2015 (4) TMI 681 - HC - Income Tax

HC affirms using EURIBOR rate for benchmarking interest on AE loan under Section 92B, rejecting rupee rate

Commissioner of Income-tax-2 Versus Tata Autocomp Systems Ltd.

The HC upheld the Tribunal's decision directing the AO to benchmark interest on a loan of EUR 20,50,000 advanced to an AE at the prevailing EURIBOR rate ... Treatment to lending transactions - Tribunal treated it on par with borrowing transactions in conservation to the provision of Section 92B - Tribunal directing the Assessing Officer to benchmark the interest at prevailing EURIBOR rate instead of rupee loan rate to compute the Arms Length interest on the loan amounting to EURO 20,50,000 advanced by the assessee to its AE - Held that:- The impugned order of the Tribunal inter alia has followed the decisions of the Bombay Bench of the Tribunal in cases of VVF Ltd. v. Dy. CIT [2010 (1) TMI 781 - ITAT, MUMBAI] and Dy. CIT v. Tech Mahindra Ltd.” [2011 (6) TMI 140 - ITAT, MUMBAI], to reach the conclusion that ALP in the case of loans advanced to Associate Enterprises would be determined on the basis of rate of interest being charged in the country where the loan is received/consumed. Mr. Suresh Kumar the learned counsel for the revenue informed us that the Revenue has not preferred any appeal against the decision of the Tribunal in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra) on the above issue. No reason has been shown to us as to why the Revenue seeks to take a different view in respect of the impugned order from that taken in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra). The Revenue not having filed any appeal, has in fact accepted the decision of the Tribunal in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra). - Decided against revenue. Issues:1. Treatment of lending transactions in comparison to borrowing transactions under Section 92B of the Income Tax Act, 1961.2. Benchmarking interest at prevailing EURIBOR rate for computing Arms Length interest on a loan.3. Deletion of adjustment made by the Transfer Pricing Officer for interest-free loan advanced to an Associate Enterprise.4. Reliance on RBI circular for fixing interest rates on outbound loans to Associate Enterprises.5. Appreciation of risk adjustments by domestic lending company for loans advanced to foreign entities.Analysis:1. The appeal by Revenue under Section 260A of the Income Tax Act, 1961 challenged the order passed by the Income Tax Appellate Tribunal regarding the treatment of lending transactions in comparison to borrowing transactions under Section 92B of the Act for the assessment year 2007-08.2. The Tribunal directed the Assessing Officer to benchmark the interest at the prevailing EURIBOR rate instead of the rupee loan rate to compute the Arms Length interest on a loan advanced by the assessee to its Associate Enterprise. This decision raised questions regarding the applicability of EURIBOR rates in India and the factors to consider for determining the Arms Length interest.3. The Tribunal deleted the adjustment made by the Transfer Pricing Officer for an interest-free loan advanced by the assessee to the Associate Enterprise, taking into account the prevalent domestic rate of interest payable on working capital loans in India. This decision highlighted the importance of considering domestic lending and borrowing market rates for such adjustments.4. The Tribunal's reliance on an RBI circular for justifying the assessee's claim to fix interest rates as per the EURIBOR rate was questioned. The circular referred to credit facilities for Indian exporters by Indian banks, which differed from outbound loans to Associate Enterprises, especially concerning the conversion of rupee into Euro through forex purchase.5. The Tribunal's failure to appreciate the risk adjustments carried out by domestic lending companies for loans advanced to foreign entities was discussed. The complexity of determining interest rates in an uncontrolled scenario, irrespective of the base interest EURIBOR, was a crucial aspect that needed consideration.In conclusion, the High Court dismissed the appeal by Revenue, citing the acceptance of similar decisions by the Tribunal in previous cases. The Court found no reason to entertain the proposed questions of law, ultimately upholding the Tribunal's decision on the issues raised in the appeal.