2015 (1) TMI 551 - AT - Income Tax

Tribunal Adjusts Loan Interest Rates & Guarantee Commission to Align with Comparable Transactions

Prolifics Corporation Limited (previously known as Semantic Space Technologies Ltd.) Versus DCIT, Circle 3(1), Hyderabad

The tribunal partly allowed the appeal, directing the AO to rework the interest on loans at LIBOR + 2.75% and to adopt a 0.53% rate for the guarantee ... Transfer pricing adjustment - whether the interest free loans and guarantees provided by assessee to AE calls for any adjustment? - Held that:- There is no dispute to the fact that providing of loans to AE is an International Transaction as per the TP provisions. Therefore, the commercial considerations advanced by assessee can not be considered while examining the ALP of the transactions. We are of the opinion that the transaction of providing loans to subsidiary whether a direct loan or providing credit for initial expenditure, which is stated to be reimbursable, do call for adjustment. Therefore, in principle we approve the adjustment made on these transactions.Since, A.E. borrowed funds from ICICI Bank, U.K. @ LIBOR + 2.75%, we are of the opinion that, that rate should be considered as ALP of interest and A.O. is directed to workout the interest at that rate on the loan provided to SSTL north America. Assessee is also objecting to the adjustment on loan given to Arsin Corporation, another A.E. of Assessee. Here, assessee has charged interest at LIBOR + 1.50 BPS. Since, we have approved LIBOR + 2.75 points on the loan given to SST, North America (A.E.) we direct the A.O. to re-workout the interest on the loan provided to this A.E. at LIBOR + 2.75% only as against LIBOR + 4.75 charged by A.O./TPO. - Decided partly in favour of assessee. Guarantee fee - Held that:- We uphold the adjustment made on guarantee commission both on the guarantee provided to Bank directly and also on the guarantee provided to the erstwhile shareholders of JYACC for assuring the payment by AE. However, we direct the TPO to adopt the rate to 0.53% which is considered as arms length in other cases. - Decided partly in favour of assessee. Issues Involved:1. Transfer Pricing (T.P.) adjustment on interest-free loans and advances to subsidiary.2. Levy of guarantee commission on corporate guarantees provided by the assessee.Issue-wise Detailed Analysis:1. Transfer Pricing Adjustment on Interest-Free Loans and Advances to Subsidiary:The assessee, a global software solutions company, acquired JYACC Inc. USA through a Special Purpose Vehicle (SPV) named SST North America Inc. USA. The acquisition involved a cash consideration and a deferred purchase consideration. The cash consideration was partially funded by loans from ICICI Bank, UK, with SSTL providing a corporate guarantee. The Transfer Pricing Officer (TPO) noted that the assessee did not charge interest on loans and advances to its subsidiary nor a guarantee commission on the guarantees provided. Consequently, the TPO made an adjustment of Rs. 29,61,576 for the loans and Rs. 2,37,83,633 for the guarantee fee, totaling Rs. 2,67,45,209. The Dispute Resolution Panel (DRP) largely upheld the TPO's findings.The assessee argued that no service was provided to its SPV and that the corporate guarantees and loans should not be treated as international transactions for the purpose of arm's length price (ALP) determination. The assessee referenced the Australian Taxation Officer's view that guarantees compensating for a subsidiary's inadequate financial position should remain with the parent company. The assessee also contended that the advances were cost-to-cost expenses and not loans or advances for ALP determination.The tribunal agreed that providing loans to an associated enterprise (AE) is an international transaction under TP provisions and warrants adjustment. However, it found the TPO's rate of interest (LIBOR + 4.75 BPS) inappropriate, favoring the rate at which the AE borrowed from ICICI Bank (LIBOR + 2.75%). The tribunal directed the AO to rework the interest at this rate for loans to SST North America and Arsin Corporation.2. Levy of Guarantee Commission on Corporate Guarantees Provided by the Assessee:The TPO levied a 2% guarantee fee on the corporate guarantees provided by the assessee for loans taken by SST North America from ICICI Bank and for the deferred purchase consideration to JYACC shareholders. The assessee argued that the corporate guarantee did not involve any cost or risk to the shareholders and should not be considered an international transaction under the amended section 92B of the Income Tax Act.The tribunal noted that providing guarantees inherently involves risk and enhances the creditworthiness of the AE, thus constituting a service. The tribunal referenced the Hyderabad Tribunal's decision in Four Soft P. Ltd., which held that corporate guarantees fall within the scope of international transactions post the retrospective amendment to section 92B. However, the tribunal found the TPO's 2% rate excessive and directed the TPO to adopt a rate of 0.53%, as considered arm's length in other cases.Conclusion:The tribunal partly allowed the appeal, directing the AO to rework the interest on loans at LIBOR + 2.75% and to adopt a 0.53% rate for the guarantee commission. The adjustments were upheld in principle, but the rates were modified to align with comparable transactions. The tribunal emphasized the inherent risk in providing guarantees and the need for ALP determination under TP provisions. The decision reflects a balanced approach, considering both the retrospective amendment to section 92B and the commercial realities of the transactions.