TaxTMI 
TaxTMI 
2025 (6) TMI 48
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....Ld. AO and the Ld. TPO, under the directions of the Hon'ble Dispute Resolution Panel (DRP'), erred in rejecting the Appellant's benchmarking analysis which demonstrated that payment of Interest on CCDs was at arm's length and further erred in conducting a fresh benchmarking exercise. 3. On the facts and circumstances of the case and in law, the Ld. AO and the Ld. TPO, under the directions of the Hon'ble DRP erred in determining the arm's length price ('ALP') of interest on CCDs by using CUP Method without analyzing or identifying any uncontrolled transaction of similar nature which is mandatory for application of the CUP method. 4. On the facts and circumstances of the case and in law, the Ld. AO and the Ld. TPO, under the directions of the Hon'ble DRP, erred in benchmarking 'Payment of interest on CCDs' by applying LIBOR rates applicable to USD, without appreciating the fact that CCDs issued are INR denominated and the interest thereon is also computed in terms of INR. 5. Without prejudice, the Ld. AO and the Ld. TPO, under the directions of the Hon'ble DRP, erred in adding the amount of transfer pricing adjustment to the total income of the Appellan....
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....tion 270A 13. On the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under Section 270A of the Act. The above grounds are independent and without prejudice to one another. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal, so as to enable the Hon'ble Income-tax Appellate Tribunal to decide this appeal according to law. 2. Succinctly stated, the assessee company, which is engaged in the business of generation, accumulation, distribution and supply of solar energy, had e-filed its return of income for the A.Y.2020-21 on 29.01.2021, declaring an income of Rs. 2,05, 4,00/-. Thereafter, the assessee company filed a revised return of income on 17.03.2021 declaring the same income as was originally returned. Subsequently, the case of the assessee company was selected for scrutiny assessment u/s 143(2) of the Act. 3. During the course of assessment proceedings, the AO taking cognizance of the fact that the assessee company had during the subject year carried out international transactions, made a reference ....
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....the remaining two proposed adjustments u/s 92CA(3) of the Act, viz. (i). adjustment by the TPO of the ALP of the international transaction of interest paid/payable to AE on Supplier credit based on LIBOR Plus 200 Basis points: Rs. 2,52,454/-; and (ii). adjustment by the TPO of the ALP of the international transaction of interest paid to AE on Compulsory Convertible Debentures (CCDs) on LIBOR Plus 200 Basis points: Rs. 15,41,567/-. 9. Thereafter, the AO vide his final order of assessment u/s 143(3) rws 144C(13) rws 144B of the Act, dated 20/12/2013 after making the aforesaid two-fold additions determined the income of the assessee company at Rs. 17,94,021/-. 10. The assessee company being aggrieved with the order passed by the AO u/s 143(3) r.w.s 144C(13) r.w.s 144B of the Act, dated 20/12/2013, has carried the matter in appeal before us. 11. We have heard the Ld. Authorized Representatives of both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions. 12. As the controversy involved in the appea....
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....the view that for all international loans, LIBOR is usually considered as a benchmark. Also, the TPO was of the view that as on account of the nature of CCDs, the assessee company remained under no obligation to repay the amount to its AE even on maturity, therefore, the currency in which the loan was taken and to be repaid would not be relevant for purpose of determining the interest rate. 12.3 Apropos, the benchmarking analysis undertaken by the assessee company using RBI Master Circular, the TPO was of the view that the same was also not appropriate, for the reason, that the RBI Circular was on a different criteria and for different purposes. Elaborating on his view, it was observed by him that the RBI directions/policies were in respect of Foreign Direct Investment policy and fund infusion from foreign sources into the Indian economy and were aimed at controlling the fund inflow from abroad in the form of debt. 12.4 Apropos the option to exercise Safe Harbour Rules by the assessee company, the TPO observed that the same was not applicable to each and every assessee, but only in some classes of assessees subject to fulfilment of certain criteria. Accordingly, the AO based ....
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....bentures, which are denominated in Indian currency. We have also carefully considered various case laws referred to by both the sides in support of their arguments. The question, which arises for consideration before the Special Bench is whether as regards TP adjustment made in respect of interest paid / payable on FCCDs/NCDs/other debentures, which are denominated in Indian currency, the benchmarking is to be made by applying PLR as against LIBOR?. In order to answer the question, it is necessary for us to refer to relevant facts of the case. The facts borne out from the record indicates that the appellant in the present cases is a wholly owned subsidiary of foreign holding company and engaged in the business of development, operation and maintenance of information technology parks in special economic zones and incidental and associated activities. During the previous year, relevant to the assessment year 2015-16, one of the international transactions that took place between the appellant and its AE was payment of interest on FCCDs. The appellant company issued FCCDs in the financial year 2011-12. The appellant has benchmarked the transaction of interest paid on FCCDs by applying ....
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.... to fact that, the nature of the transaction is a loan / borrowing or a liability. Even in the present cases, the appellant companies have treated the debentures as a long term borrowing and classified under the head liabilities in their financial statements. In fact, the TPO/Assessing Officer has also considered debentures as a loan and benchmarked the interest as a long term borrowing. Therefore, the first and preliminary argument advanced by the Sr. Standing Counsel for the Revenue in light of Clause 2.1.5 of the FDI Policy and Rule 2(k) of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 that debentures are equity instruments and it is not a loan cannot be accepted. Although the Hon'ble Supreme Court in the case of IFCI Ltd. Vs. Sutanu Sinha & Ors (supra) held them to be equity, while giving effect to contractual classification of such instruments as equity, but fact remains that the question before us is not the nature of debentures, whether it is capital or liability, but it is only on the benchmarking of interest paid / payable on the FCCDs and therefore, the arguments of the counsel for the revenue becomes purely academic. Since the TPO himself has accepte....
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....gainst which the lender must hedge with appropriate forward cover, which would be an additional cost. At the same time, when the loan is denominated foreign currency, the lender does not bear any foreign exchange risk, whereas the borrower does for this and in the situation, the borrower has to hedge and may have to enter into appropriate forward contracts which would cost additionally. The economic condition between these two situations i.e. issuance of INR denominated loan and foreign currency denominated loan is radically different and cannot be compensated on the same basis of LIBOR plus. This is a fundamental percept of transfer pricing, one has to delineate the differences in transactions undertaken and apply the benchmarking based on the functions, risks and assets. If this difference is effaced, as has been done in the rulings against the taxpayer, it would be fundamentally erroneous application of TP principles. Another key influencer of the rate of interest on a cross-border loan is the economic output, market maturity and the country credit risk of the borrower's country vis-à-vis the lender's country. From the above, it is undisputedly clear that the currency of ....
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....d., wherein, it has been clearly held that once the tested transaction is an INR denominated debt, interest rate must necessarily be based on the economic and market factors affecting Indian currency and data available for debt issuance in India rather than foreign currency rate or external data. This principle has been reiterated in the case of CIT Vs. Tata Autocomp Systems Ltd. [2015] 56 taxmann.com 206 (Bombay). From the ratios laid down by the Hon'ble High Court of Delhi and Hon'ble High Court of Bombay, it is undisputedly clear that while deciding the rate of interest for the purpose of benchmarking interest payment, it is the currency concerned in which the loan is borrowed and to be repaid is alone relevant, but not the basis of interest payable on the currency or legal tender of the place or country of resident of either party. Since the appellant in the present case has issued FCCDs to its foreign subsidiaries and denominated in Indian rupees, in our considered view, while benchmarking the rate of interest paid / payable on FCCDs, it is only the PLR rate is appropriate, but not the LIBOR plus spread as considered by the TPO. 19. Having said so, let us come....
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....OR plus spread as considered by the TPO. Further, from the above discussion, it is undisputedly clear that the currency of a loan has a significant impact on the corresponding interest, and therefore, interest on loans denominated in different currencies cannot be benchmarked against the same rate of interest which is considered for foreign currency loans/debt. In other words, the benchmark interest rate is different for loans with different currency denominations. The above position is well recognized even under the TP provisions of the Act and the related Rules. In this regard, the appellant refers to section 92CB of the Act and Rule 10TD, providing for Safe Harbour Rules. Safe Harbour Rules provide for certain circumstances, where the transfer price declared by an eligible assessee in respect of the specified international transactions, shall be accepted to be at arm's length by the tax authorities. The said rules recognizes above position that loans denominated in different currencies cannot be benchmarked against the same interest rate and provide separate criteria / benchmark rates for loans denominated in INR as against those denominated in a foreign currency. On this point ....
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.... of FCCDs as to whether FCCDs were in the nature of equity or debt. The Tribunal held that until conversion to equity, CCDs are debt instruments. In our considered view, there is inherent inconsistency in the order of the Tribunal in this regard. In fact, the assessee's before the Special Bench do not contest that CCDs are indeed in the nature of equity and in fact, the revenue in the course of their arguments have sought to argue on the contrary. Having said so, on the issue of benchmark rate, the Tribunal erroneously holds that there would be no occasion for the assessee's to repay the loan to its AE (on account of the nature of FCCD). Therefore, the currency in which the loan was taken or to be paid would not be relevant for the purpose of determining the interest rate. This finding is erroneous, because, the Tribunal upheld the adoption of LIBOR plus 200 basis points without any discussion. Further it upholds the application of LIBOR rate as being in consonance with the RBI guidelines, but there are no such guidelines issued by the RBI capping interest payments on FCCDs to LIBOR rates. In fact, the RBI Master direction itself recognizes the supremacy and relevance of the curren....
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....epends on the currency agreed upon (BFH BSt.B1. II 725 (1994), re. 1 § AStG). A differentiation between debt-claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt- claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course w....
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....ons between related parties due to the management of cross-border funding within group entities of an MNE group. Transfer pricing of inter-company loans and guarantees are increasingly being considered some of the most complex transfer pricing issues in India. The Indian transfer pricing administration has followed a quite sophisticated methodology for pricing inter-company loans which revolves around: • Examination of the loan agreement; • A comparison of terms and conditions of loan agreements; • The determination of credit ratings of lender and borrower; • The identification of comparable third party loan agreements: and • Suitable adjustments to enhance comparability. 10.4.10.2. The Indian transfer pricing administration has come across cases of outbound loan transactions where the Indian parent has advanced to its associated entities (AE) in a foreign jurisdiction either interest free loans or loans at LIBOR (London Interbank Offered Rate) or EURIBOR (Euro Interbank Offered Rate). The main issue before the transfer pricing administration is benchmarking of these loan transactions to arrive at the ALP of ....
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....should also take into account the business relationship and the functions performed by the subsidiary AE for the parent company. In the present case, we are not concerned with paragraph 10.4.10.3 of the United Nations Transfer Pricing Manual. However, we are unable to agree with the position set out and asserted in paragraph 10.4.10.2 of the Manual. The reasoning given therein is contrary to the accepted international tax jurisprudence and the rules adopted and applied. There is no justification or a cogent reason for applying PLR for outbound loan transactions where the Indian parent has advanced loan to an AE abroad. Chapter 10 of the United Nations Practical Manual on Transfer Pricing relates to country practices. The said Chapter sets out an individual country's view point and its experiences for the information of the readers. The said Chapter does not reflect the view of the Manual. Paragraph 10.1 of the United Nations Practical Manual on Transfer Pricing for Developing Countries reads:- "10.1. Preamble by the Subcommittee on Transfer Pricing: Practical Aspects 10.1.1. In the first nine chapters of this Manual, the Subcommittee has sought to pro....
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....herent risks. Its credit rating therefore was relatively low of 'BBB-'. The assessee was raising funds for such investments through issuance of debentures to its AEs. The tribunal even on comparison found that the average rate of interest of 11.30% paid by the assessee to its AEs was not excessive and was in any case lower than in the comparable instances. The tribunal rejected the transfer pricing adjustment comparing the rate of return for the assessee's US based AE. This later conclusion of the Tribunal is supported by following decisions. 4. Division Bench of Delhi High Court in case of CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523/231 Taxman 401, had held and observed 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 in....
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....ing avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no 'special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate 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 hypothetical' 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." " ....
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....t LIBOR. Accordingly, we answer the question referred to for the Special Bench as under: Whether as regards TP adjustment made in respect of interest paid / payable on FCCDs / NCDs / other debentures, which are denominated in Indian currency the benchmarking is to be made by applying PLR as against LIBOR?" (i) Yes, in favour of the assessees. (ii) Interest paid / payable on FCCDs / NCDs / other debentures, which are denominated in Indian currency to be bench marked by applying PLR rates. 13. We thus, in the backdrop of the aforesaid observations of the Tribunal, are of a firm conviction that no infirmity emerges from the benchmarking by the assessee company of the ALP of the transaction of interest paid on the CCDs to its AE by adopting SBI- PLR. Resultantly, the impugned TP adjustment of the ALP of the interest paid by the assessee company on CCDs to its AE of Rs. 15,41,567/- (supra) so made by the AO is vacated. The Grounds of appeal Nos. 2 to 5 are allowed in terms of our aforesaid observations. (B) Interest paid/payable on Suppliers Credit : 14. On a perusal of the record it transpires that the assessee company in its TP study report had reported an inte....
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....n as to whether the transaction is benchmarked at arm's length or not. But if the comparable selected itself has undertaken significant controlled transaction / no date with regard to related party transactions undertaken by it, then the comparable company, having entered into international transactions beyond a particular percentage with the related parties, it is quite possible that its overall profit may have been distorted due to such transactions irrespective of the fact whether that comparable company is functionally similar or not. Thus related party transactions entered into by comparable company tenders it as incomparable. That is why, this filter is applied to make certain that a company sought to be considered as comparable should have its profit uninfluenced by the impact of the related party transactions. When the search / comparability analysis is carried out without application of this filter, then is same cannot be stated in accordance with Rule 40B(2) of the Income Tax Rules. (d) Moreover, as seen from the final set of comparables that in most of the comparable companies current year data i.e data pertaining to F Y 2019-20 is shown as not available and....
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..... 144C(13) r.w.s 144B of the Act, dated 20.12.2023 made an addition of Rs. 2,52,454/- to the returned income of the assessee. 15. We have heard the learned representatives of both parties on the aforesaid issue i.e. transfer pricing adjustment of Rs. 2.52 lakhs (Approx.) on account of interest paid/payable on supplier's credit has been carried out by the AO/TPO. 16. Apropos the alternative contention of the Ld.AR that as the assessee company which had not earned revenue from operations during the subject year had not claimed any deduction of interest paid/payable on the supplier's credit, there was no justification for the AO to have made any addition qua TP adjustment as was suggested by the TPO, we find substance in the same. Section 92(1) of the Act, which contemplates the process of computing the income for international transactions having regard to ALP provides that any income arising from an international transaction shall be computed having regard to ALP. As per the "Explanation" to Section 92(1) of the Act, it is clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the ALP. 17.....