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2022 (12) TMI 527 - AT - Income TaxTP Adjustment - Addition made by the A.O. in the draft assessment order - application of CUP method as MAM - HELD THAT - The arm s length rate of interest in CCDs was arrived @8.58% as per Bloomberg database. The assessee applied the same rate of interest both in foreign AE and domestic AE. No other uncontrolled comparable is determined during the TP study under CUP method. The application of CUP method as MAM without taking care the risk adjustment in terms of Rule 10B(1)(e )(iii) of the Rules, which are generally involved in a third-party transaction vis - vis between AEs to facilitate maintain the level and was not transaction of rendering actual service to AE. The benchmarking done by the appellant by way of search conducted on NSE, BSE NSDL comprising of following 7 comparable should be accepted in TP study by the TPO. Revenue in TP study had considered the interest paid on loans in the oil, gas and infrastructure industries as comparable to interest on CCDs under cup method. So, the two comparables from list of comparable selected by the TPO be rejected as per the ground number 9 of the assessee. During the study the TPO should take care specific characteristics of the products being compared, functions performed, contractual terms and conditions. It is directed that the benchmarking undertaken by the assessee under CUP method using correct filter on NSE, BSE and NSDL data. We accepted, arithmetic mean of which comes 18.13%then the interest rate on CCD in respect of the impugned international transaction of 17.65% is at arm s length. The benchmark performed on Bloomberg database by the appellant be considered, the impugned international transaction of interest on CCD paid at 17.65% is at arm s length. We delete the T.P. adjustment addition proposed by the TPO and made by the A.O. in the draft assessment order and accordingly, grounds of appeal of the assessee company are setting aside to TPO considering the findings of the Bench. Needless to say the assessee should get reasonable opportunity for the case. Disallowance of legal and professional expenses - HELD THAT - Examples of research activity involves activities aimed at obtaining new knowledge, the search for alternatives and the formulation, design, evaluation and selection of possible alternatives. Since the above said expenses cannot be characterized as expenditure incurred for obtaining enduring benefit and cannot be included in the definition of project cost as per Guidance Note, it was characterized as revenue expenditure and expensed out in books of accounts. We noticed that the professional fees paid by MHPL to respective service providers post landacquisition was for availing consultancy services to assess the development opportunity with respect to residential real estate market dynamics and formulate the product-mix for MHPL. Therefore, it could be said that since MHPL is engaged in construction and development of residential projects, these professional fees paid has business nexus and incurred wholly and exclusively for business purposes. Since the said expenses were incurred post commencement of business and are intricately related to business of the assessee company, therefore, the same should be allowed as revenue expenses under section 37(1) - Accordingly, grounds of appeal Nos.14 and 15 are allowed. Advertisement and sales promotion expenses and miscellaneous expenses - HELD THAT - Expenses incurred towards advertisement and sales promotion expenses are in the nature of revenue expenses allowable under section 37(1) - We, therefore, delete the addition made on account of advertisement and sales promotion expenses and miscellaneous expenses added by A.O. to the total income of the assessee company, in absence of any contrary decision of any higher judicial forum brought to our notice by the Ld. D.R - Accordingly, grounds of appeal of the assessee company are allowed.
Issues Involved:
1. Transfer Pricing Adjustment for Interest on Compulsorily Convertible Debentures (CCDs) 2. Disallowance of Legal and Professional Expenses 3. Disallowance of Advertisement and Sales Promotion Expenses 4. Levy of Interest under Sections 234B, 234D, and 244A 5. Initiation of Penalty Proceedings under Section 271(1)(c) Detailed Analysis: 1. Transfer Pricing Adjustment for Interest on Compulsorily Convertible Debentures (CCDs): The primary issue was the transfer pricing adjustment of Rs.16,45,67,968 made by the Transfer Pricing Officer (TPO) regarding the interest paid on CCDs to the Associated Enterprise (AE). The Assessee had benchmarked the interest rate using the Comparable Uncontrolled Price (CUP) method with data from BSE, NSE, and NSDL, arriving at an average rate of 17.65%. The TPO, however, used the Bloomberg database and determined an interest rate of 8.58%, leading to the adjustment. The Tribunal referenced the Mumbai Bench decision in the case of India Debt Management Pvt. Ltd., affirmed by the Bombay High Court, which held that benchmarking using external data from sources like Bloomberg was inappropriate. The Tribunal accepted the Assessee's CUP method and the interest rate of 17.65% as at arm's length, deleting the T.P. adjustment. 2. Disallowance of Legal and Professional Expenses: The Assessee contested the disallowance of Rs.50,94,255 as capital expenditure. The Tribunal found that the expenses were incurred post-commencement of business and were related to assessing funding nuances for acquiring land and development activities. The Tribunal held that these expenses had a business nexus under section 37 of the Income Tax Act, 1961, and should be allowed as revenue expenses. 3. Disallowance of Advertisement and Sales Promotion Expenses: The Assessee argued against the disallowance of Rs.39,15,230 for advertisement and sales promotion, which the AO treated as capital expenditure. The Tribunal referred to the Supreme Court and Gujarat High Court rulings, which stated that such expenses, even if they provide enduring benefits, are revenue in nature if they facilitate business operations. The Tribunal allowed the expenses as deductible under section 37(1) of the Act. 4. Levy of Interest under Sections 234B, 234D, and 244A: The Tribunal noted that the issues regarding the levy of interest under sections 234B, 234D, and 244A were consequential to the main issues and did not require separate adjudication. 5. Initiation of Penalty Proceedings under Section 271(1)(c): The Tribunal did not specifically address the initiation of penalty proceedings under section 271(1)(c), implying that it was also consequential and did not need separate adjudication. Conclusion: The Tribunal allowed the Assessee's appeal, deleting the transfer pricing adjustment and disallowances, and provided relief on the issues of legal and professional expenses, and advertisement and sales promotion expenses. The consequential issues related to the levy of interest and penalty proceedings were not separately adjudicated.
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