ITAT Jaipur Grants Relief on Transfer Pricing, Section 14A and Section 36(1)(iii) Disallowances Where Own Funds Exceed Investments and Advances

Case Background

NM Agro Food Products Pvt. Ltd. Vs ACIT (ITAT Jaipur)
Assessment Year: 2014-15
Related Provisions: Section 14A, Section 36(1)(iii), Section 92CA, Rule 8D, Rule 10B

The Jaipur Bench of the Income Tax Appellate Tribunal rendered a significant ruling in favour of a private limited company engaged in trading agricultural commodities, granting relief on three disputed additions. The assessee had originally filed its return of income for Assessment Year 2014-15 declaring total income of ₹50,31,660. Following assessment under Section 143(3) of the Income Tax Act, 1961, the Assessing Officer (AO) brought the assessed income to ₹82,62,500 by making four additions. Of these, three were confirmed by the CIT(A) and came up for adjudication before the Tribunal.

The Tribunal ultimately deleted:

• A transfer pricing adjustment of ₹3,64,380 on interest paid to related parties
• An interest disallowance of ₹2,20,086 under Section 14A
• A disallowance of ₹24,73,296 under Section 36(1)(iii) on account of interest-free advances

However, it sustained a disallowance of ₹72,277 towards administrative expenditure attributable to exempt income under Rule 8D(2)(iii).

The appeal was accordingly partly allowed.

Issue 1: Transfer Pricing Adjustment — Can an Alleged Consent Shut the Door on Appeal?

Factual Matrix

During the relevant year, the assessee paid interest on unsecured loans obtained from four related parties:

The Transfer Pricing Officer (TPO), applying the Comparable Uncontrolled Price (CUP) method, adopted the State Bank of India's average prime lending rate of 9.83%, added 300 basis points to account for risk and unsecured nature, and determined the arm's length rate at 12.83%. Accordingly, the excess interest paid to Nand Lal Naresh Kumar and Nirmal Kumar Bansal was computed at ₹3,61,912 and ₹2,468 respectively, totalling ₹3,64,380.

The TPO observed at paragraphs 5.6 and 5.7 of his order:

"5.6 The assessee has claimed that interest was paid on market loans ranging from 15% to 18% but failed to demonstrate the same. But it is seen that the assessee has paid interest to related parties @6% namely to Manoj Traders and @12% to M/s N.M. Exports. Therefore, even internal CUP was available to the assessee.
5.7 On the basis of these facts it is held that the interest paid to the related parties was not held at Arm's Length Price. The assessee has paid interest in excess of market rate. For benchmarking this transaction CUP has been applied…"

The AO's assessment order noted that a show cause was issued via note sheet dated 29.11.2017 and that "the assessee agreed on this determination." Relying on this, the CIT(A) held the appeal against this addition to be infructuous, without examining the assessee's substantive contentions.

Tribunal's Findings

On the Preliminary Issue of Consent:

The Tribunal found that no note sheet and no written concession had been placed on record before it. The assessee had contested the arm's length rate before the TPO itself and had filed its first appeal on 23.01.2018, within a month of the assessment order, specifically disputing this addition.

More critically, the Tribunal noted that under Section 92CA(4) of the Income Tax Act, 1961, the AO "shall proceed to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the arm's length price as so determined by the Transfer Pricing Officer." The AO had no discretion whatsoever — the show cause notice was issued to ensure the addition, not to seek agreement. A consent recorded in such a mandatory statutory setting cannot deprive the assessee of its statutory right to challenge the underlying determination in appellate proceedings. The CIT(A)'s treatment of the ground as infructuous was held to be erroneous.

On Merits — Flawed Application of CUP Method:

The Tribunal examined the requirements of Rule 10B(1)(a) of the Income Tax Rules, 1962, which mandates identification of an actual comparable uncontrolled transaction, with appropriate adjustments for material differences. The TPO had identified no such uncontrolled transaction. Constructing a notional benchmark by adding 300 basis points to a bank's prime lending rate amounts to estimation, not application of CUP.