Tribunal Allows LIBOR for Transfer Pricing; Dismisses DTAA Challenge.

Instrumentarium Corporation Limited Versus DDIT (I.T.) -1 (1), Kolkata

Instrumentarium Corporation Limited Versus DDIT (I.T.) -1 (1), Kolkata - TMI Issues involved:
1. Admission of additional grounds of appeal.
2. Applicability of the India-Finland Double Tax Avoidance Agreement (DTAA) on interest income.
3. Benchmarking of the interest rate for Transfer Pricing (TP) adjustments.

Issue-wise detailed analysis:

1. Admission of additional grounds of appeal:

The assessee sought to introduce additional grounds of appeal, arguing that these grounds were legal issues going to the root of the matter and did not require fresh investigation into facts. The Revenue opposed this, contending that the additional grounds were essentially a review of the Special Bench's decision and were a dilatory tactic. The Tribunal held that Ground No. 1A was an offshoot of Ground No. 1 already adjudicated by the Special Bench and thus could not be admitted. However, Ground No. 4A, concerning the application of LIBOR instead of SBI Prime Lending Rate for benchmarking, was admitted as it related to the quantification of the Arm's Length Price (ALP) adjustment and did not require fresh fact-finding.

2. Applicability of the India-Finland DTAA on interest income:

The assessee argued that under Article 11(2) of the India-Finland DTAA, interest income could only be taxed on a receipt basis, not on an accrual basis. The Revenue countered that the Special Bench had already addressed this issue, determining that the ALP adjustment was necessary for the interest-free loan. The Tribunal upheld the Special Bench's decision, stating that the DTAA did not apply as no interest accrued or arose in this case. The Tribunal emphasized that Article 9 of the DTAA, which deals with associated enterprises and transfer pricing adjustments, was applicable. Therefore, the additional ground 1A was dismissed on both admissibility and merits.

3. Benchmarking of the interest rate for TP adjustments:

The assessee contended that the loan, denominated in US Dollars, should be benchmarked using the LIBOR rate rather than the SBI Prime Lending Rate. The Revenue argued that the loan was consumed in India, justifying the use of the SBI Prime Lending Rate. The Tribunal referred to the Delhi High Court's decision in CIT vs. Cotton Naturals (I)(P) Ltd., which held that the interest rate should be the market-determined rate applicable to the currency in which the loan is to be repaid. Consequently, the Tribunal ruled in favor of the assessee, holding that LIBOR should be applied for benchmarking the international transaction. The matter was remitted back to the TPO for recomputing the ALP adjustment using LIBOR.

Conclusion:

The Tribunal allowed the assessee's appeals in part, admitting Ground No. 4A and ruling that LIBOR should be used for benchmarking the interest rate for TP adjustments. Ground No. 1A was dismissed both on admissibility and merits, upholding the Special Bench's decision that the DTAA did not preclude the ALP adjustment for the interest-free loan.