TaxTMI 
TaxTMI 
2013 (6) TMI 174
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....s difference in arm's length price determined by Transfer Pricing Officer (TPO) in pursuance of DRP's order & the appellant. 4. On the facts and circumstances of the case, the Hon'ble DRP has erred both on facts and in law In determining reasonable interest rate at 13.25% as against 4% determined and levied by the assessee in respect of loan advanced by it in US Dollar to its subsidiary company in U.S.A. 5. On the facts and circumstances of the case, the Hon'ble DRP has erred both on facts and in law in ignoring the contention of the appellant that the comparison made by the Transfer Pricing Officer for determining the rate of interest on a transaction of a loan availed by an Indian entity is unjustified. 6. On the facts and circumstances of the case, the Hon'ble DRP has erred both on facts and in law in ignoring the contention of the appellant that for the purpose of determining the rate of interest the currency in which the loan has been advanced has to be taken into consideration and the rate of interest cannot be based on the PLR rate of Reserve Bank of India in respect of Indian Rupees. 7. On the facts and circumstances of the case, the Hon'ble DRP has erred both o....
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....ontrolled enterprises are at a lower ate, the same are at Arm's Length. In the case of interest, the assessee has mentioned that it has received interest at a rate of 4% which is comparable with the export packing credit rate obtained from independent Banks in India. 3.2 The Transfer Pricing Officer noticed from the balance sheet of the tax payer for the A.Y. 2008-09 that certain amounts given as loans by the taxpayer to its associated enterprises were outstanding as on 31.3.2007. The amount of loan which has also been reported in Form 3CEB is $ 10,50,000. The TPO further observed that in a situation where Indian company has been chosen as the tested party, the comparable rates for benchmarking the interest have to be selected from the Indian domain. He observed that it is to be seen that what the assessee would have earned by giving loans in the Indian market. It cannot be compared with the rate of interest that the AE would have paid to some third party. The TPO held that the assessee cannot be compared to the Barclays Bank. That one has to see what the independent parties in comparable transactions would do i.e. if the same loan transactions takes place between two independen....
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.... rate is to be adopted. Assessing Officer further observed that an independent person in India would expect the maximum return on its investment and if the lending rate is higher in Indian currency then he would not lend in foreign currency where the lending rate is not so attractive. Had the AE of the assessee been the tested party, then the labor rate would have been of any significance. That it should also not be forgotten that, had the AE of the assessee company would have got loan from any bank or FI in its state of residency at Libor rate, then why it did not avail of loan at such a rate. In view of the above, Assessing Officer proposed interest rate of 17.26% per annum (average yield on unrated bonds for the F.Y. 2007-08) to be adopted as the uncontrolled interest rate to arrive at the interest charged at arm's length. 3.5 TPO further observed that Indian companies go for External Commercial Borrowings as the interest rates on ECB loans are generally cheaper than the prevailing interest rates in the domestic market. That thus as can be seen that while borrowing money by X (in India) from Y (outside India), the interest rates are benchmarked with LIBOR and the interest rat....
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....has been arrived at, in the 'primary' analysis done above, by relying upon the Bond Yield data supplied by the CRISIL. The assessee has also not challenged / objected to the credit rating of the AE taken by the TPO at highest of the range (BB to D). Therefore, even going by the alternative calculation, the rate of interest arrived at 17.26% is fair and reasonable. 6. Computation of Arm's Length Price : Based on the above, the arms length price of the international transactions entered into by the tax payer (providing financial facility in the form of working capital loan to its associated enterprises) is computed as under:- 6.1 Computation of Arms Length Price : The amount on which interest of has been received Rs. 2052072 at 4% INR 5,13,01,800/- Arms Length Interest Rate 17.26% p.a. Arms length price @ 17.26% p.a. on the amount of Rs. 5,13,01,800/- Rs. 88,54,691/- 6.2 Price received vis-a-vis the Arms Length Price : The price charged by the tax payer at Rs. NIL in the form of interest to its Associated Enterprises is compared to the Arms Length Price or interest as under:- Arms length interest - Rs. 88,54,691/- Interest received - Rs. 20,5....
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....adjustment u/s. 92CA Rs. 47,45,416/- 7. Against the above order the assessee is in appeal before us. 8. We have heard the rival contentions in light of the material produced and precedent relied upon. 9. The assessee's submissions are as under:- "1. The assessee is a company engaged in the business of manufacturing & export of Ready made Garments. During the asstt. year 2008-09 following were the transactions with its associated enterprises - Equestrian Apparel sold to JPC Equestrian Rs.4,81,91,540/- Inc. USA Loan provided to JPC Equestrian Inc. USA $10,50,000 Interest received Rs. 20,52,101 /- 2. The CUP method was chosen to bench mark the sale of apparel as well as interest received on loans. 3. The case was referred to the Transfer Pricing Officer. The Ld. TPO vide its order dated 28.10.2011, determined the arm's length price. In its order, the Ld.TPO accepted the arm's length price determined by the assessee in respect of the sale of apparel to the Associated Enterprises. However, in respect of interest on the loan advanced by the assessee to its Associated Enterprise @ 4% per annum was considered to be not at arm's length. The Ld. TPO by making comparis....
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....ime lending rate in India was to be considered. Consequently, the Assessing Officer had determined the rate at 11.75 per cent and the difference to the extent of Rs. 45,23,817.53 was added to the assessee's income. The assessee submitted that the prime lending rate was a domestic rate and the transaction done by the assessee was an international transaction for which the LIBOR rate was to be applied. It further submitted that the RBI had also given directions wherein it was specifically mentioned that the LIBOR rate was to be applied. Therefore, it prayed for the deletion of addition to the total income as made by the AO. The Tribunal held that the assessee had given the loan to the associated enterprises in US dollars, and assessee was also receiving interest from the associated enterprises. Once the transaction between the assessee and the associated enterprises was in foreign currency and the transaction was an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If that was so, then the domestic prime lending would have no applicability and the international rate fixed being LI....
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....raised by the assessee on this issue is partly allowed for statistical purpose. " 5.4 The Mumbai Bench in case of Dy. ClT v. Tech Mahindra Ltd. [2011] 46 SOT 141 (URO)/12 taxmann.com 132 (Mum.) for Assessment Year (AY) 2004-05, held that the arm's length price in case of interest on extended credit period allowed to an Associated Enterprise (AE) based in USA shall be determined on the basis of USD London Inter Bank Offer Rate (LIBOR) instead of applying the rate of interest pertaining to EURO denominated loan charged to AE based in Germany since the AE was based in USA. The facts of the case were that the Assessee in that case was a joint venture between Mahindra & Mahindra Limited (Indian company) and British Telecommunications (UK Company), was engaged in rendering of software services relating to telecommunication, internet technology and engineering etc. During the previous year, the taxpayer had extended credit beyond the stipulated credit period to its AE based in USA without charging any interest on such extended credit period. During the assessment proceedings, the TPO rejected taxpayer's arguments and determined the arm's length interest for such extended credit period ....
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....nsfer pricing regulation as the substance of the transaction has to be judged as to whether the transaction is at arm's length or not. Further, CUP is the most appropriate method for determining ALP in the present case. In this case the Tribunal held as below: "In the present case the AE is a German company. Eurobior rates are based on the average interest rates at which a panel of more than 50 European banks borrow funds from one another. There are different maturities, ranging from one week to one year. These rates are considered to be the most important rate in the European money market. The interest rates do provide the basis for the price and interest rates of all kinds of financial products like interest rate swaps, interest rate futures, saving account and mortgages. We find that the RBI in respect of export credit to exporters at internationally competitive rates under the scheme of preshipment credit in foreign currency (PCFC) and Rediscounting of Export Bills abroad (EBR), has permitted banks to fix the rates of interest with reference to ruling LIB OR, EURO LIBOR or EURIBOR, wherever applicable and thereto appropriate percentage ranging from 1% to 2%. The reference to....
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.... chosen to bench mark interest received on loans. As per the transfer pricing study and the audit, the international transaction entered into by the assessee both in respect of sale of apparels as well as interest of loan advanced to its subsidiary was found to be at arm's length. 8.3 The Agreement is for fixed rate of interest and when the agreement was entered into with AE, the L1BOR, which is the accepted by the Hon'ble Tribunal in all cases as the most suitable benchmark for judging ALM in case of foreign currency loans, was well below the rate fixed by the taxpayer in this case. The L1BOR for two years are given below: 1 Year USOR Month 2002 2003 Jan 2.420% 1.477% Feb 2.496% 1.368% Mar 3.006% 1.340% Apr 2.613% 1.362% May 2.634% 1.221% Jun 2.251% 1.201% Jul 2.070% 1.279% Aug 1.943% 1.471% Sep 1.813% 1.286% Oct 1.664% 1.455% Nov 1.705% 1.487% Dec 1.447% 1.458% 8.4 At that time the rate of interest was declining. Hence it was in the best interest to go for fixed rate of interest. At that time, rate of interest was much less than 4% in USA for which c....
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....lusively for the purposes of business. 9.3 In CIT v. Motors & General Stores (P.) Ltd. [1967J 66 ITR 692 it was held by the Supreme Court that in the absence of any suggestion of bad faith or fraud, the true principle was that the taxing statute had to be applied in accordance with the legal rights of the parties to the transaction. When the transaction is embodied in a document, the liability to tax depends upon the meaning and content of the language used in accordance with the ordinary rules of construction. 9.4 In ClT v. B.M. Kharwat [1969J 72 ITR 603 the Supreme Court again reiterated that the legal effect of a transaction cannot be displaced by probing into the substance of the transaction. It was further held that the taxing authorities were bound to determine the true legal relation resulting from a transaction, where the legal relation was recorded in a formal document or it had to be gathered from evidence and the conduct of the parties to the transaction. 9.5 Very recently in a landmark decision, Hon'ble Supreme Court in the case of Vodafone International Holdings B. V. vs. UOI [2012] 17 taxmann.com 202 (SC) held that when, it comes to taxation of a Holding Stru....
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....as a colourable or artificial device. The stronger the evidence of a device, the stronger the corporate business purpose must exist to overcome the evidence of a device. 10.0 Assessee's profits are exempt under section 10B 10.1 In the case of Perot Systems TSI (India) Ltd. v. Dy. CIT [2010] 37 SOT 358/130 TTJ 685/5 ITR (Trib.) 106 (Delhi), on which the Ld. TPO put reliance, Hon'ble Delhi Tribunal held that lending or borrowing money between two associated enterprises comes within the ambit of international transaction and whether same is at ALP, has to be considered. It was held that not charging of interest on loan by assessee from AEs resulted in higher income in hands of AEs and income of assessee in India was reduced by corresponding amount. Hence, it made loan transaction in question violative of TP provisions as mentioned under section 92B and the contention of having actually not earned any income could not come to the rescue of assessee. 10.2 In this case one of the arguments of the TPO was that one of the AEs was situated in a tax heaven and not charging of the interest by the assessee from the AEs, would result in higher income in the hands of the AEs, and the in....
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....t under section 10B and AEs are not situated in tax heavens but in US where the tax rates are at par with India or may be more than that. 10.7 As per the CBDT Circular (Circular No. 12/2001, DATED 23-8-2001), the intention underlying the provision is to prevent avoidance of tax by shifting taxable income to a jurisdiction outside India by an associate enterprise controlling the prices charged in intra-group transactions. The CBDT circular explains the objective of this provision in following manner: "The new provision is intended to ensure that profits taxable in India are not understated (or losses are not overstated) by declaring lower receipts or higher outgoings than those which would have been declared by persons entering into similar transactions with unrelated parties in the same or similar circumstances. The basic intention underlying the new transfer pricing regulations is to prevent shifting out of profits by manipulating prices charged or paid in international transactions, thereby eroding the country's tax base. The new section 92 is, therefore, not intended to be applied in cases where the adoption of the ALP determined under the regulations would result in a dec....
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....nstitution in the place of residency at Libor rate, then why it did not avail of loan at such a rate. Assessing Officer observed that, no company in India would like to invest in the form of loan outside India and that also without security as the interest returns in India would be higher than those prevailing in developed markets. Finally, Assessing Officer held that interest rate at 17.26% would be fair and reasonable. 13. Before the DRP assessee inter-alia contended that comparison has to be made with respect of advance or loan in USA and not based on Indian conditions. The comparison could also be with rate of interest being paid by the multinational companies or banks in respect of money borrowed from India. However, the DRP agreed with TPO's point of view. But, it held that further addition on account of security is not needed. It opined that Arm's length interest rate may be taken as the PLR of RBI for the financial year 2007-08. In accordance with the above decision, the TPO adopted 13.25% as the rate of arms length interest rate. 14. We note that CUP method is the most appropriate method in order to ascertain arms length price of the international transaction as that....