TaxTMI 
TaxTMI 
TaxTMI 
2017 (12) TMI 197
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....ing call Centre services to companies outside India. For the year under consideration, the assessee filed return of income on 26/09/2009 declaring total income of Rs. 3,36,510/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short 'the Act') was issued and complied with. The Ld. Assessing Officer noticed international transactions of providing call centre outbound services by the assessee to the associated enterprises (AEs) and made a reference to the Ld. Transfer Pricing Officer (TPO) for determination of arm's length price of the international transaction. The learned TPO accepted the arm's length price of the said transaction of call Centre services determined by the assessee, however, he treated the pending receivables of the assessee from its AEs as another international transaction and benchmarked it on comparable uncontrolled price (CUP) method. The learned TPO allowed credit period of six months and decided that any receivables pending beyond six-months period should be treated as loan to the AE and he applied an interest rate of 16% in view of the prime lending rate of State Bank of India (SBI) + 300 basis point (to take....
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....riod agreed is an international transaction are not. 7. The Tribunal in the case of Kohinoor Foods Ltd. (TS-224-ITAT- 2014(DEL)- TP) has upheld that LIBOR rate should be applied on an international loan for computing interest. The relevant finding of the Tribunal is reproduced as under: "8.1 The advancing of loan in commercial circles to advance to AEs own business in foreign countries and inter se AE's transactions Chartered Accountant cannot be akin to financial institutions. Therefore, in our considered view, TPO has erred in summarily applying the comparable of financial institutions as uncontrolled comparable transaction. We have no issue of the TPO applying the CUP method. But the problem arises when in the name of applying CUP method; a wholly inapplicable comparable model applied which leads to distorted results. In our considered view, a significant sector of multi-national corporate set up involves creation of subsidiaries and associate enterprises for advancement of their overseas business. They help them in terms of finance by offering soft loans and subsidiary loans; they are primary focused to spread the business of the principal unit. It would have been very re....
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....market determine interest-rate applicable to the currency concerned in which the loan has to be repaid and interest rate should not be computed on the basis of the interest payable on the currency or legal tender of the place or country of the residence of either party.' The relevant finding of the Hon'ble High Court is reproduced as under: "39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon th....
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....te depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Art. 11(6), at least its wording, allows the authorities to ‗eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money." 40. The aforesaid methodology recommended by Klaus Vogel appeals to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Ind....
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....ate. 10.4.10.3. A further issue in financial transactions is credit guarantee fees. With the increase in outbound investments, the Indian transfer pricing administration has come across cases of corporate guarantees extended by Indian parents to its associated entities abroad, where the Indian parent as guarantor agrees to pay the entire amount due on a loan instrument on default by the borrower. The guarantee helps an associated entity of the Indian parent to secure a loan from the bank. The Indian transfer pricing administration generally determines the ALP of such guarantee under the Comparable Uncontrolled Price Method. In most cases, interest rates quotes and guarantee rate quotes available from banking companies are taken as the benchmark rate to arrive at the ALP. The Indian tax administration also uses the interest rate prevalent in the rupee bond markets in India for bonds of different credit ratings. The difference in the credit ratings between the parent in India and the foreign subsidiary is taken into account and the rate of interest specific to a credit rating of Indian bonds is also considered for determination of the arm's length price of such guarantees. ....
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....agreement that the guidance in those chapters reflects the application of the arm's length principle as embodied in the UN Model Tax Convention. 10.1.2. The Subcommittee recognizes that individual countries, particularly developing and emerging economies, struggle at times with the details of applying these treaty-based principles in a wide variety of practical situations. It therefore seemed appropriate to allow representatives of individual countries an opportunity to set out their individual country viewpoints and experiences for the information of readers. Those individual country views are contained in this chapter. It should be emphasized that it does not reflect a consistent or consensus view of the Subcommittee." 43. Normally there would be a difference between the lending rate and borrowing rate in each country. Some authors and writers suggest that the average or mid-point between the two should be taken. However, others like Klaus Vogel, have suggested that economic purpose and substance of the debt-claim or debt for which granting of credit calls for the lending rate would be determinative. Thus, in case of a capital investment, the borrowing rate will apply, w....