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

The Tribunal partly allowed both appeals related to interest on loans and advances to Associated Enterprises, corporate guarantee fee, interest on receivables, and disallowance of interest expense on interest-free loans to related parties for the assessment year 2018-19. The Tribunal accepted the assessee's benchmarking for interest rates and directed the Transfer Pricing Officer to adopt the ALP for corporate guarantee fee. The Tribunal also determined the interest rates on receivables and concluded that not charging interest on interest-free loans to related parties did not impact the Government exchequer.

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Issues Involved:
1. Interest on loans and advances to Associated Enterprises (AEs)
2. Corporate guarantee fee
3. Interest on receivables
4. Disallowance of interest expense on interest-free loans to related parties

Summary:

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.

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