2011 (6) TMI 140 - AT - Income Tax

ALP on euro-denominated related-party loan: CUP comparables limited to assessee-independent or independent-independent; s.10A deduction upheld

Deputy Commissioner of Income-tax, Circle 2 (3), Mumbai Versus Tech Mahindra Ltd.

ITAT, MUMBAI - AT held that for determining ALP on euro-denominated trade credit to an AE the CUP method cannot use AE-to-AE transactions as comparables; ... Determination of Arm's Length Price (ALP) interest rate for trade credit - Euro denominated loan to its AE - CUP method​​​​​​​ - Joint venture between an Indian company and a UK based company - software services relating to telecommunication, internet technology and engineering etc - Held that:- During the assessment proceedings, it was noticed that the assessee had allowed credit to its US based associated enterprises, beyond the stipulated credit period - he stand of the assessee was that excess credit period was allowed to the US AE in view of the liquidity problems faced by the AE, and that, in any event, no such interest is charged from even independent enterprises - A transaction between the associated enterprises cannot be taken as a comparable for the purpose of application of CUP method. Internal CUP, therefore, can only be a comparable transaction which the assessee enters into with an independent enterprise, while it will be an external CUP when the comparable transaction is between two independent enterprises not involving the assessee - The mere fact that the relief granted by the CIT(A) is upheld, it does not imply that the CIT(A)’s action of confirming the ALP adjustment on the facts of this case, in principle, is upheld too - Decided in the favour of assessee Regarding deduction u/s 10A - issue is covered, in favour of the assessee, by Special Bench decision in the case of ITO v. Sak Soft Ltd. [2009 (3) TMI 243 - ITAT MADRAS-D] and by Tribunal's decision in assessee's own case for the assessment year 2002-03 - Appeal is dismissed. Issues Involved:1. Determination of Arm's Length Price (ALP) interest rate for trade credit.2. Inclusion of expenses incurred in foreign currency in the total turnover for the computation of deduction under section 10A.Issue-wise Detailed Analysis:1. Determination of Arm's Length Price (ALP) Interest Rate for Trade Credit:The Assessing Officer (AO) contested the Commissioner of Income Tax (Appeals) [CIT(A)]'s determination of a 2% ALP interest rate for trade credit extended to an Associated Enterprise (AE), arguing it should be 10%, the rate charged to a German AE on a Euro-denominated loan. The assessee, a joint venture between an Indian and a UK company, allowed extended credit to its US-based AE due to liquidity issues. The Transfer Pricing Officer (TPO) rejected the assessee's justification, asserting that interest should be charged for the excess credit period, using the 10% rate charged to the German AE as a comparable under the Comparable Uncontrolled Price (CUP) method.The Tribunal found the TPO's selection of comparables flawed, noting that transactions between AEs cannot serve as internal comparables under the CUP method. The correct approach would have been to compare the interest rate charged to independent enterprises, which was nil. The Tribunal upheld the CIT(A)'s decision to use the USD LIBOR rate plus a markup, resulting in a 2% ALP interest rate, as the AE was based in the US. The Tribunal emphasized that ALP adjustments should neutralize the impact of interrelationships between AEs and align with commercial principles applicable to international transactions.2. Inclusion of Expenses Incurred in Foreign Currency in the Total Turnover for Computation of Deduction under Section 10A:The AO argued against including foreign currency expenses on telecommunication charges and technical services outside India in the total turnover for section 10A deductions, citing the absence of a specific definition of total turnover in the Act. The Tribunal, referencing the Special Bench decision in ITO v. Sak Soft Ltd. and its own decision in the assessee's case for the assessment year 2002-03, upheld the CIT(A)'s inclusion of these expenses in the total turnover.Conclusion:The Tribunal dismissed the appeal, affirming the CIT(A)'s decisions on both issues. The ALP interest rate for trade credit was appropriately determined using the USD LIBOR rate plus a markup, and foreign currency expenses were correctly included in the total turnover for section 10A deductions.