M/s Dans Energy Private Limited, New Delhi V. Deputy Commissioner Of Income Tax, Central Circle-2, Bengaluru

ITTPA 831/BANG/2022

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M/s. Dans Energy Private Limited appealed against the final assessment orders for the assessment years 2017-2018 and 2018-2019, which involved adjustments made by the Transfer Pricing Officer (TPO) regarding excess interest paid on Non-Convertible Debentures (NCDs) issued to its Associated Enterprise (AE). The TPO had rejected the assessee's benchmarking analysis and proposed significant adjustments, which were upheld by the Dispute Resolution Panel (DRP). The Tribunal, after considering the arguments and the precedents cited, remanded the matter back to the TPO for a fresh assessment, emphasizing the use of internal comparables and the need for adjustments for differences in security.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 115221 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 13-12-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 06-12-2022
• Assessment Year: 2018-2019
• Appeal Filed On: 13-09-2022
• Other Referred Cases: Aditya Birla Minacs Worldwide Ltd. ITA No.7033/Mum/2022, Uttam Bharat Electricals Pvt. Ltd. v. DCIT, Hughes Systique India Pvt. Ltd. v. ACIT, Wipro Ltd. v. ACIT, AT & S India Pvt. Ltd. v. DCIT, DCIT v. Kesoram Industries Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Rule of consistency
• Section: 143(3); 153C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “B”, BANGALORE Before Shri George George K, JM & Shri Laxmi Prasad Sahu, AM IT(TP)A No.830/Bang/2022 : Asst.Year 2017-2018 IT(TP)A No.831/Bang/2022 : Asst.Year 2018-2019 M/s.Dans Energy Private Limited B-1/E-24, Mohan Cooprative Industrial Area, Mathura Road New Delhi – 110 044. PAN : AACCD0224A. v. The Deputy Commissioner of Income-tax, Central Circle 2 Bangalore. (Appellant) (Respondent) Appellant by : Sri.Rahul Khare, Advocate Respondent by : Sri.Manjunath Karkihalli, CIT-DR Date of Hearing : 07.12.2022 Date of Pronouncement : 14.12.2022 O R D E R Per George George K, JM : These appeals at the instance of the assessee are directed against two final assessment orders, both dated 29.07.2022, passed u/s 143(3) r.w.s. 153C r.w.s. 144C(13) of the I.T.Act. The relevant assessment years are 2017-2018 and 2018-2019. 2. Common issues are raised in these appeals, hence, they were heard together and are being disposed of by this consolidated order. Identical grounds are raised in both these appeals, except for variance in figures. The grounds raised for assessment year 2017-2018 are reproduced below:- “1. That on the facts and circumstances of the case and in law, the assessment order passed by the AOI TPO, is bad in law and void ab-initio. IT(TP)A Nos.830-831/Bang/2022. M/s.Dans Energy Private Limited 2 2. Re: Proposed adjustment of INR 10,85,05,9431- on account of excess interest paid on Non-Convertible Debentures as per TPO: 2.1. On the facts and in the circumstances of the case and in law, the TPO/AO erred in making the transfer pricing adjustment on account of alleged excess interest paid by the Assessee on non-convertible debentures to the tune of INF 10,85,05,943/-. 2.2. That the DRP/TPO erred in law in making an adjustment on account of excess interest on debentures in complete ignorance of the decisions of the DRP rendered in the Assessee's own case for A Y 2015-16, where under the said issue was decided in favour of the Assessee. 2.3. That the DRP/TPO erred in not appreciating that in the absence of change in facts from AY 2015-16, there could be no occasion to make the impugned adjustment in view of the settled principle of consistency. 2.4. That the DRP/TPO grossly failed to appreciate that during the original/pre-Section 153C proceedings, the erstwhile TPO had himself accepted the benchmarking analysis of the Assessee and had not drawn any adverse inference on the said transactions. 2.5. That the DRP/TPO grossly erred in not appreciating that in the absence of any incriminating material, no adjustment/contrary view to the DRP's directions rendered in the Assessee's own case for AY 2015-16 could be permitted. 2.6. That the DRP erred in upholding the rejection of the benchmarking analysis undertaken by the Assessee summarily and without any cogent reasoning as done by the TPO. 2.7. That the DRP/TPO have erred in not appreciating that the Assessee had issued debentures through private placement and the comparables chosen by the TPO dealt in other financial instruments, could not be taken to be comparable to the Assessee. 2.8. That the DRP/TPO erred in not appreciating that even though the Filter for nor convertible debentures was allegedly applied, the final companies chosen by the TPO dealt in convertible debentures. 2.9. That the DRP/TPO erred in choosing comparables with IT(TP)A Nos.830-831/Bang/2022. M/s.Dans Energy Private Limited 3 a AAA rating, dealing in non-comparable financial products and hence, could not be compared to the Assessee 2.10. That the TPO/AO erred in rejecting the internal CUP applied by the Assessee the same having been approved by the DRP in the Assessee's own case for A.Y. 2015-16. The Applicant craves leave to add, amend, alter all or any of the grounds and submissions made herein.” 3. The brief facts of the case are as follows: The assessee is a private limited company incorporated under the provisions of Companies Act, 1956. It is engaged in development of 96 MW Jorethang Loop Hydro Electric Product in the State of Sikkim. The main business of the assessee- company is identification of hydropower projects and making investment in them. During the assessment year 2015-2016, the assessee had issued non-convertible debentures (NCDs) to its Associated Enterprise (AE), Hydreq Pte. Ltd. It is claimed that the debentures issued were on private placement basis and are unlisted, unrated, unsecured, redeemable and non- convertible. The assessee for assessment years 2017-2018 and 2018-2019 had paid interest on these debentures, which is tabulated as under:- Assessment Year Name of AE Type of transaction Rate of interest Interest paid / payable 2017-2018 Hydreq Pte. Ltd. Non- convertible 14.27% 36,26,18,219 2018-2019 13.93% 36,33,30,055 4. The above mentioned interest rate was calculated at SBI rate + 5% subject to a maximum of 15%. Consequent to a search in the business premises of the holding company of the assessee, the assessment of the assessee for assessment IT(TP)A Nos.830-831/Bang/2022. M/s.Dans Energy Private Limited 4 year 2017-2018 and 2018-2019 were centralized and selected for scrutiny. During the course of scrutiny assessment, the matter was referred to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price (ALP) of the interest payment made by the assessee to its AE. In the transfer pricing study of the assessee for the assessment year 2017- 2018, the assessee chose two comparables, which had issued NCDs during the same period of the assessee and since the debentures issued by the comparables were at the rate of 15% as opposed to 14.27% charged by the assessee, the transaction was sought to be at arm’s length. Similarly, for assessment year 2018-2019, the assessee chose two different companies, which again issued NCDs during the same period of the assessee and since the debentures issued by the comparable were at the rate of 15% as opposed to 13.93% charged by the assessee, the interest payment to the AE on these NCDs has sought to be at arm’s length. Further, the assessee had also benchmarked the transaction using internal CUP while comparing interest rate paid by the assessee to its AE as opposed the interest paid on secured loans availed by the assessee from unrelated parties such as PFC, REC and PNB, which was 13.75%. Since the said loans were secured loans, the assessee in its TP study, made an adjustment of 300 bps and arrived at the interest rate to unrelated parties at 16.75% for assessment year 2017-2018 and 18.39% for assessment year 2018-2019. Since the assessee had paid lower interest to its AE for assessment year IT(TP)A Nos.830-831/Bang/2022. M/s.Dans Energy Private Limited 5 2017-2018 and 2018-2019, the transaction was sought to be justified in its TP study. 5. The TPO for both the assessment years, rejected the benchmarking analysis of the assessee and proceeded to chose 24 comparables for assessment year 2017-2018 conducting a search in Bloomberg database. Similarly, for assessment year 2018-2019, 31 comparables were selected. The TPO determined the ALP at 10% for both the assessment years and proposed an adjustment of Rs.10,85,05,943 for assessment year 2017-2018 and Rs.10,25,04,498 for assessment year 2018-2019. 6. Aggrieved by the order of the TPO, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide its directions dated 27.06.2022, upheld the TP adjustment made by the TPO for assessment years 2017-2018 and 2018-2019. The DRP held that the methodology followed by the assessee was rejected based on inappropriate filter. It was further held by the DRP that the TPO was justified in conducting fresh benchmarking analysis by choosing CUP method and by applying appropriate filter. The DRP further rejected the objections of the assessee that rule of consistency has to be followed since the DRP for assessment year 2015- 2016 had accepted internal CUP of the assessee, which is identical for these assessment years also. Pursuant to the DRP’s directions, the impugned final assessment orders were IT(TP)A Nos.830-831/Bang/2022. M/s.Dans Energy Private Limited 6 passed for the assessment years 2017-2018 and 2018-2019 on 29.07.2022. 7. Aggrieved by the final assessment orders, the assessee has filed the present appeal before the Tribunal. The assessee has filed two sets of paper book for both the assessment years 2017-2018 and 2018-2019. One set of paper book comprising of case laws relied on and the other paper book enclosing therein the transfer pricing study for assessment years 2017- 2018 and 2018-2019, the objections raised before the DRP for both the assessment years, the comparable list etc. The learned AR reiterated the submissions that internal CUP is to be preferred to the external CUP. In this context, the learned AR relied on the following judicial pronouncements:- (i) Aditya Birla Minacs Worldwide Ltd. ITA No.7033/Mum/2022 (order dated 16.03.2016) (ii) Uttam Bharat Electricals Pvt. Ltd. v. DCIT (2019) 112 taxmann.com 305 (Jaipur-Trib.) (iii) Hughes Systique India Pvt. Ltd.v. ACIT (2013) 36 taxmann.com 41 (Delhi-Trib.) (iv) Wipro Ltd. v. ACIT (2020) 122 taxmann.com 268 (Bangalore-Trib.) (v) AT & S India Pvt. Ltd. v. DCIT ITA No.179/Kol/2016 (order dated 03.08.2016) (vi) DCIT v. Kesoram Industries Ltd. ITA No.1777/Kol/ 2019 & Ors. (order dated 28.10.2021) 8. Further, the learned AR also relied on the DRP’s directions for the assessment year 2015-2016, which observed that once an internal CUP was available, the same can be applied for benchmarking the interest payment post giving appropriate adjustments. As regards some of the IT(TP)A Nos.830-831/Bang/2022. M/s.Dans Energy Private Limited 7 comparables selected by the TPO for assessment years 2017- 2018 and 2018-2019, it was contended by the learned AR that Government companies having credit rating of AAA is selected, which is erroneous, since, the assessee has incurred huge losses year after year. Further, it was stated that the private companies taken as comparable by TPO have issued convertible debentures unlike assessee which had issued NCD’s. It was submitted that vis-à-vis convertible debentures and NCDs, convertible debentures would be fetching lesser rate of interest unlike NCDs. Therefore, it was submitted that the comparables chosen by the TPO is also faulty and the same needs to be rejected. 9. The learned Departmental Representative, on the other hand, strongly supported the orders of the TPO and the DRP. It was contended that for assessment year 2015-2016, there was no proper benchmarking by the TPO, hence, the DRP for the said assessment year had given directions that internal CUP is to be followed for proper ascertainment of ALP of interest payment to assessee’s AE. It was submitted that for the relevant assessment years, the TPO had done a proper benchmarking and the assessee has a problem with the selection of the comparables, specific plea with regard to the same ought have been raised. 10. We have heard rival submissions and perused the material on record. When internal comparables are available, it would be more appropriate to analyse the comparability first IT(TP)A Nos.830-831/Bang/2022. M/s.Dans Energy Private Limited 8 with the internal comparables. This view is supported by the following observations of Third Member of ITAT in the case of Tecnimont ICB Pvt Ltd v ACIT [2012] 24 taxmann.com 28 (Mum) (TM). The relevant extract is as below:- “10. Clause (i) of Rule 10B(e) stipulates that net profit margin from an international transaction with an AE is computed in relation to cost incurred or sales effected or assets employed etc. Clause (ii) is material for the present purpose. It provides that the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. The 'base' of this provision takes one back to clause (i) which refers to cost incurred or sales effected or assets employed or to be employed. On splitting clause (ii) into two parts, it divulges that the reference is made to internal and external comparables. One part of clause (ii) refers to 'the net profit margin realised by the enterprise .... from a comparable uncontrolled transaction' and the other part talks of 'the net profit margin realised .... by an uncontrolled enterprise from a comparable uncontrolled transaction'. It transpires that whereas the first part refers to the profit margin from internal comparable uncontrolled transactions, the second part refers to profit margin from an external comparable uncontrolled transaction. Thus it is discernible that what is to be compared under this method is profit from a comparable uncontrolled transaction. The word 'comparable' may encompass internal comparable or external comparable. There is cue in the rule itself as to preference to be given to internal comparable uncontrolled transactions vis- a-vis externally comparable uncontrolled transactions. It is because the delegated Legislature has firstly referred to the net profit margin realized by the enterprise (internal) from a comparable uncontrolled transaction and, thereafter, it points towards net profit margin realized by an unrelated enterprise (external) from a comparable uncontrolled transaction. Thus where potential comparable is available in the shape of an uncontrolled transaction of the same assessee, it is likely to have higher degree of comparability vis-a-vis com parables identified amongst the uncontrolled transactions of third parties. The underlying object behind computing ALP of an international transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse IT(TP)A Nos.830-831/Bang/2022. M/s.Dans Energy Private Limited 9 to such internal comparable case. The reason is patent that the various factors having bearing on the quality of output, assets employed, input cost etc. continue to remain by and large same in case of an internal comparable. The effect of difference due to such inherent factors on comparison made with the third parties, gets neutralized when comparison is made with internal comparable. Ex consequenti, it follows that an internal comparable uncontrolled transaction is more noteworthy vis-a-vis its counterpart i.e. external comparable.” ~~rCM fJ tiU;?J ~ ~ Un L'cwL 10.1 Based on the above observation of Third Member in case of Tecnimont ICB Pvt Ltd v ACIT (supra), we hold that 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. The 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. 10.2 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(TP)A Nos.830-831/Bang/2022. M/s.Dans Energy Private Limited 10 10.3 From the details available on record 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. The 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. In such a scenario internal comparable should be adopted for ALP computation after making adjustment for difference in security. If currency is different, it should be analysed whether any adjustment can be made for such difference as mandated by Rule 10B(3). If the internal comparison fails, then external comparables can be adopted. However, the borrowers in external comparables should have similar credit rating like that of the assessee. Further, comparison should be made for interest on NCD and convertible debenture cannot be adopted for comparison. With the above observation, we restore the issues raised in these IT(TP)A Nos.830-831/Bang/2022. M/s.Dans Energy Private Limited 11 appeals to the files of AO / TPO. The AO / TPO is directed to undertake fresh benchmarking of ALP of interest on NDC’s, keeping in view the above directions. It is ordered accordingly. 11. In the result, the appeals filed by the assessee are allowed for statistical purposes. Order pronounced on this 14 th day of December, 2022. Sd/- (Laxmi Prasad Sahu) Sd/- (George George K) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore; Dated : 14 th December, 2022. Devadas G* Copy to : 1. The Appellant. 2. The Respondent. 3. The DRP-1, Bangalore. 4. The Pr.CIT, Bengaluru. 5. The DR, ITAT, Bengaluru. 6. Guard File. Asst.Registrar/ITAT, Bangalore