Case Law Details
DCIT Vs DLF Urban Pvt. Ltd. (ITAT Delhi)
The Income Tax Appellate Tribunal (ITAT) in Delhi recently ruled in the case of DCIT vs. DLF Urban Pvt. Ltd., addressing key issues in transfer pricing adjustments. The crux of the case revolved around the Arm’s Length Price (ALP) determination for the interest on loans involving Compulsorily Convertible Debentures (CCDs) and Optionally Convertible Debentures (OCDs). The ITAT’s decision to dismiss the appeal filed by the Deputy Commissioner of Income Tax (DCIT) was based on the Transfer Pricing Officer’s (TPO) failure to apply the appropriate industry filter, thus rendering the comparison flawed and unjustified.
In this case, the DCIT challenged the ALP determination of interest on loans to Associated Enterprises (AEs), where the assessee, DLF Urban Pvt. Ltd., had benchmarked the transaction using the Comparable Uncontrolled Price (CUP) method. The assessee determined an ALP of 15% based on 47 comparables. However, the TPO rejected these comparables and substituted them with just two others, arriving at an ALP of 10.25%.
The Commissioner of Income Tax (Appeals) [CIT(A)] examined this substitution critically. The CIT(A) noted that the TPO conducted a fresh search using the Bloomberg database but neglected essential parameters like the year of issue and tenure of the instrument. Moreover, the two comparables selected by the TPO were from industries not similar to that of the assessee, specifically, rubber products and energy sectors, which have differing risk profiles and, consequently, differing interest rates.
The CIT(A) highlighted that in high-risk industries such as real estate, where the assessee operates, the interest rates are typically higher compared to lower-risk industries. Additionally, the financial products selected by the TPO were bonds/loans, unlike the CCDs issued by the assessee. Therefore, the TPO’s comparables were not appropriate for determining the ALP.
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