arm's length interest rate of 6.42%.

3. Treatment of Interest-Free Loans as Quasi-Equity:
The Tribunal found that the interest-free loans were given to ensure the AE’s day-to-day functioning and were part of a series of transactions aimed at redeeming preference shares and bringing back capital to India. The Tribunal held that these transactions were in the nature of quasi-equity, where the substantive reward was the opportunity to own capital on favorable terms rather than interest. This characterization was supported by decisions in similar cases, such as Cadila Healthcare Limited and Bartronics India Ltd.

4. Validity of Penalty in Light of Deleted Quantum Additions:
The Tribunal noted that the quantum additions related to the transfer pricing adjustments were deleted in the assessee’s appeals for A.Y. 2009-10 and 2010-11. Since the quantum additions were the basis for the penalty, the deletion of these additions meant that the penalty could not survive. Therefore, the Tribunal deleted the penalties for both assessment years.

Conclusion:
The Tribunal concluded that the transactions in question were quasi-equity in nature, and the substantive reward was the opportunity to own capital rather than interest. Consequently, the quantum additions were deleted, leading to the deletion of the penalties under Section 271(1)(c) for the assessment years 2009-10 and 2010-11. The appeals filed by the assessee were allowed.

Order Pronounced:
The order was pronounced on 19th May 2021 as per Rule 34 of the Income Tax Appellate Tribunal, Rule 1963.