TaxTMI 
TaxTMI 
2021 (4) TMI 1348
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.... The assessee issued fully convertible debentures to its AE on which interest at the rate of 12% paid. On referral the case to the Transfer Pricing officer (TPO), he observed that assessee has considered arms length value of interest at the rate of 11.96% and thus no adjustment was considered necessary to arrive at the ALP of this transaction. He observed that assessee has duly entered into an agreement with the AE's for issuing convertible debentures and agreed to pay on these FCDs (fully convertible debentures) at the rate of 12%. He observed that assessee used CUP method by which interest payable on these FCD's was benchmarked on the basis of PLR data of Indian banks maintained by Reserve Bank of India. As per the TP report submitted by the assessee, he observed that average PLR of various banks works out to 11.96%. 4. Further TPO observed that as per annexure - 2 submitted by the assessee dated 17 February 2010, it was noticed that the PLR shown against each bank are not the average PLR for the quarter ending June 2006, September 2006, December 2006 and March 2007, these are the maximum interest rate range at which at least 60% of the business was contracted by the commercial ....
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....n to account the high risk as well as the low risk factors. The assessee has not carried out any risk analysis so as to benchmark the above transaction by using the data pertaining to the maximum rate of PLR rather than the average PLR of the banks in India. Benchmarking the transaction by using the maximum prevailing PLR. (rather than the average PLR) makes no sense from the point of view of Transfer Pricing. In view of the above, therefore, the argument of the assessee that PLR data (average) of the Indian banks should be fine tuned at the level at which 60% of the business was contracted by them is not tenable. Hence, it is held that the average of the PLR of Indian Banks would be the most appropriate comparable while applying CUP in the case of the assessee. The average PLR being 10,68%. The working of the adjustment is given as under ; (i) The interest paid to CCP Cyprus (12%) 421,377,773 (ii) Interest payable at arm's length rate of interest (10.68%) 375,026,217 (iii) Difference of (i) - (ii) 46,351,555 Thus the arms length rate of interest payable on the FCDs is computed at 11.25%. Accordingly, an adjustment of Rs. 46,351,555/- is required to be made in the tr....
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....ngly, the Appellant has adopted arithmetic mean of the maximum interest rate from the RBI websites for arriving at the arm's length interest rate. vii. Based on the aforesaid analysis, the arm's length rate of interest by the banks in India was arrived at 11.96% as against the interest rate of 12% paid on FCDs by the Appellant to the AE. viii. Further, the Appellant taking the benefit of+/-5% arrived at maximum of the range at 12.56% and accordingly contended it international transaction to be at arm's length. ix. The Transfer Pricing officer has not agreed to the Appellant's consideration of the arithmetic mean of the maximum interest rates available on the RBI website for arriving at the arm's length interest rate. The TPO for the reasons given by him in his order has considered it appropriate to consider the arithmetic mean of all the interest rates including the average and minimum interest rate and as well as the maximum interest rate and to consider the arithmetic mean of such rates to arrive at the arm's length interest rate for the purposes of bench marking. x. It is the fact of the case that 'the Appellant is an NBFC and has started i....
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....s terms and conditions etc. have been examined, by the appellant while doing its benchmarking xiii. The Appellant in its submission has only mentioned that it being in the start up phase, and involved in the activity of revamping distressed assets, its risk profile is higher. However, but for mentioning the same the Appellant has not demonstrated with any kind of facts or figures, as to how its risk profiles are anyways close only to the borrowers to whom the Indian scheduled banks have lent money at the maximum rates of interest. It is worthwhile to note that, the rates of interest considered for the benchmarking in respect of the banks vary from as low as 7.75% to as high as 16.5% . It can be seen from such details that such rates of interest are also the maximum rate of interest at which these banks have lent money to the borrowers. Accordingly, it cannot be said that only the maximum rate of interest and the arithmetic mean thereof would correspond to the risk profile of the appellant for the purposes of benchmarking. xiv. More broad based and relevant could be to consider the interest rates at which the loans / advances have been given by the Indian scheduled banks to th....
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....he Appellant ought to have adopted the average lending rate of interest instead of maximum lending rate of interest without appreciating the fact that adopting the average rates would render the same incomparable in light of the difference in the risk profiles. The Appellant craves leave to add, alter, vary, omit, substitute or amend the grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Honourable Income-Tax Appellate Tribunal to decide this appeal according to law. 7. Before Us, Ld AR submitted detailed written submission, which is reproduced below:- CCP India, the Appellant, was incorporated on 28 January 2004 with an objective to provide a range of financial products that would assist small to medium sized Indian corporates in their development plans. CCP India is registered with the Reserve Bank of India as a Non-Banking Finance Company (NBFC). It commenced its business activities during the financial year ended 31 March 2005. 1. During FY 2005-06, CCP India issued fully convertible debentures (FCDs) to its associated enterprise with a coupon of SBI PLR1 + 3% (i.e., at 13.25%), and paid interest amounting to INR 1,15,04....
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....s its income in its return of income. 6. However, the learned TPO rejected the stand of CCP India, and determined arm's length price using average of minimum and maximum rates at which 60 percent of the business was contracted by banks. The learned CIT(A) upheld the adjustment made by learned TPO. The stand taken by the lower authorities was broadly that (1) no adjustment for the risk was required to be given (2) the Appellant could have borrowed from Cyprus at a much lower rate (3) the associated enterprise would get shares in the Appellant on conversion of FCDs and therefore the amount advanced by them cannot be regarded as a mere loan. 7. Submissions before the Hon'ble Bench A. It is humbly submitted that any investment into CCP India / advances given to CCP India would be inherently risky due to the reasons as indicated in para 3 above B. Further, no prudent lender bank, in the ordinary course of its banking business would have ignored the abovementioned criteria while lending funds to CCP India; and could have lent funds only if CCP India was agreeable to pay interest at a rate significantly higher than what was normally charged by the banks to its other cust....
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....ty inasmuch as if such a low premium were to be charged by commercial banks to risky start-ups engaged in risky businesses, then, every start up would indiscriminately obtain loans from banks and there would be colossal losses. F. It is further submitted that the lower authorities' stand that since the AE participates in the equity capital of the Appellant, this should justify a lower risk premium is untenable. It is submitted that while lending to an entity running a business fraught with risks, no bank will lower its premium merely because it is being offered equity shares, as the equity shares would be worthless in the event of the entity suffering losses. G. Lastly, it is submitted that CCP India being an NBFC is prohibited from obtaining a loan from Cyprus under ECB guidelines and, therefore, there is no question of comparing the interest rates prevalent in Cyprus [Page 13 of the paper book for the relevant RBI Circular]. In any event, since the FCDs were issued in Indian Rupees and interest was also paid in Indian Rupees, there is no question of benchmarking the transaction with rates charged in Cyprus. Reliance in that connection is placed on the decision of the Ho....
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....duce investors to invest, it's business activities mainly comprised of revamping distressed assets, the quality of assets would be low and risk of recovering money would be high and it has long gestation period i.e., 3 to 4 years before it would start making profits. It did not have any securities to offer which the banks in India would normally require for advancing money. It was submitted that considering the above challenges, no bank would have ordinarily lent funds, even it is considered to lent, it would have added a significant risk premium on the rate of interest charged by them considering the fact that nothing to offer as collateral. It is submitted before us that above factors were considered while benchmarking the interest payment against the arithmetic mean of maximum interest rate at which 60 percent of the business was contracted by Indian banks. It is also submitted before us that how the Indian banks are financing the start-up companies without collateral securities. 10. We notice that the associate company invested in the assessee company by subscribing to fully convertible debentures considering the risk factors to invest in the start-up company like assessee com....