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TaxTMI 
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TaxTMI 
2017 (3) TMI 1333
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.... the Act was issued. Since the assessee was involved in the international transaction in excess of Rs. 15 crores, the case was referred to Additional Director of Income-tax (Transfer Pricing), Hyderabad after getting approval from Commissioner of Income Tax - I, Hyderabad. 2.1 As per 3CEB report/TP document, the international transactions reflected are as under: AE Nature of transaction Amount Devgen Singapore Interest paid on fully convertible debentures 68,00,000 Devgen Singapore Interest paid on External Commercial Borrowings 89,35,357 Devgen Pte Ltd. Issue of share capital 20,00,00,000 2.2 Examination of TP study conducted by tax payer The taxpayer has carried out the economic analysis and has summarized it as under: Nature of international transaction Amount MAM PLI Margin of taxpayer Margin of compara bles Interest paid on fully convertible debentures 68,00,000 CUP NA NA NA Interest paid on External Commercial Borrowings 89,35,357 CUP NA NA NA Issue of share capital 20,00,00,000 Valuation as per CCI Guidelines 2.3 Analysis of the transactions: As per the audited statement of accounts the financials of the taxpayer are as u....
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....PO further observed that the assessee paid interest of 4%, which is required to be compared with LIBOR/SIBOR under CUP. The average one year SIBOR during the year ranged from 0.78 to 0.94 and the average of which works out to 0.86% which is much less than the interest paid by the taxpayer, necessitating adjustment. He observed that various judicial forums have held that for international loan transaction LIBOR is appropriate CUP. A few of them are Four Soft Ltd., Quark Systems Ltd., Dr. Reddy, Aurobindo etc. by ITAT, Hyderabad Benches. All the courts have generally held a mark-up of 200 basis points to be reasonable. Accordingly, the TPO worked out the ALP of interest on FCD as under: Interest @ 4% on Rs. 17,00,00,000 Rs. 68,00,000 Interest @ Sibor + 200 bp (0.86+2 = 2.86) Rs. 48,62,000 Excess paid Rs. 19,38,000 Accordingly, TPO made the "ALP" adjustment to the extent of Rs. 19,38,000/-. 2.6 Interest paid on External Commercial Borrowings (ECB): During FY 2008-09, the assessee borrowed sum aggregating SGD 24.3 million from Devgen, Singapore. The agreement was entered into on December 15, 2008 and duration of the agreement is till July 15, 2014. The loan was borrowe....
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....oan taken = Rs. 89,35,357 Interest @ Sibor+200 bp (0.50+2=2.50) =Rs.37,60,672 Excess paid =Rs.51,74,685 Accordingly, TPO made "ALP" adjustment of Rs. 51,74,685/-. 3. Aggrieved with the above order, the assessee preferred an appeal before the DRP. 4. As regards the interest on ECB, the DRP observed that adjustment on payment of interest of Rs. 51,74,685/- forming a view that when the interest paid to the bank (which can be considered as internal CUP) is at 11.7%, the payment of interest @ 5.94% for AY 2011-12 is reasonable and to be considered at arm's length and also considered the fact that assessee has not incurred any potential loss by borrowing money from AE. 4.1 As regards, interest on FCB, the DRP deleted the interest adjustment of Rs. 19,38,000/- holding that the interest paid for the AY at 4% is much less than the interest charged by independent bank in respect of working capital loss. Further, the DRP has relied on the decision of ITAT Bangalore bench in the case of M/s Logix Micro Systems Ltd. ( ITA No. 524/Bag/2009) wherein it was held that interest at 5% to be considered to be arm's length with regard to receivables from foreign AEs. 5. Aggrieved with ....
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....arket in which the loan is extended etc., which are crucial factors in determination of the interest rate. The pricing/fixing of the interest rate by the banks are depending on the security risk and tenure of the loan. For bench marking with the given case, it has to be determined based on the level playing field adopted by the banks. Accordingly, spread of 500 basis points is as per the international guidelines as well as the Master Circular on ECB by RBI. 7.1 Ld. AR relied on the following cases: 1. Tech Mahindra Ltd. Vs. DCIT, ITA No. 1176/Mum/2010 2. Tricom India Ltd., ITA No. 322/Mum/2014 3. Apollo Tyres Ltd. Vs. ACIT, ITA No. 616/Coch/2011 4. M/s Aithent Technologies Pvt. Ltd., ITA No. 3647/Del./2007 5. M/s Siva Industries & Holdings Ltd. Vs. ACIT, ITA No. 2148/Mds/2010. 6. M/s Cotton Natuals (I) Pvt. Ltd. Vs. DCIT, ITA No. 5855/Del./2012. 7. Vijay electrical Ltd. Vs. Addl. CIT, ITA No. 1140 & 1159/Hyd/2013. 8. Tooltech Global Engineering Pvt. Ltd. Vs. DCIT, ITA No. 273/PN/2014 9. TTK Prestige Ltd. Vs. ACIT, ITA No. 1257/Bang./2011 10. Kohinoor Foods Ltd., Vs. ACIT, ITA No. 3688 to 3691/Del/2012. 8. In the rejoinder, ld. DR submitted that assessee has not submitte....
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....h is its Associated Enterprises and which is the subsidiary company, is out of the funds of the assessee company. It is not borrowed funds. The assessee has given the loan to the Associated Enterprises in US dollars. The assessee is also receiving interest from the Associated Enterprises in Indian rupees. Once the transaction between the assessee and the Associated Enterprises is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIB OR would come into play. In the circumstances, we are of the view that it LIB OR rate which has to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the Associated Enterprises. As it is noticed that the average of the LIB OR rate for 1-4-2005 to 31-3-2006 is 4.42 per cent and the assessee has charged interest at 6 per cent which is higher than the LlBOR rate, we are of the view that no addition on this count is liable....
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.... Similar view has been taken in the case of Tata Auto comp Systems Limited vs. ACIT, ITAT Mumbai, ITA NO. 7354/MUM/11(A. Y. 2007-08). 4.8 On the legal principles there is no dispute that LIBOR specific percentage points has to be considered as ALP. There is also no basis, as rightly observed by the DRP, to adopt corporate bonds rate at 17.26%. Therefore, in principle we agree with Assessee's contentions that libor + percentage points is to be accepted. However, it is seen from the details furnished at page 91 of paper book, few of loans provided in AY 2003-04 and 2004-05 in the case of Arubindo and Arubindo Farmo industria Farmaceutica Ldta and loans obtained from Axis bank and Federal Bank where the rate of interest paid was LIBOR +2.1% and LIBOR +3.25%. On these loans Assessee seems to have advanced at LIBOR +3% to Aurbindo whereas rate of interest received in Aurobindo Farmo industria Farmaceutica LTDA is 13.06%. Therefore, to the extent of advances which were given at a rate lesser than the rate at which those are obtained, the AO is directed to examine and if so, the rate of interest paid should be considered as ALP in order to determine the interest received. With these dir....
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....well as external "CUP". 9.5 After careful analysis of the judicial pronouncements and RBI guidelines, we are of the view that the assessee has borrowed the loan from its AEs in terms of FCD and ECB. For the purpose of "FCD", the bench marking has to be done considering the internal as well as external "CUP". Obviously, the interest charged is better than internal "CUP". The external "CUP" are the rates available in the international market. The assessee has already submitted that the LIBOR rate at that point of time was 1.24% with the spread of 500 bps, it comes to 5.24%, which is less than 4% charged by the assessee. With regard to ECB, the bench marking has to be done on External "CUP" at the rate available in the international market. The assessee has already considered this aspect and compared the LIBOR and SIBOR rates at that point of time and considered the SIBOR based rate with 500 bps is favourable to the assessee. Accordingly, the assessee has adopted SIBOR + 500 bps as the ALP. 9.6 The ld. DR has vehemently put forth his argument for adopting 500 bps instead of adopting 200 bps as adopted by TPO. We found that there is no basis for adopting one spread of 200 bps in the ....