TPO's Failure to Adopt Prescribed Benchmarking Method u/s 92C: ITAT Deletes Protective TP Addition on Interest Income [Read Order]

The Pune Bench of the Income Tax Appellate Tribunal (ITAT) deleted a protective Transfer Pricing (TP) adjustment of ₹13,81,700 on interest income and ruled that the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) failed to adopt any of the prescribed methods under Section 92C of the Income Tax Act for determining the Arm's Length Price (ALP).

Precision Camshafts Limited (assessee), a listed company based in Solapur is engaged in the manufacturing of camshafts for the Railways and Auto Industry. The dispute arose during the reassessment for the Assessment Year (AY) 2021-22.

The assessee provided a cash advance facility to its 100% subsidiary, PCL International Holdings BV Netherlands (AE), primarily to enable the subsidiary to repay a loan taken from Bank of Baroda-London.

The assessee charged an interest rate of 1.9% on the said loan, which was the same rate of interest charged by Bank of Baroda-London to the AE. The assessee contended that this transaction was at Arm's Length Price (ALP), relying on the Bank of Baroda rate as the Comparable Uncontrolled Price (CUP) Method.

The TPO was not convinced by the assessee's benchmarking analysis. Although the TPO held that the 1.9% rate was offered by the bank due to the corporate guarantee provided by the assessee, the TPO ultimately proposed a protective addition of ₹13,81,700.

The TPO determined the ALP interest rate by adding a 0.5% risk mitigation factor to the 1.9% rate and held that the Arm's Length Interest should be 1.95%. The Assessing Officer (AO) passed a Draft Assessment Order based on the TPO's findings, which was subsequently upheld by the DRP in its order.

Aggrieved by the final Assessment Order, the assessee appealed to the ITAT. The assessee raised an additional ground of appeal challenging the protective addition and argued that it was made without adopting any of the prescribed methods.

The two-member bench comprising Rama Kanta Panda (Vice President) and Vinay Bhamore (Judicial Member) observed that the TPO and DRP failed to apply any of the methods prescribed in Section 92C of the Income Tax Act for determining the ALP.

The Tribunal relied on the precedent set by the ITAT Pune in the case of Rehau Polymers Pvt. Ltd. Vs. ACIT, which held that an adjustment of ALP was not sustainable if no method had been adopted by the TPO for its determination.

The Tribunal also noted that the Bombay High Court has ruled that the action of the TPO in determining ALP without following any of the prescribed methods is incorrect.

The tribunal held that the protective adjustment of ₹13,81,700 was not sustainable. The Tribunal directed the AO/TPO to delete the addition respectfully following the binding precedents. The appeal of the assessee was partly allowed.

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