Sutherland Global & Others [TS-718-ITAT-2023(CHNY)-TP]

• The case is on the requirement of quoting a DIN;

• The ITAT observed that the requirement of CBDT Circular No. 19/2019 was not satisfied in this case;

• ITAT read the Circular and observed “on and from 01.10.2019, any communication issued without a valid DIN and quoted in the body of the order is invalid and shall be deemed to have never been issued”;

• Revenue argued that subsequently a valid DIN was generated and communicated to the Assessee along with separate intimation and thus, there was proper compliance of the CBDT Circular No. 19/2019;

• After hearing the parties on scope of CBDT Circular No. 19/2019 and jurisprudence of requirement of DIN, ITAT noted that with the launch of various e-governance initiatives, Income-tax Department is moving toward total computerization of its work and this has led to a significant improvement in delivery of services and brought greater transparency in the functioning of the tax administration, thus, observed that the Circular was issued for mandatory generation of DIN to maintain a proper audit trail;

• The ITAT noted that every income-tax authority is required to satisfy the twin conditions viz., a) allot DIN and b) quote such DIN in the body of the communication;

• Chennai ITAT quashed the final assessment orders passed pursuant to DRP directions issued without quoting computer generated DIN.

Arkha Solar Power Private Limited [TS-720-ITAT-2023(VIZ)-TP]

• The assessee is engaged in Solar Power generation for AY 2017-18;

• TPO agreed with assessee’s use of CUP method for benchmarking interest paid on NCDs issued to AEs but held that assessee’s selection of comparables as arbitrary

• TPO accordingly proposed an adjustment by computing difference between interest adopted by assessee @13% and median computed by TPO @ 8.95%;

• The ITAT however considered assessee’s submissions that TPO selected comparables having secured debentures, whereas assessee had issued NCDs as unsecured and also some comparables selected by the TPO were not in solar power sector;

• The ITAT observed that “The key criteria for determining the interest rate is the risk involved. When the loan given is unsecured, the risk is higher and there would be a higher rate of interest. In our considered view, the relationship of a holding / subsidiary is not the criteria for determining the interest with respect to secured / unsecured debt instruments”;

• The ITAT finally held the rate of interest adopted by the assessee to be at an arm’s length.

- Rules on ‘market value’ for inter-unit electricity transfer for Sec.80-IA(8) of the Act - Jindal Steel & Others [TS-731-SC-2023]

Facts

• The Assessee had supplied power (electricity) to its industrial units for captive consumption at the rate of Rs.3.72 per unit.

• For the assessment year under consideration, the Assessee was paid at the rate of Rs.2.32 per unit for the surplus electricity supplied to the State Electricity Board.

• Assessing Officer took the view that the Assessee had declared inflated profits by showing supply of power at the rate of Rs.3.72 per unit to its sister units i.e., for captive consumption and accordingly restricted the deduction claim under Section 80-IA of the Act.

• CIT(A) confirmed the order of the Assessing Officer. The Hon’ble Tribunal set aside the order of CIT(A) by directing the assessing officer to allow relief to the Assessee under Section 80 IA as claimed.

• The Hon’ble High Court upheld the order of the Tribunal.

Hon’ble Supreme Court

Upholding the order of High Court, Hon’ble Supreme Court noted as under:

• The explanation below sub-section (8) defines the expression “market value” to mean the price that such goods or services would ordinarily fetch in the “open market”. Expression “open market” is not a defined in the Act.

• Black’s Law Dictionary, 10th Edition, defines the expression “open market” to mean a market in which any buyer or seller may trade and in which prices and product availability are determined by free competition

• P. Ramanatha Aiyer’s Advanced Law Lexicon has also defined the expression “open market” to mean a market in which goods are available to be bought and sold by anyone who cares to. Prices in an open market are determined by the laws of supply and demand.

• Therefore, the expression “market value” under Section 80-IA(8) of the Act would mean the price of such goods determined in an environment of free trade or competition.

• An industrial consumer could purchase electricity from the State Electricity Board or avail electricity produced by its own captive power generating unit. No other entity could supply electricity to any consumer.

• The captive power plants of the Assessee could sell or supply the surplus electricity (after supplying electricity to its industrial units) to the State Electricity Board only and not to any other authority or person. Thus, the price of Rs.2.32 per unit is a contracted price. There was no room or any elbow space for negotiation on the part of the Assessee.

• Therefore, determination of tariff between the Assessee and the State Electricity Board cannot be said to be an exercise between a buyer and a seller in a competitive environment or in the ordinary course of trade and business i.e., in the open market. Such a price cannot be said to be the price which is determined in the normal course of trade and competition.

• Value of the power supplied by the State Electricity Board to the industrial consumers should be construed to be the market value.

- Accepts adopted of Quotation as Internal CUP for benchmarking loan advanced to AEs – Intas Pharmaceutical Ltd [ITA No. 400/Ahd/2018]

Facts

• The Assessee had charged interest on outstanding amounts of advance to AEs @ 3.22% (adopting LIBOR+260 basis points), based on quotation given by Bank of Nova, Scotia (BNS), Singapore.

• The TPO however rejected Assessee’s internal CUP and proposed adjustment by adopting LIBOR/EURIPOR plus different mark ups, and further addition of 100 basis points towards forex risk adjustment.

• CIT(A) held that quotation relied upon by the Assessee was not a publication, and therefore, could not be relied upon as authentic and reliable.

Hon’ble Tribunal

ITAT observes that there is no basis for doubting the authenticity of the quotation; Opines, “How a publication is reliable, while a quotation is not has not been explained by the Ld.CIT(A). What can be derived from the order of the Hon’ble Gujarat High Court is that what is relevant for accepting an internal CUP is authenticity of the document from which it is derived. ... we see no reason given by the authorities below, nor is there any finding by the Revenue Authorities below to the effect that quotation of the Bank of Nova Scotia, Singapore was, in any way, not authentic. There is no investigation or inquiry conducted by the Revenue Authorities with regard to the authenticity of the quotation, and the Bank of Nova Scotia, Singapore is a renowned bank having global operations”

Hon’ble Tribunal upholds adoption of internal CUP and directs deletion of TP-adjustment in this respect.

- Quashes assessment order on share sale. Holds deviation from the AO from the TPO’s order not permissible under law - SAC Finance Company limited [TS-665-ITAT-2023(DEL)-TP]

Facts

• The Assessee acquired shares of an Indian company, Orbgen Technologies Private Limited (‘Orbgen’) through fresh subscription as well as purchase from independent third-party shareholders. The price was supported by valuation report.

• Thereafter, in the same FY, on March 30, 2017, the above shares were sold by the Assessee to its wholly owned subsidiary - Wormhole Technology (Singapore) Private Limited (‘Wormhole’). Due to close proximity of time, both purchase and sale transactions were undertaken at the same price.

• During the assessment proceedings the case was referred to the TPO, who vide order dated 30.01.2021 under Section 92CA(3) of the Act did not draw any adverse inference in respect of armed length price.

• The AO substituted the sale consideration by calculating it on the basis of the sale of shares of Wormhole by Assessee in the next FY (i.e., FY 2017-18) alleging that Wormhole derived its 100% value from its investment in shares/securities of Orbgen.

• The DRP largely upheld the order of the AO.

Hon’ble Tribunal

The Hon’ble Tribunal opined that where TPO has not proposed any adjustment and valuation has been adopted by the AO without verifying the true and correct facts qua the assets, the adjustment cannot be sustained.

This this regard Hon’ble Tribunal remarked – “the assessee has raised two fold objections. Firstly, the AO exceeded its jurisdiction by not following the order of TPO passed u/s 92CA(3) of the Act. In support of this contention, ld. AR drew our attention towards provisions of Section 92CA of the Act and placed reliance on various judicial pronouncements. Secondly, the value adopted is erroneous and contrary to settled position of law. It is stated that the fair market value (FMV) was computed as per DCF methodology and was duly supported by a valuation report obtained from an independent Chartered Accountant. The AO substituted the sale consideration on the basis of the sale of shares of Wormhole by the assessee in the next financial year i.e. F.Y. 2017-18. The assessee claimed before the ld. DRP that the total assets of Wormhole also included the assets (situated outside India) other than investment in Orbgen and, therefore, the AO grossly erred in deriving the value of shares of Orbgen on the assumption that 100% value is relatable to its investment in Orbgen. There is no dispute that the ld. TPO did not propose any adjustment. As per Section 92CA(4) of the Act, the AO is required to compute the Arm’s Length Price in conformity with the ALP so determined by the TPO. But in the present case, the AO deviated from the order of TPO. Such deviation is not permissible under law in the light of the statutory provisions and judicial pronouncements as relied by the assessee in its written submissions.”

OTHER UPDATE

CBDT notification amending Rule 10TA and Rule 10TD (Safe Harbour Rules) w.e.f. 1 Apr 2024.

For easy understanding, we have also captured the amendment in respective Rules:

Rule 10TA

• Loans advanced to any associated enterprise(s) (AE/s), now covered, instead of loan only to wholly owned subsidiary. Further, requirement to source the above loan, in INR, dropped.

• Definition of operating expense / operating revenue amended – Loss / gain on transfer of assets on which depreciation has been included in the operating expense, shall be treated as operating in nature.

Rule 10TD

• In case of loans advanced in INR, the requirement of the AE to obtain credit rating only from ‘CRISIL’ is done away with – instead credit rating to be obtained from a credit rating agency which is SEBI registered & RBI accredited.

• In case of loans advanced in foreign currency

1. Dual scenario introduced –

   1. Loans advanced to all the AE(s) does not exceed INR 250 crore; and

   2. Loans advanced to all the AE(s) exceeds INR 250 crore.

2. New reference rate allowed due to phasing out of LIBOR.

3. Changes in Spread added to reference rates.

Tabulated below are relevant rates:

Credit Rating	SH rates
For loans advanced to all the AE(s) does not exceed INR 250 crore
AAA to A -	Reference Rate* + 150 bps
BBB+ to BBB -	Reference Rate* + 300 bps
BB+ to D or Not Available	Reference Rate* + 400 bps

 

For loans advanced to all the AE(s) exceed INR 250 crore
AAA to A -	Reference Rate* + 150 bps
BBB+ to BBB -	Reference Rate* + 300 bps
BB+ to BB -	Reference Rate* + 450 bps
C+ to D or Not Available	Reference Rate* + 600 bps

* Reference Rate

Currency	Reference Rate
USD	6M SOFR + 45 bps
Euro	6M EURIBOR
UK Pound Sterling	6M SONIA + 30 bps
JPY	6M TORF+ 10 bps
AUD	6M BBSW
SGD	6M SORA + 45 bps

• Credit rating to be obtained from SEBI registered and RBI accredited credit rating agency.

• If more than one credit rating available for the borrowing AE/s, least of such credit rating shall be adopted.