AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2021 (4) TMI 1348
X X X X Extracts X X X X
X X X X Extracts X X X X
....ans by providing a range of financial products. 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% ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of interest. The average rate of PLR related to the banks in India takes in 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 FCD....
X X X X Extracts X X X X
X X X X Extracts X X X X
....revamping distressed assets, it was considered that the average and minimum interest rates were not comparable due to inherent risk factors and accordingly, 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 rate....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lend at interest rates much higher than the normal commercial rates. It is further not the case that in respect of any of such maximum rate of interest, the advance or the loan given and its 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 appellan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsfer pricing adjustment in respect of difference in the interest rate. 3. In disregarding the specific facts of the Appellant which were relevant in the determination of the arm's length rate of interest. 4. In stating that the 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 bus....
X X X X Extracts X X X X
X X X X Extracts X X X X
....39;s case, even though a still higher rate could have been justified but, on a conservative basis, only the rates as aforesaid as appearing on the RBI website were taken into account. The Appellant offered to tax the differential of Rs. 4,04,457 between the transfer price and the arm's length price (as adjusted by the 5% margin) as 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 ind....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rther, it is pertinent to note that the arm's length rate derived by the learned TPO/ CIT(A) by his approach is 10.59%, which almost the same as the SBI PLR of 10.35% (as mentioned in para 2 above), meaning thereby that the risk premium to be charged to the Appellant over and above the PLR rate would be merely 0.24%. It is most respectfully submitted that this is completely divorced from commercial reality 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 Cy....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cted by the commercial banks. We notice that on the other hand TPO adopted the average of the PLR of Indian banks as it would be the most appropriate comparable while applying the CUP method. We notice that the assessee argues that investment in its company would be inherently risky due to following reason that it is in start-up stage and it received its NBFC license only in the year 2005. It did not have past performance record which could induce 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 a....