2018 (11) TMI 1711 - AT - Income Tax

Tribunal Upholds CIT(A) Orders on Arm's Length Price Adjustments

The Tribunal dismissed both of the Revenue's appeals, affirming the CIT(A)'s orders that deleted the arm's length price adjustments for corporate ... Determination of ALP on corporate guarantee on loans availed by AE - international transaction within the meaning of sec. 92B - DR vehemently during the course contends that a corporate guarantee is very much an international transactions post facto amendment in sec. 92B of the Act with retrospective effect dated 01.04.2002 - CIT-A deleted the addition - HELD THAT:- Revenue fails to dispute the fact that the learned co-ordinate bench hereinabove has considered amended provision as well. There is no dispute that the CIT(A) has adopted judicial consistency in following his findings on the every issue in earlier assessment years attending finality upto this tribunal as well. There is no distinction on facts or law indicated at the Revenue’s behest in the impugned assessment year. We therefore affirm the CIT(A)’s findings under challenge deleting corporate guarantee’s arm’s length price adjustment(s) in both the impugned assessment years. Transfer pricing adjustment in respect of assessee’s loans given to its overseas associate enterprises - HELD THAT:- The matter is well covered by the general consensus among the hon'ble ITAT Benches that international transactions involving cross-border country loans to AE can be benchmarked against LIBOR, as also supported by the RBI’s circu9lar that a spread ranging from 1% -2% over LIBOR is reasonable (or advancing loans. Therefore, in deciding the matter, it is held that an interest rate of LIBOR plus 2% can be held to be Arm’s length rate of interest, and as for the case at hand, the interest charged by the assessee from its AE is higher than LIBOR plus 2%, the adjustment made by the ld. TPO in the case is held to be unjustified and not sustainable. See M/S EIH LIMITED AND VICE-VERSA [2018 (1) TMI 1372 - ITAT KOLKATA] - Revenue’s appeals are dismissed. Issues Involved:1. Deletion of arm's length price (ALP) adjustment for corporate guarantees provided to overseas associate enterprises (AEs).2. Deletion of transfer pricing adjustment for loans given to overseas associate enterprises.Issue-wise Detailed Analysis:1. Deletion of ALP Adjustment for Corporate Guarantees:The Revenue's first substantive ground challenges the CIT(A)'s decision to delete the ALP adjustment of Rs. 2,97,86,393/- and Rs. 89,22,433/- for the assessment years 2011-12 and 2013-14, respectively, regarding the corporate guarantees provided by the assessee to its overseas AEs. The Tribunal referenced a prior decision in the assessee’s own case for the assessment year 2012-13, where it was adjudicated that corporate guarantees do not constitute an international transaction under Section 92B of the Income Tax Act, 1961.The Tribunal noted that the CIT(A) held that Transfer Pricing (TP) provisions do not apply to corporate guarantees provided before the amendment to Section 92B by the Finance Act, 2012. The CIT(A) also found the methodology applied by the TPO for computing the ALP to be without a reasonable basis. The Tribunal cited the case of M/s. EIH Ltd. vs. DCIT, which clarified that the term 'guarantee' was included in the definition of 'international transaction' retrospectively from 01/04/2002, but this inclusion was clarificatory and did not alter the basic character of the definition under Section 92B. It was held that a corporate guarantee provided by a parent company to its subsidiary without any consideration does not affect the profits, incomes, losses, or assets of the parent company and hence falls outside the ambit of an 'international transaction'.The Tribunal also referenced the Ahmedabad Tribunal's decision in the case of Micro Ink, which stated that if a subsidiary could not borrow money independently and required a guarantee from the parent, it is a shareholder function not warranting a guarantee fee. The Tribunal concluded that since no consideration was received by the assessee for the corporate guarantee, it does not constitute an international transaction. The Tribunal upheld the CIT(A)'s order and dismissed the Revenue's ground on this issue.2. Deletion of Transfer Pricing Adjustment for Loans Given to Overseas AEs:The Revenue's second substantive ground pertains to the deletion of transfer pricing adjustments of Rs. 2,44,17,630/- and Rs. 9,25,64,000/- for loans provided by the assessee to its overseas AEs. The Tribunal referred to its previous decision for the assessment year 2012-13, where it was held that the ALP of interest on loans given to AEs should be benchmarked against international rates like LIBOR rather than domestic rates.The CIT(A) had determined that the Comparable Uncontrolled Price (CUP) method was the most appropriate method for benchmarking the interest rate and disagreed with the TPO's application of local interest rates. The CIT(A) held that an interest rate of LIBOR plus 2% is reasonable for cross-border loans, and since the assessee charged an interest rate higher than LIBOR plus 2%, no adjustment was warranted. This view was consistent with the decisions of various ITAT benches, including the Chennai and Delhi benches, which supported benchmarking against LIBOR for foreign currency denominated loans.The Tribunal found no infirmity in the CIT(A)'s order and noted that the Revenue failed to provide any distinguishing facts or legal arguments for the assessment years in question. Consequently, the Tribunal upheld the CIT(A)'s findings and dismissed the Revenue's ground on this issue as well.Conclusion:The Tribunal dismissed both of the Revenue's appeals, affirming the CIT(A)'s orders that deleted the ALP adjustments for corporate guarantees and loans provided to overseas AEs. The judgments were pronounced in the open court on 30/11/2018.