2019 (6) TMI 1691 - AT - Income Tax

Arm's-length interest rate for assessee's advances abroad set at LIBOR + 300 bps. Commercial expediency emphasized.

DCIT-9 (1) (1), Mumbai Versus M/s. Air Works India (Engineering) Pvt. Ltd. AND M/s. Air Works India (Engineering) Pvt. Ltd. Versus CIT (A) -15, Mumbai.

The Tribunal determined that the arm's-length interest rate for the assessee's advances to its associated enterprises abroad should be calculated at LIBOR ... TP Adjustment - interest rate chargeable on the sum advanced by the assessee to its associated enterprises abroad - Assessee submtted rate of interest charged should be LIBOR - HELD THAT:- We find that the commercial expediency aspect of granting interest-free loans is already against the assessee by a Catena of case laws in this regard. Assessee submission that, commercial rationality should be considered in distinction from commercial expediency is not at all convincing. It is evident from the submissions of the learned counsel of the assessee himself that ITAT as well as honourable jurisdictional High Court in several case laws have upheld the applicability of interest rate of LIBOR +200 bps to 300 bps. In the present case the learned CIT-A has adopted rate of interest of labour +300 bps for assessment year 2010 – 11 which the assessee accepts. In our considered opinion on the facts and circumstances of the case following the precedent’s from ITAT and honourable judicial High Court we hold that arm’s-length interest should be computed at the rate of interest of LIBOR +300 bps. That is the rate adopted by the learned CIT-A for assessment year 2010-11 is also directed to be adopted for assessment year 2009-10. Assessee’s appeal is partly allowed and revenues appeal stands dismissed. Issues:Interest rate chargeable on the sum advanced by the assessee to its associated enterprises abroad.Analysis:The judgment by the Appellate Tribunal ITAT Mumbai involved appeals by the assessee for assessment year 2009-10 and by the revenue for assessment year 2010-11. The common issue raised in these appeals was the interest rate chargeable on the sum advanced by the assessee to its associated enterprises abroad. For the assessment year 2009-10, the transfer pricing officer applied an interest rate of 11.96%, making an adjustment of rupees 66,28,068. In contrast, for the assessment year 2010-11, the officer arrived at a rate of LIBOR + 950 basis points, resulting in an adjustment of rupees 58,52,296. The learned CIT-A confirmed the addition for the 2009-10 assessment year and adopted a rate of LIBOR + 300 basis points for the 2010-11 assessment year.The assessee's counsel argued that for the 2009-10 assessment year, the interest rate should be LIBOR only, citing various case laws from the Bombay High Court and ITAT. For the 2010-11 assessment year, the counsel supported the CIT-A's decision of LIBOR + 300 basis points. Additionally, the counsel highlighted the rationality of granting the loan, especially considering the AE as a start-up company. On the other hand, the departmental representative argued for the adoption of LIBOR + 300 bps for both assessment years.After considering the submissions and case laws, the Tribunal found that the commercial expediency aspect of interest-free loans was consistently ruled against the assessee in previous cases. The Tribunal rejected the argument that commercial rationality should be considered separately from commercial expediency. Following precedents from ITAT and the High Court, the Tribunal held that the arm's-length interest rate should be calculated at LIBOR + 300 bps for both assessment years. Consequently, the assessee's appeal was partly allowed, and the revenue's appeal was dismissed.In conclusion, the judgment established the applicable interest rates for the assessee's advances to its associated enterprises abroad, emphasizing the importance of commercial expediency and rationality in determining arm's-length interest rates based on established legal precedents.