Case Law Details
City Corporation Limited Vs DCIT (ITAT Pune)
With regard to first issue pertaining to TP adjustment in respect of interest payment on debentures, the TPO has discussed this issue from Para 6 onwards and has given his findings at Para 16 of his order. During transfer pricing proceedings, the TPO while going through the assessee’s Form 3CEB and transfer pricing report observed that it has not done the benchmarking of the payment of interest on debentures/compulsory Convertible debentures (CCDs) properly. The TPO observed that the assessee had issued Compulsory Convertible Debentures to its AEs in India and abroad against which it had claimed an interest payment of Rs.3,92,81,275/-. In respect of the same, the TPO held that the said transaction was, in fact, a shareholder activity and that the payment of interest was nothing but a self-inflicting loss. Accordingly, a show cause notice was issued to the assessee in this regard. The assessee made a detailed submission before the TPO. The same is not being reproduced for the sake of brevity. Further, the assessee’s reply was duly considered but rebutted by the TPO. It was observed by the TPO that as per the assessee’s agreement dated 22.03.2012 under which the funds had been brought, the AE’s were referred to as investor and not as lender. Further, as per the terms of the agreement, the funds were to be used for the specific projects only. The assessee was also not allowed to raise any loan or debt for the project without the written consent of the lender. No such loan was appearing in the balance sheet of the assessee. Also, the agreement under which the funds has been brought from the AE, is self-inflicted agreement and under Income Tax Act, self-inflicted loss is not allowable. The TPO then held that by this agreement, the lenders (who are also shareholders) have been ensured that it does not have to pay the tax on the dividend which would be available for the distribution and would have been taxed in India. Therefore, it was clear that the interest payments were made to the shareholder/ultimate shareholder only.
The TPO went on to refer to the OECD report of 1979, OECD Guidelines, 2010, provisions of section 2(22)(e) of the Act and various other case laws. In view of the above, the TPO took the Arm’s Length Price of the payment of interest to AE at Rs. Nil and thus, made an unward adjustment of Rs.3,92,81,275/- and the same was confirmed by the Assessing Officer in his order.
We have gone through the findings of the Ld. CIT(Appeal) as well as the Tribunal’s order in assessee’s own case for the assessment year 2014-15 in ITA No.618/PUN/2020 & ITA No.44/PUN/2021 wherein the Tribunal at Para 5 had referred to its own order for assessment year 2013-14 in ITA No.772/PUN/2018 and taken a decision upholding the findings of the Tribunal in assessee’s own case for the assessment year 2013-14. The relevant findings of the Tribunal read as follows:
“5. Having heard both the sides through Virtual Court and gone through the relevant material on record, it is seen that similar issue came up for consideration before the Tribunal in the assessee’s own case for the immediately preceding assessment year 2013-14. In fact, the TPO also referred to his own decision taken for the assessment year 2013-14 for determining NIL ALP. The Tribunal, vide its order dated 18-12-2020 in ITA No.772/PUN/2018, has countenanced the assessee’s stand by holding that the assessee rightly issued debentures and CCDs to its AEs and the AO was not justified in re-characterizing the transactions. As regards the ALP determination, the Tribunal restored the matter to the file of AO/TPO for a fresh determination. Since the facts and circumstances of the instant appeal are mutatis mutandis similar to those of the preceding year, respectfully following the precedent, we approve the view taken by the ld. CIT(A) and hold that the AO was not justified in re-characterising the transaction of issue of debentures/CCDs as that of equity shares. As regards the ALP determination, we again follow the view taken by the Tribunal for the immediately preceding year and direct the AO/TPO to recompute the ALP of the transactions of payment of interest on debentures/CCDs…………………..
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