Internal CUP rate of foreign-currency bank borrowings held arm's-length for interest-free WOS loans; AO to recompute ALP; s.80HHC remanded

ITAT, Mumbai - AT held that the internal CUP - the rate of foreign-currency borrowings from the bank - is an appropriate arms-length interest rate for interest-free loans advanced to wholly owned foreign subsidiaries, and directed the AO to recompute the ALP accordingly; the fact that the bank loan was not specifically used to fund the remittances was held immaterial. The Tribunal also remanded the claim for deduction under s.80HHC for fresh computation by the AO in accordance with the retrospective amendment to that provision.

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Issues:
1. Transfer pricing adjustment on interest-free loans to foreign subsidiaries.
2. Declining deduction under section 80HHC due to loss before incentives from export activities.

Transfer Pricing Adjustment on Interest-Free Loans:
The appeal was filed against the order passed by the Commissioner (Appeals) regarding the assessment under section 143(3) of the Income Tax Act for the assessment year 2002-03. The primary grievances of the assessee were twofold. Firstly, challenging the transfer pricing adjustment on interest-free loans given to its foreign subsidiaries, where the Transfer Pricing Officer (TPO) determined the arms length price at 14% p.a. Secondly, contesting the denial of deduction under section 80HHC due to a loss before considering incentives from export activities. The assessee argued that as they had sufficient interest-free funds, charging no interest on the loans was justified. The authorities considered the ALP under the Comparable Uncontrolled Price (CUP) Method, which remained unaltered. The Tribunal emphasized that under the CUP method, the focus is on prevailing prices in similar unrelated transactions, not on costs. The Tribunal concluded that the arms length price should be based on the rate at which the assessee borrowed foreign currency loans, i.e., internal CUP, leading to a direction for the Assessing Officer to recompute the ALP accordingly.

Deduction under Section 80HHC:
Regarding the denial of deduction under section 80HHC due to a loss before considering export incentives, the Tribunal directed the matter to be reassessed by the Assessing Officer in line with the provisions of Section 80HHC, as amended by the retrospective amendment. The Tribunal noted the submission of revised computation for a previous assessment year and instructed the Assessing Officer to examine the deduction for the current year following the same approach. Consequently, the issue of deduction under section 80HHC was also remanded to the Assessing Officer for fresh computation.

In conclusion, the appeal was allowed for statistical purposes, with the Tribunal upholding the assessee's contentions on the determination of the ALP for interest-free loans to foreign subsidiaries and directing reassessment by the Assessing Officer for both the transfer pricing adjustment and the deduction under section 80HHC.

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