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

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; internal CUP comparables must involve the assessee and an independent party, while external CUPs are between independent parties. On the facts the tribunal allowed relief to the assessee on the ALP interest issue. The tribunal also upheld deduction under s.10A relying on precedent favorable to the assessee. The appeal was 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.

---