The Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that the Transfer Pricing Officer ( TPO ) failed to apply the industry filter while determining the Arm’s Length Price ( ALP ) of interest, leading to the deletion of the addition and the dismissal of the revenue’s appeal.
The appellant DLF Urban Pvt. Ltd was engaged in the business of construction, development and sale of integrated townships and residential houses and apartments. It filed the return of income on 28.09.2016 declaring loss of Rs.1,65,90,818/- which was subsequently revised on 30.11.2016 at a loss of Rs.90,47,202/-. The case was taken up for scrutiny and in view of reported international transactions and “specified domestic transactions” with the AEs, and the case was referred to the TPO for determination of arm’s length price of such transactions
The TPO passed the order under Section 92CA (3) of the Income Tax Act, 1961 on 31.10.2019 wherein adjustment under Section 92CA of the Income Tax Act, of Rs.3,28,72,48,398/- was proposed which included adjustment to purchase cost of land development rights of Rs.3,22,42,75,788/- and adjustment of interest paid to AEs on CCD / OCD of Rs.6,29,72,610/-.
Mr. Rajat Garg representing the revenue submitted that the TPO in his order has dealt in detail why the ALP determined by the assessee was not proper and he claimed that based on speaking order the TPO computed the ALP of the interest on loan of CCD/ODC at the rate of 10.25% against 15% paid by the assessee. Further submitted that the CIT(A) order was contradictory because on one hand he disagrees with the TPOs approach of conducting the fresh search and also the introduction of two comparables selected by him, on the ground that the company was not similar to the assessee’s company.
The bench observed that the TPO conducted fresh search on the Bloomberg database; however, the parameters such as year of issue, tenure of the instrument etc. which need to be considered while performing the search have not been considered by the TPO. It is also observed that the two comparables considered by the TPO were the companies which were not similar to the appellant company. The companies identified by the TPO operate in different industry i.e. Rubber products (Suja Shoei Industries Private Limited) and Energy sector (Celestial Solar Solutions Private Limited).
Thus, TPO did not apply the industry filter for determining the ALP which is critical as the rates of interest may differ from industry to industry based on the circumstances prevailing in each industry. Further, in a high-risk industry like the real estate sector, the rate of interest is likely to be more vis-a-vis a low-risk industry. It is also observed that the instruments selected by the TPO are bonds/loans instead of CCDs (as issued by the appellant).
Further the average rate of interest on such 49 comparables comes to 15.34%. After adding the two comparables selected by the TPO, the 35th percentile comes to 15.00% and the 65th percentile comes to 18.00% with a median of 16.00% which is higher than the 15% coupon rate of interest paid by the appellant company. Therefore, the adjustment made by the TPO is not justified and warranted. Thus, addition made by the AO/TPO of Rs 6.29 crores on account of disallowance of interest on CCDs/OCDs is deleted.
The two member bench of the tribunal comprising Shamim Yahya ( Accountant member ) and Anubhav Sharma ( Judicial member) concluded that the CIT(A) has thoughtfully taken into consideration the facts in wholesome manner and has adopted a judicious approach by considering median @16% based on 49 comparables i.e. 47 comparables selected by assessee company as well as 2 by TPO. Even if the 2 comparables were not of the same industry but as the assessee does not object to their inclusion, the order of CIT (A) cannot be faulted. There is no apparent infirmity requiring our indulgence. Accordingly, the grounds so raised have no substance. Accordingly, appeal of the revenue was dismissed.
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