2023 (7) TMI 1257 - AT - Income Tax

TP adjustment - outstanding loan due from AE located in Dubai - TPO had taken interest rate @ 10.589% and charged interest on the loan amount - HELD THAT - As in AY 2009-10 and 2010-11, the assessee did not make transfer pricing study. As noticed that the assessee had charged interest @ 5.14% and 5.08% respectively in those years, while the average LIBOR rate was 2.853742 and 1.284833 in those years respectively. It appears that no TP adjustment was made in those years. We are of the view that interest rate may be fixed at LIBOR 300 basis points - we direct the AO/TPO to recompute the transfer pricing adjustment by adopting interest rate of average LIBOR 300 basis points. Disallowance u/s 14A - assessee had made investments AO disallowed 0.5% of the average value of investments, income from which does not form part of investments - HELD THAT - As we notice that the details of quantum of exempt income were not given. It is well settled proposition that the amount of disallowance u/s 14A should not exceed exempt income. Accordingly, we restore this issue to the file of AO and direct him to restrict the disallowance to the quantum of exempt income. Disallowance of Travelling expenses - expenses incurred towards purchase of foreign exchange - HELD THAT - In our view, the assessee may be provided with one more opportunity to offer explanations. Accordingly, we restore this issue to the file of AO for examining it afresh. Addition of interest income found in ITS data, but not reported by the assessee in the return of income - HELD THAT - We notice that the assessee has accepted this addition before the AO. Hence we dismiss this ground of the assessee. Addition u/s 41(1) of the Act towards remission of liability - huge sum was due from party for quite long time - HELD THAT - We notice that the AO has not examined as to whether the above said amount was claimed as expenditure in any of the years, which is the paramount condition for invoking provisions of sec.41(1) of the Act. Accordingly, we are of the view that this issue requires fresh examination. Accordingly, we restore this issue to the file of AO. We also direct the assessee to furnish all the relevant details to AO. Disallowance of set off of short term capital gain considering it as bogus/sham transactions - HELD THAT - In our view, this issue also requires fresh examination. Accordingly, we restore this issue to the file of AO. We also direct the assessee to furnish all the relevant details to the AO. Disallowance u/s 43B - reducing the same from closing Work in Progress - HELD THAT - We notice that the interest was payable to Punjab and Maharashtra Co-operative Bank. The interest payable to a co-operative bank was brought within the ambit of sec.43B of the Act with effect from AY 2018-19. Accordingly, we direct the AO to delete this disallowance and consequently, the same is not required to be deducted from the value of Work in Progress.

Summary

Issues:
1. Transfer pricing adjustment on outstanding loans due from Associated Enterprise (AE) in Dubai.
2. Disallowance under section 14A of the Income Tax Act.
3. Disallowance of traveling expenses.
4. Addition of interest income not reported in the return.
5. Disallowance under section 41(1) of the Act.
6. Disallowance of set off of short-term capital gain.
7. Disallowance under section 43B of the Act.
8. Disallowance of claim of set off of brought forward loss.
9. Interest disallowance under section 36(1)(iii) of the Act.

Transfer Pricing Adjustment on Outstanding Loans:
The appellant, a builder and developer, engaged in international transactions with its AE in Dubai by providing loans. The Transfer Pricing Officer (TPO) made adjustments, leading to disputes resolved by the Dispute Resolution Panel (DRP). The Tribunal directed the AO/TPO to recompute the transfer pricing adjustment by adopting the interest rate of average LIBOR plus 300 basis points for consistency across multiple assessment years.

Disallowance under Section 14A:
The AO disallowed 0.5% of the average value of investments under section 14A but failed to consider the quantum of exempt income. The Tribunal directed the AO to restrict the disallowance to the actual quantum of exempt income, emphasizing that the disallowance should not exceed the exempt income amount.

Other Disallowances and Additions:
Various issues such as disallowance of traveling expenses, addition of unreported interest income, and disallowances under sections 41(1), 43B, and 36(1)(iii) were also addressed. The Tribunal ordered a fresh examination for several issues, directing the AO to reevaluate and provide opportunities for the appellant to furnish relevant details. Notably, the Tribunal emphasized the need for proper examination and consideration of relevant facts before making disallowances or additions under the Income Tax Act.

Conclusion:
The Tribunal partially allowed the appeals, emphasizing the importance of accurate computations, adherence to legal provisions, and proper examination of facts in determining transfer pricing adjustments, disallowances, and additions under various sections of the Income Tax Act. The judgments aimed to ensure fairness, consistency, and compliance with the law in resolving the disputes between the appellant and the tax authorities.