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Facts
The appeals and cross-objections were filed against the order of the CIT(A) concerning assessment years 2013-14 to 2016-17. The issues involved transfer pricing adjustments on interest paid to an AE, addition for 'on money' cash receipts, and the validity of assessment proceedings under Section 153A.
Held
The Tribunal upheld the CIT(A)'s deletion of transfer pricing adjustment for interest on CCDs, finding the assessee's benchmarking flawed. The Tribunal also upheld the CIT(A)'s decision regarding the addition for 'on money' receipts, restricting it to 15% of the gross receipts. The jurisdictional grounds raised by the assessee were dismissed.
Key Issues
Whether the transfer pricing adjustment for interest on CCDs was justified, whether the addition for 'on money' receipts should be restricted to profit element, and whether the assessment under Section 153A was valid due to lack of incriminating material.
Sections Cited
250, 153A, 143(3), 144C(3), 92C, 127, 69
AI-generated summary — verify with the full judgment below
O R D E R Per Bench: This bunch of four appeals by the revenue and four cross objections by the assessee were filed against the order of the Learned Commissioner of Income-tax (Appeals)-56, Mumbai, [hereinafter called “Ld.CIT(A)”] passed u/s 250 of the Income-tax Act, 1961 (in short, ‘the Act’), dated of order 28/02/2023, combined order passed for A.Ys 2013-14 to 2016-17. The impugned order was emanated from the orders of the Ld. Deputy Commissioner of Income-tax, Central Circle- 6(2), Mumbai [for brevity, the “Ld. AO”], passed u/s 153A of the Act r.w.s. 143(3) r.w.s. 144C(3) of the Act for A.Ys. 2013-14 to 2015-16 and order passed u/s 143(3) r.w.s. 144C(3) of the Act for A.Y. 2016-17, all the assessment orders were passed on 23/01/2019.
Considering the appeal record we find that the Ld.CIT(A) passed a combined order related to A.Ys 2012-13 to 2016-17. The appeals filed by the revenue and cross objection filed by the assesseeonly related to A.Ys 2013-14 to 2016-17. No appeal is filed related to AY 2012-13. All the appeals and the cross objections have same nature of facts and have common issues. So all the appeals and cross objections are taken together, heard together and disposed of by a common order.
C.O. 57/Mum/2023 for A.Y. 2013-14 are taken as lead case.
3. The revenue has raised the following grounds:- to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd
1. On facts and circumstances of the case and in law the Id. CIT(A) Tax has erred in deleting the Transfer Pricing adjustment on account of difference between the interest paid by the assessee to its AE and its Arm's Length Price.
2 On facts and circumstances of the case and in law the CIT(A) Tax has erred in holding that the interest paid by the assessee during the year was at arm's length price. The Ld. CITIA) has erred in considering the benchmarking rate at SBI PLR- 300bps as against SBI PLR +75bps as determined by the TPO. In doing so, the id. CITIA) has not given any reason for not selecting the rate determined by the TPO
3 On facts and circumstances of the case and in law the id. CIMA) Tax has erred in wrongly interpreting the Judgement of the Delhi ITAT in the matter of Granite Gate Properties Put. Ltd. wherein the rate of SBI PLR 300bps was considered as the benchmarking rate. It is the intention of the law, and a generally accepted principal that benchmarking rate should be applied on a case to case basis and a specific rate of 300bps cannot be considered as a thumb rule for all cases if it is accepted by the ITAT in a specific case.
4 On facts and circumstances of the case and in law the Id. CIT(A) Tax has erred in wrongly interpreting the provisions of second proviso to section 92C of the Income Tax Act and in applying the same. The variance of 5% should be considered on a percentage basis of the arm's length price and not on an absolute basis. Ground Non- TP issue: 5. "Whether on the facts and circumstances of the case, the Id. CITIA) was right in restricting the addition of the receipt of on money of Rs. 66.68 lakhs to only 15% of the receipts and allowing the appeal of the assessee.?"
C.O. No. 57/Mum/2023 4. In the Cross Objection, the assessee has raised the following grounds:- “Revised Grounds of Appeal a. That the Ld. AO erred in making addition/adjustment for transfer pricing for the A.Y. 2013-14 and thereby reducing the WIP in the absence of incriminating materials found in the search, without appreciating the settled legal principle that assessment can be b. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in rejecting the additional ground raised by the assessee without considering the decision of the Hon'ble Jurisdictional High Court in the case of Commissioner of Income Tax-II Pune vs. Continental Warehousing Corporation (Nhava Sheva) Ltd [Income Tax Appeal No. 523 OF 2013]. c. The appellant craves leave to add to, alter, to delete from or substantiate the above ground of appeal.”
Pecuniary jurisdiction of assessing officer (application U/R 27 of Income Tax(Appellate Tribunal) Rule, 1963 on dated 02/11/2023) 5. The Learned Authorised Representative (“Ld. AR”) advanced his arguments and filed a written submission, which has been taken on record. The assessee has raised additional grounds challenging the jurisdiction of the Deputy Commissioner of Income-tax, Central Circle–6(2), Mumbai, in completing the assessment.The Ld. AR submitted that the assessee had declared a loss of Rs.8,65,13,046/- in the return of income, and therefore the assessee’s case squarely falls within the purview of CBDT Instruction No. 1/2011 dated 31/01/2011. According to the said Instruction, the pecuniary jurisdiction in such cases lies with the Income-tax Officer. Consequently, the assessment order passed by the Deputy Commissioner of Income-tax is without jurisdiction and liable to be quashed. In support of this contention, he placed reliance on the judgment of the Hon’ble Calcutta High Court in PCIT-1, Kolkata v. Shree Shoppers Ltd.,reported in 2023 (3) TMI 1432 (Cal)&order of Hon’ble High Court of BombayinAshok Devichand Jainv.Union of Indiareported in [2023] 151 taxmann.com 70 (Bombay). He further argued that to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd the jurisdiction assumed by the Ld. DCIT is erroneous, and therefore the entire assessment proceedings stand vitiated.
6. In response, the Learned Departmental Representative (“Ld. DR”) submitted that in cases arising out of search and seizure operations, the concept of pecuniary jurisdiction under CBDT Instruction No. 1/2011 is inapplicable. The said Instruction governs normal assessments and not assessments framed pursuant to search and seizure proceedings. Search assessments are governed by CBDT Instruction No. F. No. 286/92/2001-IT (Inv.) dated 21/08/2001, which deals with the centralization of search cases and decentralization of non-search cases. The Ld. DR placed reliance on the judgment of the Hon’ble Delhi High Court in Chaudhury Skin Trading Company &Ors. v. PCIT &Ors., WP (C) 3837/2016, CM APPL 16315/2016, decided on 02/11/2016. The relevant paragraphs (7 to 10) are reproduced below: “7. Counsel for the revenue submitted that the writ proceedings are without merit. It was stated that the mention of the fact. Le search and seizure operation and the proposal to centralize it were reasons enough for which a valid notice could be given. Furthermore, the assessees did not express prejudice or substantial prejudice at the stage when they had responded to the notice. On the merits, it was urged that the rationale, is of coordinating the post investigation efforts and meaningful assessments were sufficient compliance with law It was highlighted that the search has yielded incriminating documents and in this context coordination m regard to the block assessment with respect to post search investigation was relevant and could be efficaciously carried out at one place. It is evident from the above discussion that the petitioners grievance as articulated is twofold, firstly whether the notice was vitiated and secondly if not whether the reasons given in the transfer order are of the nature that can stand scrutiny under Section 127.
8. The narrative would disclose that none of the assessees voiced any prejudice at the stage when they were issued notices. The record shows that all of them responded to the notice and gave their own justification why the final order under Section 127 should not be made. The assessee has no doubt relied upon the authority to say that this omission does not stop it from contending that the notices were void at the same time, the Court is not unmindful of the fact that two stages are separate. The substantiality of prejudice for lack of reasons or otherwise has to be independently considered given the fact of each cases. In the present case it is not as if the notice did not contain the reasons at all. The assessees contentions that the notice did not contain reasons is fallacious, the reference to search and seizure operations and the proposal to centralize the cases in Ghaziabad cannot be considered no reasons. If these had been omitted, the assessees would have been within their rights that the notices did not contain reasons. The assessees were fully aware of the search and seizure operations and the fact that its premises in Ghaziabad too were subject to such proceedings. Having regard to all these facts, the Court hereby rejects the first contention that the ingredients of the notice did not exist when the proposal to transfer was first notified to these assessees.
9 As far as the rationale to transfer, ie, conduct of coordinated post search investigation and meaningful assessment goes, we are of the opinion that like in the case of first contention, the assessees have failed here as well The kind of reasoning required by an order under Section 127 cannot be compared or likened to a quasi judicial order that has adverse consequences. One can understand if additions are made on sketchy or bare minimum reasons, they cannot be upheld. However, what is proposed by an order under Section 127 is the transfer of one or several assessments from one circle to another, to that extent inconvenience undoubtedly ensue, however, to say that this leads to grave prejudice if detailed reasoning were not given is something that the Court cannot countenance The consequence would only be that the assessees contentions would have to be taken into account by another Assessing Officer who would also have before him or her all other related assessments. In these circumstances, the to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd Court is unprepared to hold that the brief reasons relied upon by the revenue does not amount to reasons ar all or that they are vague. In such exercise in every case where an order under Section 127 is challenged, there are two interests those of the assessees who invariably plead inconvenience and hardship and that of the revenue which would inevitably cite public interest. The Court's task is to unravel whether in fact the revenue's contentions are correct and if so reject the assesseescontentions. On the other hand, if there is no real public interest and if there are no reasons even the briefest one, the order ca be sustained. Conversely, if there is reasoning and the public interest is discernable, as in this case, the only result can be rejection of the assessees contentions
10. In view of the forgoing analysis, we are of the opinion that these petitions have no merit, they are accordingly dismissed along with pending applications.”
7. The Ld.DR submitted a written submission dated 23/04/2024 where the Ld.DR respectfully relied on the order of Hon’ble Gujarat High Courtin case of Kamlesh Rajnikant Shah vs. PCIT reported in (2022) [138 taxmann.com 59 (Gujarat). The relevant paras 2.2 and 2.2.1 of the DR’s written submission are as follows:- “2.2 The seminal decision of the Hon'ble Gujarat High Court in Kamlesh Rajnikant Shah vs. Principal Commissioner of Income Taxx (2022) [138 Taxmann.com 59 (Gujrat)] articulates the statutory provisions governing the power to transfer cases under centralization. The Court emphasized that Section 127(1) mandates the Commissioner to exercise this authority only after affording the assessee a reasonable opportunity of being heard and recording reasons for such transfer. This emphasizes the procedural fairness and legitimacy integral to the transfer process. Importantly, the High Court observed: "We may only observe that the transfer order passed under Section 127 of the Act is more in the nature of an administrative order rather than a quasi-judicial order and the assessee cannot have any right to choose his Assessing Authority, as no prejudice can be said to have been to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd caused to the assessee depending upon which authority of the department passes the Assessment Order. The assessee can only be concerned with getting an opportunity of hearing before the concerned Assessing Authority and adduce his evidence and make his submissions before the concerned Assessing Authority."
2.2.1 This observation underscores that the essence of the transfer order is administrative in nature. The assessee's primary entitlement is to a fair hearing and the opportunity to present evidence and submissions. Irrespective of the Assessing Authority designated to the case, no prejudice can be claimed by the assessee based on the authority within the tax department that issues the Assessment Order. The fairness and legality of the assessment remain consistent regardless of which specific authority within the department makes the decision. Thus, the validity of the Assessment Order should not be challenged solely on the basis of the authority issuing it.”
We have heard the rival submissions and perused the documents available on record. On a plain reading of CBDT Instruction No. 1/2011 dated 31/01/2011,we find that, in terms of pecuniary jurisdiction, the assessee’s case would ordinarily fall within the jurisdiction of the Income-tax Officer and not the Deputy Commissioner of Income-tax. However, in search and seizure cases, the concept of pecuniary jurisdiction has no application, as search assessments are not assigned to any Income-tax Officer. The lowest authority empowered to complete a search assessment is the Assistant Commissioner of Income-tax or Deputy Commissioner of Income-tax. We note that the Hon’ble Delhi High Court in Chaudhury Skin Trading Company &Ors. (supra) and the Hon’ble Gujarat High Court in Kamlesh Rajnikant Shah (supra) have clearly distinguished between jurisdiction applicable in normal assessments and jurisdiction applicable in search assessments. In view of these binding judicial precedents, the CBDT Instruction to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd relied upon by the assessee is not relevant for determining jurisdiction in search- related assessments.The Ld. AR has further placed reliance on the decisions of the Hon’ble Calcutta High Court in Shree Shoppers Ltd. (supra) and the Hon’ble Bombay High Court in Ashok D. Jain (supra). However, both these decisions pertain to issues arising in non-search assessments and are, therefore, not applicable to the present controversy.In light of the above discussion, we find no merit in the jurisdictional objection raised by the assessee. Accordingly, the additional ground raised
in the cross-objection for all the assessment years stands dismissed. Cross Objection of the Assessee A.Y. 2013-14 TO 2015-16 Jurisdiction of assessment U/s 153A of the Act, Lead AY 2013-14
9. The Ld. AR has challenged the jurisdiction of the assessment completed under section 153A of the Act on the ground that the assessment was framed without reference to any incriminating material. This legal issue was duly raised before the Ld. CIT(A), who has examined and adjudicated the matter at page 18 of the appellate order. The relevant paragraph from page 18 of the impugned appellate order is reproduced below: “ The appellant has relied upon the decisions in the cases of CIT vs. Continental Warehouse Corporation (2015) 374 ITR 645, CIT Vs Gurinder Singh Bava 79 taxmann.com 398 (Bom), CIT Vs Continental Warehousing Corporation (Nhava Sheva) Ltd 5 TMI 656 (Bom) and Jasmin K. Ajmera (ITA no. 983/Mum/2020. The decision relied upon by the appellant talks about incriminating evidence or incriminating material found during search action and not merely ‘seized material’ or ‘seized documents’. to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd During the search proceedings, it was revealed that the Ekta group was involved in taking "On-money' on sale of flats/shops in the projects constructed by the group. In the case of the appellant, page no. 18 of Annexure-A4 seized from residence of Shri Parteek Arora, contained specific details of taking On-money in cash in respect of sale of flat no. B-1203 and B- 1205, Tripolis Project, Goregoan. Mumbai. In view of the facts and circumstances of the case of the appellant, there was incriminating material/evidences, based on which the AO has initiated and completed the assessment proceedings u/s 153A of the Act In view of the facts as discussed above, the assessment order making certain additions/disallowances passed by the AO u/s 153A of the Act is the valid order in the eyes of the law.”
10. The Ld. AR filed a written submission and contended that, in the absence of any incriminating material for an unabated assessment year, the order passed by the Ld. AO under section 153A is without jurisdiction. In support of this contention, the Ld. AR placed reliance on the judgment of the Hon’ble Supreme Court in PCIT v. Abhisar Buildwell Pvt. Ltd. (2023) 149 taxmann.com 399 (SC).
The Ld. DR, on the other hand, submitted that paragraph 7 of the impugned assessment order specifically records the existence of incriminating material. Based on such material, an addition of Rs.66.68 lakhs was made to the assessee’s total income. Therefore, for the unabated year under consideration, the Ld. AO had duly relied upon incriminating material, rendering the assessment under section 153A valid.
12. We have heard the rival submissions and carefully examined the material on record. The reliance placed by the Ld. AR on Abhisar Buildwell Pvt. Ltd. (supra) to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd is noted. In that decision, the Hon’ble Supreme Court held that where no incriminating material is unearthed during a search in respect of an unabated assessment, no addition can be sustained, and the entire assessment must fail. However, the facts of the present case are materially distinguishable. Here, incriminating material was indeed found during the search, and a part of the addition has been made on the basis of such material. Accordingly, we find no infirmity in the appellate order on this issue and the same is upheld. The ground raised by the assessee in the cross-objection is, therefore, rejected.
(AY 2013-14) On money cash on sale of shop 13. During the search proceedings in A.Y. 2013-14, it was found that the assessee received on money on sale of shop amount to Rs.66,68,000/-. The Ld.AR stated that the Ld.AO has added back the entire amount with the total income of the assessee. In his argument, he stated that only the profit part is duly embedded in the transactions. The addition was challenged before the Ld. CIT(A). The Ld. CIT(A) observed the only the profit percentage will be applicable for addition. The observation of the Ld. CIT(A) is reproduced as below:- “17.3.5 The another argument made by the appellant is that only income embedded in the gross receipt should be added instead of gross amount mentioned in the incriminating documents. It is a fact that the appellant is engaged for the business of builder and developer. The incriminating documents contained the details of receipt of On-money in cash in respect of sale of flats in project Tripolis at Goregaon. The AOhas made addition on the basis of receipt mentioned in page no.18 of annexure A4 seized during the search proceedings. The search was to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd conducted by the department in the case of entire Ekta Group' including employees During the search in the group cases various incriminating documents have been seized. Other cases of group were subjected to search assessment in other group cases, on the basis of the analysis of entire documents seized dunng the search proceedings, the ITAT Mumbai has held that the net income element embedded in the on money receipts could safely be taken in the case of the captioned assessee 15% of the amount of the on money receipts The relevant Para of ITAT's decision in the case of Mis. Ekta Housing Pvt. Ltd. [ITA No.1732- 1733/Mum/2019 is reproduced as under- “………….9. We shall now advert to the grievance of me assessee that the CI(IA) had erred in estimating the income element embedded in the on-money of Rs. 29 lac received by the assessee@ 20% of such receipt which is on higher side, and the same should have been estimated @ 12% of the amount of such on money receipt as was offered by the assesseeesofar the quantification of the income element embedded in the on-money received by the assessee is concement we find mat it was the claim of the assessee Thar the same in all fairness be taken 12% of the said recepts as was offered by it. However, the CIT(A) being of the view that the assessee could not substantiate the very basis for estimating the income element embedded in the on-money receipt @ 12% thus held a conviction that the same could reasonably be taken 20% of the said receipts. Admittedly,both the assessee and the CIT(A) had resorted to an estimation of the income element embedded in the on-money receipts which we are afraid in neither case is backed by any basis or reasoning. As coserved by us hereinabove, the Hon'ble High Court of Gujarat in the case of Dy CIT s. Panna Corporation (2012) 82 OCH 208 (Guj) had held that for the purpose of estimating the income element embedded in the on-money receipts what should be estimated as a reasonable profit out of such receipts must bear an element of estimaton. Admitedly, the quantification of the income element embedded on the on-money receipts has to be on the basis of a process of estimation but then there has to be to the extent possible some logical reasoning explaining the basis for arriving at such estimate. As is discernible from the order of the CIT(A) was the claim of the assessee company that its group concrns which had approached the income-Txr Settlement Commission (for short ITSC) had offered for txs the income element embedded in the on-money received by them@15% of such receipts and the same had been accepted by the commission. However, the CIT(A) was of the view that the percentage of profit offered by the above concerns to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd before me ITSC and accepted by thelatter was applicable only to the cases before the commission and was in no way binding on the other case which were not before it. At the same time, it was observed by the CIT(A) that the percentage of profit offered by the group concerns before the ITSC and accepted by the latter could be taken as a guiding factor. in the backdrop of the aforesaid observation of the CIT(A), we are of the considered view that she in all fairness for the purpose of estimating the income element embedded in the on-money receipts could have safely taken it at the same figure @ 15% of the amount of onmoney receipts as was accepted by the ITSC. Our aforesaid conviction is all the more supported by the fact that no reason or logic had been given by the CIT(A) for taking the income element embedded in the on-money receipts 20%. We, thus, are of the considered view that the net income element embedded in the on money receipts can safely be taken in the case of the captioned assessee @15% of the amount of the on-money receipts. The Ground of appeal No. 2 raised by the assessee is partly allowed in terms of our aforesaid observations…” Thus, looking to the facts of the case of the appellant vis-à-vis group cases of Ekta Group, entire gross On-money' receipts cannot be considered as unaccounted income. 15% of the 'On-money' receipts has been upheld as unaccounted income by the ITAT. Mumbai in the group case, ie. M/s. Ekta Housing Pvt. Ltd., therefore 15% of gross receipts of Rs.66,68,000/- which comes to Rs. 10,00.200/- is upheld as unaccounted income of the appellant and the balance addition of Rs.56,67,800/-is deleted.”
14. The Ld.AR further relied on the order of Hon’ble Gujarat High Court in the case of DCIT vs Panna corporation (2012) 82 CCH 266 (Guj). The Ld.AR submitted a written submission and the relevant para 3 on page 21 is extracted as below:- “3. The same principle has been followed by the Gujarat High Court in case of Dy.CIT Vs. Panna Corporation (2012) 82 CCH 266 (Guj), wherein it is held, that for the purpose of estimating the income element embedded in the on-money receipts what should be estimated as a reasonable profit out of such receipts must bear an element of estimation. Relevant para is herein reproduced below: to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd "13. We may recall that the Tribunal, in the impugned judgment, relied on its previous judgment in case of Kishor Mohanlal Telwala v. Asstt. CIT MANU/IB/5041/1997: (1999) 64 77) (Ahd) 543. The said judgment of the Tribunal was apparently carried in appeal by the Revenue. The High Court by a speaking under dt. 24-4-2000, dismissed the appeal holding that no question of law was involved. Significantly, in case or Kishor Mohanlal Telwala (supra), the assessee was engaged in the business of construction. In his case, unaccounted receipt of Rs. 1.47 crores was detected. In this background, the Division Bench confirmed the view of the Tribunal and did not accept the contention of the Revenue that us no accounts had been maintained to substantiate the expenditure incurred by the assessee, the entire amount received by the respondent should be treated as income. The court concluded that the Tribunal was justified in considering that the respondent assessee ought to have spent reasonable amount for the purpose of receiving such grass receipt.
It can, thus, be seen that consistently, this court and some other Courts have been following the principle that even upon detection of on-money receipt or unaccounted cash receipt, what can be brought to tax is the profit embedded in such receipts and not the entire receipts themselves. If that be the legal position, what should be estimated as a reasonable profit out of such receipts, must bear an element of estimation.
In view of the legal position that not the entire receipts, but the profit element embedded in such receipts can be brought to tax, in our view, no interference is called for in the decision of the Tribunal accepting such element of profit at Rs. 26 lakhs out of total undisclosed receipt of Rs. 62 lakhs. In other words, we accept the legal proposition, the Tribunal accepting Rs. 26 lakhs disclosed by the assessee as profit out of total undisclosed receipt of Rs. 62 lakhs, would not give rise to any question of law. In the result, the tax appeals are dismissed."
15. The Ld. DR argued that the Ld. CIT(A) erred in adjudicating the issue and in restricting the addition to 15% of the gross cash received by the assessee from the sale of flats. She placed reliance on the order of the Coordinate Bench of the ITAT, Mumbai, in Alik Akbar Samai Choudhuri, to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd pronounced on 17/05/2024, wherein the Bench confirmed the addition of 100% of the on-money amount under section 69 of the Act.
We have heard the rival submissions and perused the material available on record. We note that the Ld. CIT(A) has adjudicated the issue by placing reliance on the assessee’s own case in & 1733/Mum/2019, order dated 24/05/2021. Further, relying on the judgment of the Hon’ble Gujarat High Court in Panna Corporation (supra), the Ld. CIT(A) has correctly observed that the gross receipts are embedded with the gross profit element. Therefore, when the amount in question is treated as part of sales, the entire gross receipt cannot be added back to the total income.In this factual backdrop, the order relied upon by the Ld. DR in Ali Akbar Samai Choudhury (supra) is clearly distinguishable and does not apply to the present case.Accordingly, we uphold the findings of the Ld. CIT(A), and the ground raised by the revenue stands dismissed.
A.Y. 2014-15 – Interest on late payment of service tax – Rw.11,01,353/- 16. Related to this addition, the revenue challenged the order of the Ld.CIT(A) that the addition was made by the Ld.AO regarding provision for contingency of Rs.11,34,,400/- made on account of interest on late payment of service tax. The assessee challenged this issue before the Ld.CIT(A). The Ld.CIT(A) deleted the addition made by the Ld.AO with the following observations at para 8 on pages 12-13, which as follows:- “8. Ground no.2 is regarding disallowance of provision for contingencies of Rs. 11,34,400/-made on account of interest on late payment of service tax. to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd 8.1 During the assessment proceedings the AO observed that during the year the appellant claimed expenses of Rs.11,34,400/- in respect for provision for contingency. The AO was of the view that the provision was male or contingency and the assessee had not actually incurred the expenditure. There AO disallowed the pros of Rs. 11.34.400/-.
4.2 During the appellate proceedings, the appellant has fled a written submission.
The appellant has submitted that the provision of Rs.11 34,400 was made respect of interest on delayed payments of service tax. The provision was made as per the regalement of service la casted that out of provision of Rs 11.34,400 the amount of Rs 11.01 353/- was paid on 08 11.2013 and balance amount of Rs 22.047 was returned back and credited to the P&L AFY 2013 14 relevant to 2014-10 The facts on record reveal that during the year, the appellant had made provision for payment of interest on delayed payment of service tax. The provision was made as per the requirement of the service tax Act. The provision was in fact subsequently paid on 08 11 2013 and a balance provision was returned back and other for laxation in AY 2014-15 Thus the provision of ere was not contingent but it was an ascertained liability Therefore the disallowance of Rs 11.34,400- made by the AD in respect to provision for interest on delay payment of service taxis deleted Accordingly, ground no 2 of the appeal is Allowed”
The Ld.AR argued and respectfully relied on the order of Hon’ble Supreme Court of India in Lachmandas Mathuradasv. CIT reported in [2002] 122 Taxman 828 (SC). The relevant para 3 is extracted below:- “3. While granting special leave to appeal, the appeal has been confined to question Nos. 1 and 2 only. The High Court has proceeded on the basis that the interest on arrears of sales tax is penal in nature and has rejected the contention of the assessee that it is compensatory in nature. In taking the said view the High Court has placed reliance on its to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd Full Bench's decision in Saraya Sugar Mills (P.) Ltd. v. CIT [1979] 116 ITR 387 (All.) The learned counsel appearing for the appellant-assessee states that the said judgment of the Full Bench has been reversed by the larger Bench of the High Court in Triveni Engg. Works Ltd. v. CIT [1983] 144 ITR 732 (All.) (FB), wherein it has been held that interest on arrears of tax is compensatory in nature and not penal. This question has also been considered by this Court in Civil Appeal No. 830 of 1979 titled Saraya Sugar Mills (P.) Ltd. v. CIT decided on 29-2-1996. In that view of the matter, the appeal is allowed and question Nos. 1 and 2 are answered in favour of the assessee and against the revenue. No order as to costs.
The Ld.DR argued and relied on the ordet of Ld. CIT(A).
We heard the rival submissions and considered the documents available on the record. We find that the said issue related to the provision is not a contingent liability. The provision was created by the assessee in respect of interest on delayed payment of service tax. The said provision was made as per the requirement of the service tax Act and it is also submitted that out of provision of Rs.11,34,400/-, the amount of Rss.11,01,353/- was paid in FY 2013-14 and the balance amount of Rs.22,047/- was written back and credited to P&L Account in FY 2013-14 relevant to A.Y. 2014-15. So considering this, relying on the order of Laxmandas Mathura (supra), the expenses is in compensatory in nature. The view taken by the Ld.CIT(A) is upheld. Accordingly the ground of the revenue is dismissed. to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd A.Y. 2015-16 – bogus purchases (Assessee’s appeal) 20. During the search proceedings, the statement of the director of the assessee company was recorded. In the statement of Shri Vivek Mohnani, Joint MD of the assessee duly recorded on 12/10/2015 in which he admitted that purchase of Rs.44,72,989/- made from Singular Mercantile Pvt Ltd was bogus. Therefore, the Ld.AO issued show cause notice. But the assessee submitted that the assessee had not claimed the said expenses in P&L Account and it was carried forward to work-in-progress. Accordingly, the Ld.AO reduced the WIP amount to Rs.44,723,989/- from closing WIP of the closing stock amount to Rs.612,93,00,948/- allowed to be carried forward instead of closing WIP of Rs.613,37,73,937/-. The same reduction in WIP was challenged before the Ld.CIT(A) and the Ld.CIT(A) dismissed the ground of the assessee. The Ld. CIT(A) has taken the observations at para 38 on pages 46, which is extracted below:- “38. Ground No.2 is regarding addition of Rs 44,72.989/- in respect of bogus purchases and reducing the same from WIP.
38.1 During the assessment proceedings, the AO observed that during the search proceedings the statement of Sh. VivekMohnani Joint MD of the Ekta Group was recorded on 12.10.2015, in which he had admitted that the purchases of Rs 44.72.989 made from Singular Mercantile Pvt Ltd was bogus. Therefore the AO issued show cause notice as to why addition of bogus purchases should not be made in response to the show cause notice, the assessee submitted that these expenses were not claimed as expenses in the P&L account and was carried forward to WIP Therefore, it was submitted that this could not be taxed as income. However the AD was of the view that the reduction of bogus purchase from WIP in A,Y.2017-18 is not correct accounting treatment Further these purchases were admitted as bogus during the search to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd proceeding Therefore, the AD has reduced the bogus purchases amounting to Rs 44,72.989 from the closing WIP and closing WIF amounting to Rs 612.93.00.948 was allowed to be carried forward instead of the closing WIP of Rs.513.37.73,937 38.2 During the appellate proceedings, the appellant fired a written submission which is reproduced as under:- “During the course of search the appellant had made admissions related to alleged bogus purchases. Al costs, including these purchases were not clamed as expense but were only added to the Work-n-Progress account shows the balance sheet of the Appellant.
Upon admission of the above the appellant had duly reduced the extreme amount of purchases from the Work-in-Progress account in the Assessment Year 2017-18 However, disregarding the same the Ld. AO has arbitrarily proceeded with again reducing the purchase cost from the Work- Progress account in each year. This actor of the Lo AO would result in double reduction of the same amount which wasn’t even clamed as deduction in the first place. Hence, we pray your honor that the above amount may not be reduced from the work- In- Progress account of this year and this ground be allowed.”
38.3 The facts recorded in the assessment order and submission made by the appellant has been considered. It is submitted by the appellant that the alleged bogus purchases were admitted during the search proceedings and such bogus purchases were not claimed as brogus purchase but added to the WIP. As the purchases were accepted as bogus the appellant reduced the entire amount of purchase from WIP in AY 2017-18 Thus there would be double reduction of the same amount. The fact remains that the purchases amounting to Rs. 44,72,960 was accepted by Sh. Vivek Mohnani, Joint MD of the Ekta Group as bogus purchases made from Singular Mercantile Pvt. Ltd. On the basis of admission made during the search proceedings, the appellant reduced the bogus purchases from the work in progress in FY 2016-17 relevant to A.Y.2017-18 Such purchases made by the appellant FY 2014-15 is the expenses related to FY 2014-15 and a has to to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd be considered in FY 2015-16 and not related to AY 2017-18. Even though the appellant has included these expenses work in progress, the expenses relates to A.Y. 2015-16 and is to be considered only in the year is which has been incurred. Therefore, the AD justified in reducing the amount of bogus purchases from the WIP for AY 2015-16 However, the AO is directed to allow the effect of this in A.Y 2017-18.”
The Ld.AR argued and stated that the entire bogus purchases will not be added back to the total income and only the proportionate gross profit will be added back. Considering this, he respectfully relied on the orders of ITO 41(1)(3), Mumbai vs Mulchand Ramajor Gupta 2025 (6) TMI 139 (ITAT, MUMBAI); ACIT vs Vijay Security Systems P Ltd 2025 (6) TMI 473 (ITAT, MUMBAI) and further relied on ITO vs M/s Mangalam Drugs & Organics Ltd, Mumbai reported in 2025 (5) TMI 1703 (ITAT, MUMBAI) where the co-ordinate bench has taken view that the entire purchases was not added back with the total income. Only the proportionate gross profit will be added back.
The Ld.DR argued and stated that the director of the assessee company has duly accepted the bogus purchases. No substantial evidence was submitted before the Ld.AO in support of his claim. She further respectfully relied on the order of the Hon’ble HIGH Court of Bombay in PCIT v. Kanak Impex (India) Ltd., reported in [2025] 172 taxmann.com 283 (Bombay) where the Hon’ble High Court has added back the entire purchases with the total income of the assessee. The relevant paragraph is reproduced as below:- “39. In the instant case before us, the respondent-assessee has not appeared in the re- assessment proceedings to discharge its onus on proving purchase transactions under to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd consideration. Before the CIT(A) for the first time, scanty details of sundry debtors, creditors and stocks were given. The CIT(A) gave a finding of the respondent-assessee's involvement in bogus transaction. Therefore, the finding of the AO on the genuineness of the purchases was confirmed by the CIT(A). Before the Tribunal, the respondent-assessee has not canvassed any submission on the genuineness of the purchases but only pleaded for an estimation of a certain percentage of such bogus purchases to be added. Therefore, before all three authorities, the respondent-assessee has not proved the genuineness of the purchases, which inter alia include the source of making the payment for such purchases. In the light of these factual findings by three authorities, today before this Court, the respondent-assessee's submissions that they have discharged the onus cast upon them to prove the genuineness of the purchases, including the source cannot be accepted.”
We have heard the rival submissions and perused the documents available on record. The Ld. AR placed reliance on certain orders of the co-ordinate benches of the ITAT, Mumbai. However, we find that in those cases the assessees had duly discharged their onus by furnishing supporting documents such as purchase bills, stock registers, bank statements and ledger accounts. In the present case, the assessee has accepted the fact of bogus purchases and has never retracted such admission before any of the authorities below. Moreover, during the assessment proceedings, the assessee failed to furnish any documentary evidence to substantiate the genuineness of the impugned purchases. Thus, the primary onus to establish the genuineness of the purchases has not been discharged. Consequently, the reliance placed on the orders of the co-ordinate benches is misplaced. to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd We respectfully rely on the decision in Kanak Impex (India) Ltd. (supra). In view of the above discussion, we find no infirmity in the findings of the Ld. CIT(A), and therefore no interference is warranted. Accordingly, the ground raised by the assessee is dismissed.
A.Y. 2013-14 : Transfer Pricing issue (Revenue’s appeal) 24. The Ld.AO made adjustment u/s 92CA(3) toward interest amount to Rs.3,32,55,122/-. The said adjustment was duly made in the WIP of the assessee. The assessee received the amount from sister concern out of India and interest paid by the assessee to AE is at arm’s length price (ALP). The Ld.AO, after the TP study has taken SBI PLR as comparable rate which was increased by 75 basis point considering credit rating of the assessee and the risk involved. The Ld.AO has benchmarked the interest rate at 15.5% as against interest rate of 17.19% taken by the assessee. The aggrieved assessee filed appeal before the Ld.CIT(A). The Ld.CIT(A) considered that SBI PLR rate could be taken as comparable to determine the ALP of the interest paid on CCD to AE. The assessee had issued CCD amounting to Rs.134,95,10,000/- to SA Chitra Ventures Ltd, who was based in Cyprus, The debentures were issued in 4 tranches in A.Ys. 2011-12 and 2012-13 and the rate of interest was 19.17% per annum. The assessee benchmarked the transaction using Bloomberg and FCMDA data base. The assessee benchmarked the transaction considering US Industrial Yield which was adjusted with respect to Indian Industrial Yield. The assessee also took the fluctuation risk. On the other hand, the Ld. AO has taken SBI PLR as comparable rate which was further increased by 75 basis point considering credit rating of assessee and risk involved. to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd The aggrieved assessee challenged the adjustment before the Ld.CIT(A). The Ld. CIT(A) adjudicated the issue for AY 2012-13 and followed in other years. The CIT(A) relied on the order of Granite Gate Properties Pvt Ltd vs ACIT (2020) 116 taxmann.com 952 (Del Trib.) where the co-ordinate bench of ITAT, Delhi held that where the assessee paid interest on FCCDs issued by assessee to its AEs as per the investment agreement, the SBI PLR rate plus 300 basis point should be taken into consideration for payment of interest for purpose of determining the ALP. Accordingly, the Ld.CIT(A) adjusted and restricted the same to the amount of Rs.1,31,10,958/-. Finally, the Ld.CIT(A) has taken view that the difference is (+) / (-) 5%; so as per the Finance act, 2012 with effect from 01/04/2013, in case of assessee, the variation between the ALP determined by the TPO and that taken by the assessee is 1.42% for A.Y. 2012-13 and it is within the acceptable range of 5% of the price of international transactions actually undertaken by the assessee. Thus, the entire addition is finally deleted by the Ld.CIT(A). So, accordingly, the reduction of WIP amounting to Rs.1,31,10,958/- is also deleted. The aggrieved revenue filed an appeal before us.
The Ld.AR in argument has invited our attention to appellate order para 7.3.4. The observation of the LD.CIT(A) is extracted below:-
“7.3.4 in the case of the appellant, the Arms Length Price of the interest paid is taken SBI PLR of 14.75% + 350 basis point which comes to at 17 75% as against 18.17% taken by the appellant. Thus, the difference between ALP considered by me TPO and that taken by the appellant comes to 1.42%. Second proviso to Clause 2 to sec 920 provides that if the variation between the ALP determined by the TPO and the price at which international transaction has actually undertaken to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd does not exceed such percentage of the actual price of the transaction, the price at which international taxation has actually undertaken should be the ALP of the transaction the proviso, the word "such percentage was substituted for 5% of the letter by Finance Act. 2011 wet. 01.04.2012. Further the words "not exceeding 25% was inserted by Finance Act. 2012 wet 01.04.2013 in the case of the appellant, the variation between the ALP determined by the TPO and that taken by the appellant is 1.42% A.Yr. 2012-13 and it is within acceptable range of 5% of the price of international transaction actually undertaken by the appellant. Thus, the rate of 19.17% of interest paid on CCD should be the ALP, therefore, no adjustment in the transaction paid the interest paid to AE on CCD is warranted. Therefore, the adjustment of Rs 1.31.10.958/- made by the TRO as well as the AO is deleted. As a consequence the reduction in the closing WIP amounting to Rs 1,31,10,358/- is also deleted.”
The Ld.DR submitted the written submission dated 24/04/2024. Para 4 of the same is duly extracted below:- “4. Transfer Pricing Issue: The decision of Ld. CIT(A) not acceptable on following grounds:
4.1. The assessee used CUP method for benchmarking and considered USD industrial yields pertaining to the US economy and not of India. The assessee did not make any efforts to find out the interest rate of CCDs issued in India and also assessee issued CCDs in Indian rupees and hence the appropriate comparable has to be taken which is applicable in India.
4.2. The assessee issued CCDs but the comparison used pertains to OCDs. The main difference between compulsory convertible debentures and other convertible securities is that owner of the CCD must convert their debentures into equity whereas in other types of convertible securities, the owners of the debenture are given the option to convert and the CCDs have lesser rate of interest than the OCDs/NCDs. to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd 4.3. Further, the assessee issued CCDs in Indian rupees and the appropriate comparable have to be taken which is applicable in India. Accordingly, considering the credit rating of the assessee and the risks involved, 75 basis points is added to the SBI PLR and the coupon rate is benchmarked at 15.5%.
4.4. Matter pertains to addition on account of interest paid to AE on CCD of Rs.1,31,10,958/- which has been reduced from the Closing WIP of the assessee. The assessee has charged interest payable to AE 19.17% Rate considered by TPO = SBI PLR + 75bp = 14.75+0.75=15.5% CITIA) applied rate SBI PLR 300bp = 14.75 + =17.75% 4.5. The 14 CIT (A) has relied upon the judgment of Hon'ble ITAT, Delhi in the matter of Granite Gate Properties (P) Ltd. The judgment of GGPL States that considering the risk of investment, an addition of 300bp can be considered reasonable and therefore, the transaction can be considered to be at ALP. However, the judgment of the ITAT does not set any benchmark for determination of ALP ie 300 bps. An analysis on a case to case basis needs to be done before determining the addition to SEII PLR. Neither CITIA) nor the assessee has considered any of the above and have considered the rate of 300bp as a benchmark for addition. On the other hand, the TPO has considered specific risk and financial analysis pertaining to the credit rating of the assessee and arrived at the rate of 75bp. A view can be taken that the addition of 75bp to the PLR as done by the TPO is fair and reasonable considering the facts of the case.
4.6. Further, the proviso allows for a variance of up to 5% from the arm's length price is not a threshold that automatically validates any variance within that range. The CIT (A) should have considered the specific facts of the case to determine whether the variance was acceptable or not. With regards to variance of 5%, as per proviso 2 of section 92C: to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd "Provided further that the variation between the arm's length price so determined and price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed such percentage not exceeding three percent of the latter, as may be notified by the Central Government in the Official Gazette is this behalf, the price of which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm's length price”
4.7. A stand can be taken that the variance of 5% should be calculated based on the actual transfer price determined on a variable basis and not on absolute basis. eg. If the ALP is determined 17.75% then 5% variance should be considered as 17.75%-5% ie. 17.75* 1.05=18.6375% and 17.75*0.95=16.8625% Therefore, interest rate within the above range shouldbe considered rather than 22.75% and 12.75%. The intent of law should have been considered while interpreting the above provision.”
The Ld.AR argued and respectfully relied on the order of the Ld.CIT(A). The Ld.AR filed the written submission. The relevant part of the written submission is extracted below:- “B. Transfer Pricing Issue No rationale for adding 75 basis points to SBI PLR
The CIT(DR) in her written submissions has placed significance reliance on the report of TPO wherein the learned TPO had added a risk premium of 75 basis points to the SBI PLR Rate of 14.75%. As per the learned DR, the TPO has carried out a risk assessment of the appellant in order to arrive at the impugned risk premium of 75 basis points. Further, in Para 4.6.1. of her written submissions she has contended that the methodology is sound, conservative and tailored to the facts. to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd 2. In response to the same the appellant would like to strongly contend that the TPO is not an expert in assessing the risk of any company and an addition of 75 basis points is absolutely baseless, arbitrary and does not have any rationale whatsoever. The TPO in his order has merely stated that on doing a risk assessment of the appellant (in his opinion) the premium should be 75 basis points. It is very discernible from the said report that this is an ad-hoc figure and as such there is no rationale behind the same. For once, if the TPO had relied upon the report of an expert such as a credit rating agency in arriving at the impugned risk premium of 75 basis points, the same could have been considered. Courts have held that mechanical adoption of rates from unrelated cases violates the mandate of fact-specific benchmarking. Moreover, the TPO report is unsupported by any fresh analysis of appellant's rating, cash flows, or assets.
3. On the contrary, the CIT(A) and appellant's contention that a risk premium of 300 basis points must be added to the SBI PLR rate is not only based on a scientific and rationale method, but it is backed by judicial precedents in the case of Granite Gate Properties Pvt. Ltd., CIO SanjivSapra& Associates LLP Versus Asstt. Commissioner Of Income Tax, Central Circle-6, New Delhi, 2018 (5) TMI 1774-ITAT DELHI. "27. On merit also, the AO/TPO made the addition on account of differential rate of interest on FCCDs. The assessee applied the interest rate on the basis of SBI PLR rate plus 300 basis points for the reasons that the FCCDs being unsecured and hybrid/quasi equity instrument as compared to plain vanilla loan instrument Therefore, the SBI PLR plus 300 basis points over it was reasonable and on the arm's length, particularly when the same was permissible under Foreign Exchange Control Regulations. The AO/TPO, however, restricted the interest rate to 12.25% The variance in the rate of interest as per TPO/AO to be adjusted and added was 3.75% which was within the permissible range of 5% as permitted by second proviso to Section 92C(2) of the Act. It is also relevant to point out that the percentage of 3% in the aforesaid proviso has been inserted by the Finance Act, 2012 wef 01.04.2013 and prior to that amendment, this percentage was at 5%. In the present case, since the difference is less than 5%, therefore, no addition on account of arm's length price could have been made by the AO/TPO. As such on merit also, no addition could have been made." to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd The appellant's interest rate of 19.17% is within the tolerance band of (+/-)5% from SBI PLR of 14.75% as stipulated in section 92C(2) of the Act.
4. Further, as regards the tolerance band of (+/-)5% the learned CIT(DR) in her written submission has argued that the same is not a blanket entitlement and the same should be considered only for the purposes of minor variations/deviations from the adopted ALP. Further, she has also contended that since the appellant has only taken one comparable price for the purpose of determining the ALP, the benefit of the (+/-35% tolerance band is not available.
In this regard, the appellant would like to strongly submit that as per section 92C(2) of the Act, if the benefit of tolerance limit of (+/-) 5% is applied to the present transaction in question, the same will be at arm's length. It is the argument of the appellant that the statute has provided for a tolerance limit of (+/- 5% merely for the reason that the risk appetite, cash flow, financial health, etc. of each assessee may differ and as a result for the sake of simplicity and in order to avoid any sort of ambiguity, the same has been prescribed as a guideline in order to address variations arising on account of the said factors between different assessees.
As a result, in this regard, the contention of the CIT(DR) that the tolerance band of (+/-)5% is only a blanket entitlement and the same should be considered only for the purposes of minor variations/deviations from the adopted ALP is fully misplaced and flawed. She has failed to understand that it is for ruling out this very subjectivity (of different interest rates adopted by different persons based on factors such as risk appetite, cash flow, financial health, etc. of each assessee) that this tolerance band of (+/-15% has been introduced in section 92C(2) pf the Act.
Further, the benefit of tolerance limit is available even in a situation where only one price or comparable is considered for the purpose of benchmarking. The same has been discussed and explained in great detail by the coordinate Bench of ITAT, Kolkata in the case of Philips India Limited Vs. ACIT in ITA Νο.218/Kol/2019 wherein reliance was placed on the judgement of Hon'ble ITAT Mumbai in the case of The Development Bank of Singapore wherein two provisos contained in section 92C(2) of the Act have been explained for their operability and benefit of tolerance limit available under the said Section read with the two provisos. Relevant extract of the same has been reproduced below: to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd "11. Applicability of second proviso to Section 92C(2) of the Act in a situation where only one comparable is available for benchmarking was considered by the Coordinate Bench of ITAT, Mumbai in the case of The Development Bank of Singapore (supra) wherein it was held that the second proviso has to be read distinctly from the 1st proviso and the words "so determined in the 2nd proviso should apply to ALP determined under the main sub-section (2) by which the tolerance band also becomes available where only one price is determined us ALP. The relevant extract from the decision of the Coordinate Bench of ITAT, Mumbai (supra) is reproduced for ease of reference:
“11. At this juncture, we consider it expedient to note that the alive quoted provisoto section 92C(2) has been substituted by the Finance (No.2) Act 2009 wef 1.10.2009 with two provisos. The first proves states that Provided that where more than one price is determined by the most appropriate method the arm's length price shall be taken to be the arithmetical mean such prices: As per the second proto if the variation between the arm's length price in determined and price at which the international transaction has actually been undertaken does not exceed the specified percentage of the latter, the prior at which the international transaction her actually been undertaken shall be deemed to be the arm's length price. Main sub section (2) provides that the most appropriate method as per sub-section(1) shall be applied for the determination of AL As per the first proviso where more than one price is determined by the most appropriate method the arm's length price shall be taken to be the arithmetical mean of such prices. Per contra, if there is only one price which it determined by the most appropriate method, then as per the main sub-section (2) without the aid of proviso, that price shall constitute the ALP. The second pro comes into play to deem the actual transacted price at the ALP. It provides that where the variation between the ALP so determinant does not exceed the specified percentage the price at which the international transection has actually been undertaken shall be deemed to be the arm's length price. The words 'so determined an employed in the second proviso assume significance. As these have been used in the second previse distinct from the subject matter of the first proviso, naturally these will apply to the ALP determined under sub-section (2) consisting of the main provision and also the first proviso. Resultantly, the option of deemed ALP shall extend not only to a situation where more than one price is determined at ALP by the most appropriate method but abs where only one price is determined as ALP. The net result is that the to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd option to the assessee shall be available in both the situations, covered under main sub section (2) and she the first proviso"
Considering the facts of the case and the difference in the benchmark margin of 13.61% vis- à-vis 10.53% of the assessee which falls within the tolerance limit of +/-5% as contained in Section 920(2) of the Act and the decision of the Coordinate Bench of ITAT, Mumbai, we hold that the benefit of tolerance limit under 2nd proviso to Section 92(C)(2) of the Act is available to the assessee in the present case where only one comparable of Tata Elexsi is considered for the purpose of benchmarking. Accordingly, the upward adjustment made by the Ld. TPO in the software development segment is deleted. Ground no. 3 of the assessee is allowed"
8. In light of the above, it is the appellant's submission that its case is squarely covered by the decision of this Hon'ble Tribunal and accordingly, on applying the tolerance band of (+/-)5% to the SBI PLR rate of 14.75%, the same is at ALP and there cannot be any addition on this ground whatsoever.
ITAT in various judgement has held that SBI PLR 300 basis points is ALP. We place our reliance on the judgement of Granite Gate Properties Pot. Ltd.. C/O SanjivSapra& Associates LLP Versus Asstt. Commissioner Of Income Tax, Central Circle-6, New Delhi, 2018 (5) TMI 1774- ITAT DELHI, relevant para is herein reproduced below.
"27. On merit also, the AO/TPO made the addition on account of differential rute of interest on FCCDs. The assessee applied the interest rate on the basis of SBI PLR rate plus 300 basis points for the reasons that the FCCDs being unsecured and hybrid/quasi equity instrument as compared to plain vanilla loan instrument Therefore, the SBI PLR plus 300 basis points over it was reasonable and on the arm's length, particularly when the same was permissible under Foreign Exchange Control Regulations. The AO/TPO, however, restricted the interest rate to 12.25% The variance in the rate of interest as per TPO/AO to be adjusted and added wa 3.75% which was within the permissible range of 5% as permitted by second proviso to Section 92C(2) of the Act. It is also relevant to point out that the percentage of 3% in the aforesaid proviso has been inserted by the Finance Act, 2012 wef 01.04.2013 and prior to that amendment, this percentage was at to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd 5%. In the present case, since the difference is less than 5%, therefore, no addition on account of arm's length price could have been made by the AO/TPO. As such on merit also, no addition could have been made."
Further, we place our reliance on the judgement of M/S Granite Gate Properties Pot Ltd Versus The A.C.I.T Central Circle -6 New Delhi, 2019 (3) TMI 1805 -ITAT DELHI "11. We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below. We have also perused the orders of the co-ordinate bench relied upon by the Id counsel for the assessee. The undisputed fact is that the FCCDs were issued during FY 2008-09, 2009-10 and 2011-12, which means that no fresh FCCDs were issued during the year under consideration. The year wise details of interest rate, interest amount payable and interest rate and amount restricted by the TPO can be understood from the following chart ………………………………………… 13. Similarly, in ITA No. 7025/DEL./2017, the findings given by the co-ordinate bench read as under,
"14. Therefore, in view of the above finding of a coordinate bench of this Tribunal in assessee's own case for the immediately preceding years, we are of the considered opinion that the issue is no longer res integra and this bench is required to follow the same in the absence of any change of circumstances. No change of circumstances is pleaded before us. We, therefore, while respectfully following the above decision, reach a conclusion that it is reasonable on facts and also permissible under law to include 300 points basis while calculating the interest rate. Further, in view of the fact that the variance does not exceed 5% for the FCCDs issued during the FYs 2008-09 and 3% for the FCCDs issued subsequently interference by the Ld. TPO with the value of the international transaction. The addition, therefore, cannot be sustained and shall be directed to be deleted. We accordingly direct the learned AO/TPO to delete the same."
FCCDs issued are Hybrid Instruments It is further stated that instruments under consideration are Fully Compulsorily Convertible Debentures (FCCDs), which by their very nature are hybrid instruments and not plain vanilla to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd debt. Unlike standard borrowings, FCCDs compulsorily convert into equity after a specified period, thereby exposing the investor to a higher level of equity risk in addition to credit risk. A lender in the case of a simple loan transaction is assured of repayment of principal with interest, and therefore benchmarks such as the SBI (PLR) are appropriate. However, in the case of FCCDs, there is no redemption in cash, the investor ultimately becomes an equity shareholder. This means the investor's return depends on the performance and valuation of the company at the time of conversion and that too risk involved in the appellant's case is even higher being a real estate company. The element of uncertainty, illiquidity, and equity market risk makes FCCDs economically distinct from loans. Consequently, SBI PLR, which represents the base lending rate for secured, standard loans to prime customers, cannot be applied as an arm's length benchmark. Applying PLR would ignore the additional risks borne by the investor, such as:
1. 1. Absence of repayment guarantee the investor cannot demand cash redemption at maturity.
2. Exposure to equity fluctuations-value upon conversion depends on market performance.
Industry-specific risk - in sectors like real estate, equity risk is compounded by regulatory and market uncertainties.
Lack of secondary market liquidity - unlike listed debt, FCCDs often cannot be readily liquidated. Because of these risks, an unrelated investor would demand a risk-adjusted return higher than PLR. This principle has also been recognized by judicial forums, such as the ITAT in Granite Gate Properties (supra), where SBI PLR-300 basis points was held to be a reasonable benchmark for FCCDs. Therefore, the reliance of the TPO on SBI PLR plus a nominal 75 bps is fundamentally flawed, as it treats FCCDs as if they were secured, plain debt. In reality, FCCDs are equity-risk bearing instruments, and the applicable arm's length interest rate must incorporate a significantly higher premium to reflect this hybrid nature.” to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd 28. The Ld.DR submitted another submission dated 05/08/2025, the relevant part of which is extracted below:- “4.10. Refuting the "Hybrid Instrument" Argument-CCDs as Debt for Interest Benchmarking (ITAT Bangalore in CAE Flight Training Case) 4.10.1. Assessee's Claim of Non-Comparability to Debt: At one stage, the assessee advanced a subtle argument that because CCDs are hybrid instruments (having characteristics of equity), one cannot simply compare their interest rate to ordinary debt instruments. The implication of this argument was that the very act of benchmarking CCD interest against something like a bank loan or debenture might be flawed, perhaps suggesting that the interest on CCDs should be viewed in context of equity-like returns. The Department submits that this line of reasoning is misguided and has been rejected by courts. While OCDs are indeed hybrid in legal form, until the moment of their conversion, they function as debt a fixed obligation to pay interest (and potentially accumulate towards conversion value). For transfer pricing purposes, the transaction we are examining is precisely the payment of interest on a debenture, which is a debt servicing transaction. Whether that debenture eventually becomes equity does not change the character of the payments made during the pre-conversion period. A recent and pertinent decision comes from the Bangalore Bench of the ITAT in CAE Flight Training (India) Pvt. Lal vs. DCIT" Attached herewith and marked as annexure 14). In that case, the issue was whether interest paid on CCDs could be disallowed by recharacterizing the CCDs as equity. The TPO there had argued that CCDs were equity in nature (being compulsorily convertible) and hence no interest should be allowable at all (treating it akin to dividend). The ITAT emphatically rejected that approach and held that until conversion, CCDs are to be treated as debt and interest on them is allowable as interest.”
We have carefully considered the rival submissions, the written arguments placed on record, and the orders of the revenue authorities. The limited issue before us is whether the Ld. CIT(A) was justified in deleting the transfer pricing adjustment of Rs.1,31,10,958/- towards interest on CCDs issued to the AE. The to 1489/Mum/2023 CO 57 to 60/Mum/2023 Ekta Everglade Homes Pvt Ltd material facts remain undisputed. The assessee issued fully compulsorily convertible debentures (CCDs) to its AE in earlier years and paid interest at 19.17%. The Ld. TPO adopted SBI PLR plus 75 basis points and determined the ALP at 15.5%, whereas the Ld. CIT(A), following judicial precedents including Granite Gate Properties Pvt. Ltd. (supra), applied SBI PLR plus 300 basis points and computed the ALP at 17.75%. In the present case, we find that the assessee has relied upon a single comparable, drawn from foreign industrial yield data, which is neither functionally comparable nor representative of lending conditions prevailing in the Indian market where the CCDs were denominated and serviced. The assessee’s benchmarking suffers from inherent defects and cannot be regarded as a reliable CUP under Rule 10B. Consequently, the tolerance range under section 92C(2) cannot be invoked mechanically in a situation where the very determination of ALP is unsupported by credible comparables. Further, the judicial precedents relied upon by the assessee, including Granite Gate Properties Pvt. Ltd. (supra) and subsequent orders, are fact-specific and pertained to foreign-currency FCCDs or materially different commercial circumstances. These decisions do not lay down a universal benchmark of SBI PLR + 300 basis points, nor do they assist the assessee in the present INR- denominated CCD transaction. The reliance on these judgments is therefore misplaced. On the contrary, the Ld. TPO’s approach of adopting SBI PLR with an appropriate 75-basis-point risk adjustment is grounded in domestic financial realities, reflects borrower-specific credit considerations, and conforms to the arm’s-length principle. Accordingly, we uphold the transfer pricing adjustment made by the Ld. AO/TPO, and set aside the contrary findings of the Ld. CIT(A).
We adjudicate all issues pertaining to A.Y. 2013-14, A.Y. 2014-15 and A.Y. 2015-16, which are mutatis mutandis applicable to the other assessment years under consideration. Accordingly, the respective grounds of appeal and cross- objections are decided as under.
31. Grounds are decided as below:- REVENUE'S APPEALS
GROUND ITA 1486-M-2023 ITA 1487-M-2023 ITA 1488-M-2023 ITA 1489-M-2023 AY 2013-14 AY 2014-15 AY 2015-16 AY 2016-17 1 to 4 Allowed Allowed Allowed Allowed 5 Dismissed Dismissed Dismissed Dismissed Assessee's Cross Objection
CO-57-M-2023 CO-58-M-2023 CO-59-M-2023 CO-60-M-2023 AY 2013-14 AY 2014-15 AY 2015-16 AY 2016-17
Dismissed Dismissed Dismissed Dismissed Additional Gr
1 Dismissed Dismissed Dismissed NA