2022 (3) TMI 1448 - AT - Income Tax

TP Adjustment - adjustment in the arm s length price in respect of the interest charged on the advances by the appellant companies to its AE Virgo Europe SPA - whether LIBOR is to be taken as the basis of interest benchmarking for foreign currency denominated loans or whether Indian PLR will be relevant? - HELD THAT - In the case of CIT Vs Tata Autocomp Systems Ltd 2015 (4) TMI 681 - BOMBAY HIGH COURT concluded that ALP in the case of loans advanced to Associate Enterprises would be determined on the basis of rate of interest being charged in the country where the loan is received/consumed. The stand of the authorities below in replacing the LIBOR with Indian PLR cannot be upheld. It is not even the case of the revenue authorities that the basis points above the LIBOR are inadequate or too low. Accordingly benchmarking by the assessee cannot be faulted with. We delete the impugned ALP adjustment. The assessee gets the relief accordingly. Adjustment value of the pledge of shares - HELD THAT - We find that there is no dispute that the shares are pledged at the instance of or and for the benefit of an associated enterprises of the assessee keeping this in mind when we look at definition of transaction in section 92F(v) it is clear that transaction includes an arrangement understanding or action in concert-(A) whether or not such arrangement understanding or action in concert is formal or in writing; or (B) whether or not such arrangement understanding or action is concert is intended to enforced by legal proceedings . It cannot therefore be said that pledging shares for the benefit of an associated enterprises is not a transaction between the associated enterprise. It is akin to a corporate guarantee and is therefore required to be benchmarked as such. What is the rate at which such corporate guarantee is to be benchmarked and whether a corporate guarantee constitutes international transaction at all ? - As relying on case of Siro Clinpharm Pvt. Ltd 2021 (10) TMI 754 - ITAT MUMBAI we uphold the action of the authorities below in principle but we scale down the ALP adjustment to 0.5% of the correct value of shares and for the actual pledge period. To this extent the assessee will get relief. Penalty u/s. 271(1)(c) - Issuance of corporate guarantees did not constitute an international transaction under section 92B as it had no bearing on the profits income losses or assets of the enterprise giving such guarantee. This stream of decisions included decisions as in the cases of Micro Ink Ltd 2015 (12) TMI 143 - ITAT AHMEDABAD Siro Clinpharm Pvt. Ltd 2016 (5) TMI 633 - ITAT MUMBAI Bharti Airtel Ltd 2014 (3) TMI 495 - ITAT DELHI In view of this position it cannot be said that assessee s explanation that the guarantee given by the pledge of shares did not constitute international transaction was not a reasonable explanation. Accordingly it was not a fit case for imposition of penalty u/s. 271(1)(c).

Summary

Issues Involved:
1. Adjustment of Arm's Length Price (ALP) for interest on advances to associated enterprises (AEs).
2. Treatment of pledge of shares as an international transaction.
3. Disallowance of unrealized export receivables from deduction under Section 10B.
4. Penalty under Section 271(1)(c) for concealment of income.

Issue-wise Detailed Analysis:

1. Adjustment of Arm's Length Price (ALP) for Interest on Advances to AEs:
The primary issue is whether the interest rate charged by the assessee on loans to its AEs should be benchmarked using LIBOR or Indian Prime Lending Rate (PLR). The assessee had granted loans denominated in foreign currencies (Euro and USD) to its AEs and charged interest based on LIBOR plus a margin. The Transfer Pricing Officer (TPO) proposed adjustments based on Indian PLR, which was higher.

The Tribunal referred to the case of CIT Vs Tata Autocomp Systems Ltd, which established that the ALP for loans advanced to AEs should be determined based on the interest rate in the country where the loan is received. The Tribunal observed that LIBOR plus a margin is a more appropriate benchmark than Indian PLR for foreign currency loans. Consequently, the Tribunal deleted the ALP adjustment made by the TPO and upheld the assessee's method of benchmarking using LIBOR plus a margin.

2. Treatment of Pledge of Shares as an International Transaction:
The assessee had pledged shares with the State Bank of India as collateral for a loan to its AE, Virgo Europe SPA. The TPO treated this pledge as an international transaction and made an ALP adjustment by valuing the pledge at 2.5% of the share value.

The Tribunal held that pledging shares for the benefit of an AE constitutes an international transaction akin to a corporate guarantee. The Tribunal referred to the case of Siro Clinpharm Pvt. Ltd vs. ITO, which held that corporate guarantees are international transactions and should be benchmarked. However, the Tribunal scaled down the ALP adjustment to 0.5% of the correct value of shares for the actual pledge period, following the decision in CIT Vs Everest Kento Cylinders Ltd.

3. Disallowance of Unrealized Export Receivables from Deduction under Section 10B:
The assessee contested the disallowance of Rs. 30,99,342/- from the deduction allowable under Section 10B due to unrealized export receivables. The Tribunal noted that the CIT(A) had not adjudicated this issue on merits and remitted the matter back to the CIT(A) for a fresh adjudication in accordance with the law.

4. Penalty under Section 271(1)(c) for Concealment of Income:
The penalty was imposed on the assessee for concealment of income related to the ALP adjustment for the pledge of shares. The Tribunal noted that at the relevant time, there were several decisions holding that corporate guarantees did not constitute international transactions under Section 92B. Given this legal position, the assessee's explanation that the pledge did not constitute an international transaction was considered reasonable. Consequently, the Tribunal deleted the penalty imposed under Section 271(1)(c).

Separate Judgments:
- The Tribunal delivered separate judgments for different assessment years and appeals, but the principles applied were consistent across these judgments.
- For each assessment year, the Tribunal upheld the ALP adjustments in principle but scaled down the quantum to 0.5% of the correct value of shares for the actual pledge period.
- The Tribunal consistently deleted the penalties imposed under Section 271(1)(c) for concealment of income related to the ALP adjustments.

Conclusion:
The Tribunal's consolidated order addressed multiple appeals involving common issues related to transfer pricing adjustments, treatment of international transactions, and penalties for concealment of income. The Tribunal provided detailed reasoning for its decisions, referencing relevant case laws and legal principles, and granted relief to the assessee by deleting the ALP adjustments and penalties while remitting certain issues for fresh adjudication.