Tribunal adjusts notional interest for transfer pricing, emphasizes justifiable mark-up

The Tribunal partially allowed the appeal by M/s Aithent Technologies Pvt. Ltd., directing the Transfer Pricing Officer to recalculate notional interest at US LIBOR plus 170 basis points for loans to its wholly owned subsidiary. The decision, issued on 2nd September 2019, addressed the adjustments made by tax authorities regarding notional interest, Arm's Length Price determination, and the application of LIBOR rates in transfer pricing analysis. The Tribunal accepted a reduced mark-up, emphasizing the specific circumstances of the case and the justifiability of the mark-up.

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Issues:
1. Adjustment of notional interest on loans given to wholly owned subsidiary.
2. Determination of Arm's Length Price for international transactions.
3. Application of LIBOR rate in transfer pricing analysis.
4. Justifiability of mark-up on LIBOR rate in transfer pricing.

Analysis:
1. The appeal concerned M/s Aithent Technologies Pvt. Ltd. disputing the adjustments made by the Ld. TPO and Ld. AO regarding notional interest on loans given to its wholly owned subsidiary, Aithent Inc., USA. The initial adjustment suggested by the Ld. TPO was contested by the assessee, leading to subsequent adjustments and appeals.

2. The issue of determining the Arm's Length Price for international transactions was central to the case. The Ld. TPO recommended adjustments based on PLR rates and benchmarking interest on loans and software development services. The Ld. DRP confirmed these adjustments, leading to further appeals and re-computations of the ALP.

3. The application of LIBOR rate in transfer pricing analysis was a key point of contention. The Ld. DRP applied a mark-up of 500 basis points to the LIBOR rate for determining the notional interest, which was challenged by the assessee. The debate revolved around whether the LIBOR rate without any mark-up is applicable to non-banking entities.

4. The justifiability of the mark-up on the LIBOR rate in transfer pricing was extensively argued by both parties. The assessee contended that the mark-up of 500 basis points was not justified due to reduced risk factors in transactions with wholly owned subsidiaries. The Ld. AR proposed an alternative mark-up of 170 basis points, which was accepted by the Tribunal to meet the ends of justice.

5. The Tribunal ultimately allowed the appeal in part, directing the Ld. TPO to recompute the notional interest at US LIBOR plus 170 basis points, acknowledging the specifics of the case and the justifiability of the mark-up. The judgment was pronounced on 2nd September 2019, settling the dispute regarding the adjustment of notional interest on loans given to the wholly owned subsidiary.

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