TaxTMI 
TaxTMI 
2024 (7) TMI 493
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....essee had obtained following loans and paid interest to AE. ECB Loan number 1 ECB Loan number 2 Date of Loan Agreement 16/12/2014 18/05/2015 Loan Facility Rs. 300,00,00,000/- Rs. 1300,00,00,000/- Interest rate 10.5% 10% The TPO applied SBI Rate and calculated the Arm's Length Price. 2.1 The Assessing Officer (NFAC) passed a Draft Assessment order u/s 144Cr.w.s. 143(3) of the Act on 28/09/2021. Aggrieved by the Order the Assessee filed objections before the Dispute Resolution, Panel-3, Mumbai(DRP-3).The DRP passed an order on 30/03/2022. DRP held that the Interest shall be calculated at SBI Base rate plus 25 basis points. The Assessing Officer, Assistant Commissioner of Income Tax Circle 4 (AO) passed Final Assessment Order as per the Directions of the DRP on 31/05/2022 making an adjustment of Rs. 75,00,000/- to the Total Income of the Assessee. Aggrieved by the Final Assessment Order the Assessee filed an appeal before ITAT. The assessee has raised following grounds of appeal: "Ground No. 1: On the facts and in the circumstances of the case and in law, the Assistant Commissioner of Income Tax-4, Pune ('the ACIT')....
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....ed the transaction of Interest Payment using 'Other Method'. During the year assessee has paid Interest of Rs.159.17 crores to its AE Air Products Holding BV Netherland on the ECB loan. The Assessee considered Weighted Average Lending Rate (WALR) of various banks at that point of time. The Ld.AR invited our attention to page 181,182 of the paper book which were relevant pages of the Transfer Pricing Study Report. The Ld.AR read out the tables which are reproduced here as under : ECB Loan 1 Public Sector Banks Pvt Sector Banks Foreign Banks Scheduled Commercial banks Dec 2014 11.27% 12.09% 10.69% 11.45% Weighted Average Lending Rate 11.38% ECB Loan 2 Public Sector Banks Pvt Sector Banks Foreign Banks Scheduled Commercial banks May 10.89 % 11.84 % 10.22 % 11.06 % Weighted Average Lending Rate 11.00% 3.1 Ld.AR also pleaded that Safe Harbour Rules prescribe interest rate of SBI base rate plus 300 basis points. Ld.AR insisted that there has to be an appropriate mark up for the SBI Base rate. The DRP has not considered these facts. 3.2 The Ld.AR relied on following case laws :  Granite ....
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....reof at 10.0%." Thus, actually Rate of Interest was 10% compound interest. 6.2 The other Loan Agreement was dated 16/12/2014 for an amount up to Rs. 300,00,00,000/- at Interest rate 10.5%. It also had provision of compounding. This Loan was to be repaid on or before 15/3/2021 as per the schedule mentioned in the agreement. 6.3 However as per the balance sheet actual loan availed as on 31/03/2018 is only Rs. 1525,00,00,000/-from the Air Product Holdings BV Netherlands(page 124 of paper book). In the Form 3 CD Audit Report Air Product Holdings BV Netherland is a holding company of the assessee. (page 122, 123 of the paper book). OECD Guideline on this issue: 6.4 OECD guideline on this issue are reproduced hereunder from the OECD Manual. "10.62. The creditworthiness of the borrower is one of the main factors that independent investors take into account in determining an interest rate to charge. Credit ratings can serve as a useful measure of creditworthiness and therefore help to identify potential comparables or to apply economic models in the context of related party transactions. Furthermore, in the case of intra group loans and other financial instruments t....
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....eed to in comparable circumstances. In the case of a loan from the parent entity of an MNE group to a subsidiary, the parent already has control and ownership of the subsidiary, which would make the granting of security less relevant to its risk analysis as a lender. Therefore, in evaluating the pricing of a loan between associated enterprises it is important to consider that the absence of contractual rights over the assets of the borrowing entity does not necessarily reflect the economic reality of therisk inherent in the loan." 6.5 Thus, when we read the OECD Guidelines on the issue of determination of Arm's length Interest on the Loan taken from the AE, one needs to consider and analyze many factors. In this case the Loan was provided by an AE situated in Netherland which is one of the holding companies. However, in the Transfer Pricing Study Report submitted by the assessee the Assessee has not carried out proper analysis of the transaction. The relevant part of the TPSR is reproduced here as under : "11.1. Economic Analysis The Weighted Average Lending Rate ('WALR') is a good external comparable available to benchmark the cost of an ECB. ....
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.... would have earned Interest at the rate of 0.2% to maximum 2% had it given loan to an entity situated in Netherland, USA, UK etc. 10. On perusal of the Financials of the Assessee which has been filed in the paper book, it is observed that the Revenue of the company has gone up substantially, the company is also setting up phase 2 of Kochi Project, the company has only one Loan, i.e. This ECB Loan. There are substantial assets which assures proper interest payments. The revenue is as under : 31.03.2018Rs. 31.03.2017 Rs. Sales of Finished Goods 152199,00,000 308300,000 Sale of traded Goods 169400,000 2500,000 Sale of Services 140000,000 66400,000 Total Operative Revenue 15611100,000 431800,000 Profit before Interest & Depreciation 2623500,000 187500,000 Interest paid & Bank Charges 15768, 00,000 222800,000 10.1 The Interest expenses are mainly on account of this impugned ECB. When we have analysed these Financials, it is observed that Revenue has grown 3.5 times, the profit before Interest and Depreciation has also grown almost 12 times. Any Financial Corporations/Banks considers projected Future Revenue and ....
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....and Analysis : 12. In this case, draft assessment order under section 144C of the Income Tax Act was passed by Assessing Officer(AO) of the National Faceless Assessment Centre as per the newly inserted faceless assessment procedure. Prior to that National e- assessment centre through ITBA made a reference to the Transfer Pricing Officer under section 92CA of the Act for deciding Arm's Length Price of the transactions. The Transfer Pricing Officer passed an order dated 24.07.2021. After that as per section 144C of the Act, the AO(National Faceless Assessment Centre passed draft assessment order under section 144C of the Act. The assessee's filed objections before Dispute Resolution Panel(DRP) as per section 144C(2) of the Act. The relevant provision of section 144C are reproduced here as under: 144C(1&2): "144C. (1) The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss retu....