2023 (5) TMI 361 - AT - Income Tax

Tribunal partially allows appeals on interest rates, corporate guarantee fees, and related party loans

GKC Projects Limited, Hyderabad Versus Asst. Commissioner of Income Tax, Circle-3 (1) /Asst. Commissioner of Income Tax, Central Circle-3 (1), Hyderabad

The Tribunal partly allowed both appeals related to interest on loans and advances to Associated Enterprises, corporate guarantee fee, interest on ... TP Adjustment - Interest on loans and advances given to the AEs - Assessee argued for the loans and advances in foreign currency, the interest should be the market determined rate applicable to the currency concerned in which the loan has to be repaid but not on the basis of the currency or legal tender of the place or country of residence of either of the parties - HELD THAT:- As in the light of the decision in the case of CIT VS. vs M/S Cotton Naturals (I) Pvt. Ltd. [2015 (3) TMI 1031 - DELHI HIGH COURT] in that case also, both learned TPO and the DRP referred to the PLR rates only by way of analogy so as to state the prevailing interest rates in India, but while applying CUP method for comparability, they had applied LIBOR rates prevailing and applied a mark-up of 700 points on account of low credit rating of the subsidiary AE and the cost of transaction. Interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made and, therefore, domestic interest rate should not be applied for determining the interest rate in case of loans to be re-paid in foreign currency. Respectfully following the decision of the Hon’ble Delhi High Court (supra), we hold that the ALP of interest shall be determined with reference to the interest rates applicable to the currency in which the loan has to be repaid. Since the assessee had already benchmarked the transaction and made a suo motto adjustment at 10.55% which is certainly higher than the LIBOR+400 basic points adopted by various fora, the same can be accepted. Adjustment of corporate guarantee fee - assessee suo motto adjusted at 0.5% towards commission from the AEs - HELD THAT:- Having considered the facts in their entirety, and while respectfully following the view taken by the Hon’ble Bombay High Court in the case of GlenmarkPharmaceuticals Ltd.[2013 (11) TMI 1583 - ITAT MUMBAI] we deem it just and proper to accept the ALP of corporate guarantee at 0.53%. We accordingly direct the learned Assessing Officer/learned TPO to adopt the same. Rate of interest on the receivables - HELD THAT:- We are of the considered opinion that the ends of justice would be met by accepting the interest rate on similar foreign currency receivables/advances as LIBOR+200 points. We accordingly direct the AO / TPO to adopt the same. Interest expense stating that the assessee advanced interest free loans to related parties - specific contention of the assessee is that there is business contingency in advancing the moneys to the subsidiaries because of the conditions stipulated by the concessionaire to create the SPVs for execution of the project - HELD THAT:- There is no denial of the fact that the related parties are the wholly owned subsidiaries of the assessee. There is also no specific denial that such subsidiaries were assessed to tax in the same territory and were paying taxes. Revenue failed to contend and establish that because of the assessee not charging any interest on the moneys advanced to the subsidiaries, there is any leakage of revenue – on the face of the allegation of the assessee that if the assessee charges interest, such an expense is allowable in the hands of the subsidiaries. Revenue does not dispute the contention of the assessee that at one place or the other, the interest expense has to be allowed. It is a revenue neutral transaction and assessee not charging any interest on the loans and advances made to its subsidiaries does not have any impact on the Government exchequer. With this view of the matter, we allow grounds. Application of markup of 10% on the contract revenue and proposing an adjustment - HELD THAT:- As no information is furnished to contradict the findings of the authorities below. In these circumstances, we do not find anything illegality or irregularity in the authorities adopting the markup at 10% of the sub-contract services amount. Ground is accordingly dismissed. Issues Involved:1. Interest on loans and advances to Associated Enterprises (AEs)2. Corporate guarantee fee3. Interest on receivables4. Disallowance of interest expense on interest-free loans to related partiesSummary:Interest on Loans and Advances to AEs:The assessee adopted the Comparable Uncontrolled Price (CUP) method and made a suo motto adjustment at 10.55% as interest income on outstanding loans to GKC Projects, Zambia Ltd., and GKC Projects LLC, Oman. The Transfer Pricing Officer (TPO) applied the SBI PLR at 14.05%, which was approved by the Dispute Resolution Panel (DRP). The Tribunal relied on the Delhi High Court's decision in CIT vs. M/S Cotton Naturals (I) Pvt. Ltd., which held that the interest rate should be the market-determined rate applicable to the currency in which the loan is repaid. The Tribunal accepted the assessee's benchmarking at 10.55%, which is higher than LIBOR+400 basis points, and allowed grounds No. 2 to 4.Corporate Guarantee Fee:The assessee adjusted the corporate guarantee fee at 0.5% commission for GKC Projects LLC, Oman. The TPO recomputed it at 1.9%, supported by the DRP. The Tribunal, following the Bombay High Court's decision in Glenmark Pharmaceuticals Ltd. vs. Addl. CIT, deemed it proper to accept the ALP of corporate guarantee at 0.53% and directed the TPO to adopt the same. Grounds No. 5 to 8 were allowed in part.Interest on Receivables:The assessee argued that receivables arising in the course of business should not be treated as loans for interest levy. The TPO proposed interest at SBI short deposit rate after a 30-day credit period, sustained by the DRP. The Tribunal, referencing multiple decisions, concluded that interest on foreign currency receivables should be LIBOR+200 points. Grounds No. 9 to 12 were partly allowed.Disallowance of Interest Expense on Interest-Free Loans to Related Parties:The assessee advanced interest-free loans to related parties for business exigency, supported by a letter from Karnataka Renewable Energy Development Ltd. The Tribunal noted that the subsidiaries were assessed in the same region and rate, making the transaction revenue-neutral. The Tribunal allowed grounds No. 13 and 14, stating that not charging interest does not impact the Government exchequer.Assessment Year 2018-19:The facts were similar to the previous year. The Tribunal applied its findings from the previous year to the issues of corporate guarantee fee and interest on receivables, directing the TPO to adopt the same rates. The Tribunal dismissed ground No. 10 related to the markup on contract revenue due to lack of contradictory information. Ground No. 11, concerning disallowance of interest on interest-free loans, was resolved similarly to the previous year.Conclusion:Both appeals were partly allowed. The order was pronounced on April 28, 2023.