2013 (6) TMI 174 - AT - Income Tax

Interest Rate on Foreign Currency Loan at 4% Held Arm's Length Under Section 10B, CUP Method Applied

The ITAT Delhi held that the interest rate of 4% charged by the assessee on a foreign currency loan to its subsidiary was at arm's length, rejecting the ... Transfer pricing adjustment - Whether DRP has erred in determining reasonable interest rate at 13.25% as against 4% determined and levied by the assessee in respect of loan advanced by it in US Dollar to its subsidiary company in U.S.A. - DRP ignored the contention of the appellant that the interest rate in respect of international transaction in foreign currency has to be in accordance with LIBOR - Held that:- CUP method is the most appropriate method in order to ascertain arms length price of the international transaction as that of the assessee. Thus agree with the assessee’s contention that where the transaction was of lending money in foreign currency to its foreign subsidiaries the comparable transactions, therefore, was of foreign currency lended by unrelated parties. The financial position and credit rating of the subsidiaries will be broadly the same as the holding company. In such a situation, domestic prime lending rate would have no applicability and the international rate fixed being LIBOR should be taken as the benchmark rate for international transactions. As decided in Siva Industries and Holding Ltd. vs. ACIT [2011 (5) TMI 451 - ITAT, CHENNAI] that the assessee had given the loan to the associate enterprise in U.S. dollars, and in such a situation when the transaction was in foreign currency, and the transaction was an international transactions, then the transaction would have to be looked upon by applying the commercial principles in regard to international transactions. In such a situation domestic prime lending would have no applicability and the international rate fixed being LIBOR rate would have to be adopted. Also see M/s Four Soft Ltd., Hyderabad vs. DCIT Supra [2011 (9) TMI 634 - ITAT HYDERABAD], Dy. C.I.T. vs. Tech. Mahindra [2011 (6) TMI 140 - ITAT, MUMBAI], Tata Autocomp Systems vs. ACIT [2012 (5) TMI 45 - ITAT MUMBAI]. As the assessee has arrangement, for loan with Citi Bank, for less than 4%. However, for loan provided to its AE’s it has charged 4% p.a. interest. Hence, adjustment suggested by the TPO is not warranted. As assessee’s profits are exempt u/s. 10B, hence, there is no case that assessee would benefit by shifting profits outside India as relying on Philips Software Centre P Ltd. vs. ACIT [2008 (9) TMI 466 - ITAT BANGALORE-B] and Mumbai Tribunal in the case of I.T.O. vs. Zydus Altana Health Care P Ltd. [2010 (4) TMI 883 - ITAT MUMBAI]. As in the present case the loan agreement was for fixed rate of interest. The LIBOR to be accepted as the most suitable bench mark for judging Arms’ length price in case for foreign currency loan. Hence, adjustment as made by the TPO is not warranted. The rate of interest charged by the assessee for the loans transactions with the AE was Arms Length Price. Hence, no transfer pricing adjustment is called for. Assessee’s appeal is allowed. Issues Involved:1. Legality of the Assessing Officer's order under Section 143(3) read with Section 144C of the Income Tax Act.2. Determination of the correct income of the appellant.3. Arm's length price (ALP) determination by the Transfer Pricing Officer (TPO).4. Appropriate interest rate for loans advanced to a subsidiary in the USA.5. Comparison methodology for determining the interest rate.6. Consideration of the currency in which the loan was advanced.7. Applicability of LIBOR for international transactions in foreign currency.8. Adjustment on account of transaction cost.9. Fixed interest rate agreements and their implications.10. Detailed transfer pricing study and comparable instances.11. Applicability of variation in arm's length interest.12. Adjustment on account of security for loans advanced to a subsidiary.13. Additional grounds of appeal.Detailed Analysis:1. Legality of the Assessing Officer's Order:The appellant challenged the legality of the Assessing Officer's order passed under Section 143(3) read with Section 144C of the Income Tax Act, asserting it was flawed both legally and factually.2. Determination of the Correct Income:The appellant declared an income of Rs. 20,75,768/-, but the Assessing Officer assessed it at Rs. 67,46,180/-. The primary dispute revolved around the addition of Rs. 47,45,416/- due to differences in the arm's length price determined by the TPO.3. Arm's Length Price Determination by TPO:The TPO identified a discrepancy in the interest rate applied to a loan provided by the appellant to its subsidiary in the USA. The TPO determined an arm's length interest rate of 17.26%, while the appellant had applied a 4% rate, leading to an addition of Rs. 68,02,619/-.4. Appropriate Interest Rate for Loans:The appellant argued that the interest rate should be based on the LIBOR rate, considering the loan was in US dollars. The TPO and DRP, however, applied the Prime Lending Rate (PLR) of the Reserve Bank of India (RBI), resulting in a rate of 13.25%.5. Comparison Methodology:The appellant contended that the comparison should be made with loans in the USA, not based on Indian conditions. The TPO and DRP's approach of using Indian market rates was challenged as inappropriate for an international transaction.6. Consideration of Currency:The appellant emphasized that the loan was in US dollars, and the interest rate should reflect the currency of the loan. The DRP's application of the PLR of RBI, which pertains to Indian Rupees, was deemed incorrect.7. Applicability of LIBOR:The appellant cited various case laws supporting the use of LIBOR as the benchmark for international transactions in foreign currency. The Tribunal agreed, stating that domestic prime lending rates have no applicability in such cases.8. Adjustment on Account of Transaction Cost:The TPO added transaction costs and other adjustments to the interest rate, which the appellant argued were arbitrary and not reflective of actual comparable transactions.9. Fixed Interest Rate Agreements:The appellant had entered into fixed-rate loan agreements in 2002 and 2003. The Tribunal noted that these agreements were valid and should not be disregarded. The LIBOR rates at the time were lower than the fixed rate applied by the appellant.10. Detailed Transfer Pricing Study:The appellant had conducted a detailed transfer pricing study, which the TPO and DRP largely ignored. The Tribunal found that the study supported the appellant's position on the arm's length nature of the transactions.11. Applicability of Variation in Arm's Length Interest:The appellant argued that the 5% variation rule should apply, which the TPO ignored. The Tribunal did not find merit in the TPO's approach.12. Adjustment on Account of Security:The DRP initially considered an adjustment for the lack of security but later agreed with the appellant that no further addition was required on this account.13. Additional Grounds of Appeal:The appellant reserved the right to add, amend, or alter any grounds of appeal, which was noted but did not affect the Tribunal's decision.Conclusion:The Tribunal held that the interest rate applied by the appellant (4%) was at arm's length and aligned with international commercial principles, specifically the LIBOR rate. The Tribunal rejected the TPO's and DRP's application of Indian domestic rates and adjustments. Consequently, the appeal was allowed, and no transfer pricing adjustment was warranted.Order:The appeal by the Assessee was allowed, and the order was pronounced in the open court on 08/2/2013.