Tribunal remands case for fresh determination of arm's length price for loans and share capital.

The tribunal set aside the lower authorities' orders and remanded the case to the Assessing Officer for a fresh determination of the arm's length price of interest-free loans and share application money given by the appellant to its Associated Enterprises. The tribunal directed the AO to consider the Bombay High Court's decision's ratio and allow the appellant to present evidence. The appeal was allowed for statistical purposes.

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Issues Involved:
1. Upward adjustment on account of interest on loans and share application money given by the appellant to its Associated Enterprises (AEs).
2. Application of Fixed Deposit rate of interest at 8.90% by the Transfer Pricing Officer (TPO).
3. Consideration of RBI guidelines and LIBOR rates for benchmarking the transaction.

Issue-Wise Detailed Analysis:

1. Upward Adjustment on Account of Interest on Loans and Share Application Money:
The appellant contested the upward adjustment of Rs. 15,50,59,824/- made by the CIT(A) on account of interest on loans and share application money given to its AEs. The appellant argued that the adjustment was based on the TPO's own calculations and assumptions, applying a Fixed Deposit rate of interest at 8.90%. The appellant claimed that this interest rate was prejudicial and against natural justice.

2. Application of Fixed Deposit Rate of Interest at 8.90% by the TPO:
The TPO noted that the appellant had advanced loans and share application money to its AEs without charging any interest except for a 5% interest rate on loans to Geodesic Hong Kong Ltd., based on LIBOR plus 200 basis points. The TPO proposed an interest rate of 20.72% for the current year, similar to the previous assessment year. However, the TPO eventually applied a net interest margin rate of 2.3% on the interest rate of 6.6%, resulting in an 8.9% interest rate for determining the arm's length price (ALP) of the transactions.

3. Consideration of RBI Guidelines and LIBOR Rates for Benchmarking the Transaction:
The appellant argued that the LIBOR Plus method should be used for determining the ALP, citing various judgments where LIBOR was considered an appropriate benchmark for foreign currency loans. The appellant also referenced RBI guidelines for calculating interest rates on export credit in foreign currency on a LIBOR Plus basis. The TPO, however, applied a different method, considering the appellant's borrowing cost of 6.6% on zero-coupon bonds and adding a net margin rate of 2.3%.

Tribunal's Decision:
The tribunal noted that the appellant had raised Rs. 640 crores through zero-coupon convertible bonds, convertible into shares after five years, with an option for the lender to get interest at 6.6% if not converted. The TPO's application of an 8.9% interest rate for determining the ALP was based on this borrowing cost. The tribunal referred to the Bombay High Court's decision in the case of Tata Autocomp Systems Limited, which held that the rate of interest for transfer pricing purposes should be based on the rates prevailing in the country where the loans are consumed.

Conclusion:
The tribunal set aside the orders of the authorities below and restored the matter to the AO for de-novo determination of the ALP of the international transaction of interest-free loans and share application money advanced by the appellant to its AEs. The AO was directed to consider the ratio of the Bombay High Court's decision and provide the appellant with an opportunity to present necessary evidence and explanations. The appeal was allowed for statistical purposes.

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