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2023 (4) TMI 557 - AT - Income TaxTP Adjustment - ALP of interest on NDC s Non-convertible debentures - Comparable selection - HELD THAT - When internal comparables are available, it would be more appropriate to analyse the comparability first with the internal comparables. First internal comparables should be evaluated for ALP computation. If for any reasons, internal comparables fail the comparability test, then the external comparables can be adopted for ALP computation. ALP of interest on loan will depend on various factors like the nature and purpose of the loan, currency in which the loan is provided and in which interest is to be paid, security or guarantees offered by the borrower, the amount duration of the loan and credit rating of the borrower. In the instant case, the assessee has also taken secured loans from unrelated third parties being PFC, REC and PNB at the rate of interest of 13.75%. The assessee has contended that these third party loans can be taken as internal comparables and they were also accepted by the DRP as comparables for A Y 2015-16. The learned DR contended that the internal comparables cannot be accepted due to difference in geographical region. It is contended that the associated enterprises are outside India and the third party lenders are in India. It is not clear if the NCD issued to associated enterprise is denominated in Indian rupees and whether the interest on these NCD's is paid in Indian rupees. If the loan taken from associated enterprise is denominated in Indian rupees and the loan taken from third parties is also denominated in Indian rupees and the interest on such loans is also paid in Indian rupees, the question of geographical difference does not arise. Therefore, taking internal comparables will also take care of credit rating of borrowers and nature and purpose of the loan. Thus, if both the loans are denominated in same currency, internal comparables can be adopted for computation of ALP. NCD issued to associated enterprise is unsecured and loans taken from third parties are secured loans, hence, adjustment for this difference should be made as directed by the DRP in AY 2015- 16. Therefore, we remand the matter back to the TPO to verify if the currency of the internal comparables and NCD issued to associated enterprise is same - internal comparable should be adopted for ALP computation after making adjustment for difference in security - borrowers in external comparables should have similar credit rating like that of the assessee - comparison should be made for interest on NCD and convertible debenture cannot be adopted for comparison. Appeals filed by the assessee are allowed for statistical purposes.
Issues Involved:
1. Legality of the assessment order. 2. Transfer pricing adjustment on account of excess interest paid on Non-Convertible Debentures (NCDs). Detailed Analysis: 1. Legality of the Assessment Order: The assessee argued that the assessment order passed by the AO/TPO is "bad in law and void ab-initio." This contention was raised as a preliminary issue, challenging the validity of the assessment order itself. However, the judgment does not provide a detailed discussion or ruling on this specific issue, suggesting that the primary focus was on the transfer pricing adjustments. 2. Transfer Pricing Adjustment on Account of Excess Interest Paid on NCDs: The core issue in both assessment years 2017-2018 and 2018-2019 was the proposed adjustment of INR 10,85,05,943 and INR 10,25,04,498, respectively, on account of alleged excess interest paid by the assessee on NCDs to its Associated Enterprise (AE), Hydreq Pte. Ltd. 2.1. Transfer Pricing Officer's (TPO) Analysis: - The TPO rejected the assessee's benchmarking analysis, which used internal Comparable Uncontrolled Price (CUP) method. - The TPO chose 24 comparables for assessment year 2017-2018 and 31 comparables for assessment year 2018-2019 from the Bloomberg database. - The TPO determined the Arm's Length Price (ALP) at 10% for both assessment years, leading to the proposed adjustments. 2.2. Dispute Resolution Panel (DRP) Findings: - The DRP upheld the TPO's adjustments, rejecting the assessee's methodology based on inappropriate filters. - The DRP emphasized that the TPO was justified in conducting a fresh benchmarking analysis using the CUP method and applying appropriate filters. - The DRP dismissed the assessee's argument that the rule of consistency should apply, as the DRP had accepted the internal CUP for assessment year 2015-2016. 2.3. Assessee's Arguments: - The assessee argued that the internal CUP should be preferred over the external CUP, citing several judicial pronouncements to support this position. - The assessee highlighted that the DRP for assessment year 2015-2016 had accepted the internal CUP, and there was no change in facts warranting a different approach. - The assessee contended that the comparables chosen by the TPO included government companies with AAA ratings and companies issuing convertible debentures, which are not comparable to the assessee's NCDs. - The assessee also pointed out that the TPO's comparables dealt in different financial instruments, making them unsuitable for comparison. 2.4. Tribunal's Observations and Ruling: - The Tribunal emphasized that when internal comparables are available, they should be preferred for ALP computation. - The Tribunal referenced the case of Tecnimont ICB Pvt Ltd v ACIT, which supports the use of internal comparables due to their higher degree of comparability. - The Tribunal noted that the assessee had taken secured loans from unrelated third parties at an interest rate of 13.75%, which could serve as internal comparables after necessary adjustments for security differences. - The Tribunal remanded the matter back to the TPO to verify if the currency of the internal comparables and NCDs issued to the associated enterprise is the same. If so, the internal comparables should be adopted for ALP computation after making adjustments for differences in security. - If the currencies are different, the TPO should analyze whether any adjustment can be made for such differences as mandated by Rule 10B(3). If internal comparables fail, external comparables with similar credit ratings should be used, and only NCDs should be considered for comparison, not convertible debentures. Conclusion: The Tribunal allowed the appeals filed by the assessee for statistical purposes, directing the AO/TPO to undertake a fresh benchmarking of the ALP of interest on NCDs, keeping in view the directions provided. The matter was remanded back for a detailed verification and appropriate adjustments.
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