2017 (6) TMI 1207 - HC - Income Tax

ALP in the case of loans advanced to Associate Enterprises - whether loans determined on the basis of rate of interest being charged in the country where the loan is received / consumed? - Held that - In the present case the Revenue has not brought on record any other evidence to the effect that in the country where the loan is received by the Associate Enterprise the rate of interest is different than the one which is being charged by the assessee. Further it has been brought on record that the assessee has been advanced loan by the foreign bank at rate of 4.79 % and has charged interest on loan advanced to Associate Enterprise at Rs. 7.3%. We could have considered the case of the Revenue had the Revenue brought on record the rate of interest being charged in the country where the Associate Enterprise of the assessee has advanced the loan. Naturally the period for which loan has been given would be considered and not the period within which the loan has been repaid. However considering the fact that the assessee has got the loan at 4.79% and has advanced the loan to his Associate Enterprise at 7.3% and the very basis of the order of the Transfer Pricing Officer was on wrong premise i.e. it has considered the rate as prevailing in India the Tribunal has considered the facts of the present case in a plausible manner.

Summary

Issues:
Transfer Pricing Adjustment Validity
Application of RBI Guidelines
Arm's Length Interest Rate Determination

Transfer Pricing Adjustment Validity:
The appellant contested the Tribunal's decision regarding the Transfer Pricing adjustment, arguing that the Commissioner (Appeals) had validly considered it as required by law. The appellant emphasized that the Transfer Pricing adjustment involved converting the floating rate of interest to a fixed rate, in line with RBI guidelines. The appellant also highlighted a previous case where the same circular was applied. The appellant asserted that factors like goodwill and reputation justified a lower interest rate for the loan. The Tribunal's consideration of the loan repayment period was criticized by the appellant, who believed it was essential to consider the loan's duration.

Application of RBI Guidelines:
The respondent, represented by a senior advocate, countered the appellant's arguments by stating that the Transfer Pricing Officer had erroneously considered the Indian interest rate. The respondent argued that the Arms Length interest was appropriately determined based on the interest rate prevailing in the country where the loan was utilized. The Tribunal's findings regarding the benchmarking of interest rates by the appellant were supported by the respondent's submissions.

Arm's Length Interest Rate Determination:
In the judgment, it was referenced that the determination of the arm's length price for loans to Associate Enterprises should be based on the interest rate in the country where the loan is received or consumed. The Tribunal found that the Revenue failed to provide evidence of a different interest rate in the country where the loan was utilized by the Associate Enterprise. The Tribunal considered that since the appellant received the loan at 4.79% and charged 7.3% to the Associate Enterprise, the Transfer Pricing Officer's reliance on the Indian interest rate was incorrect. The Tribunal concluded that the facts of the case were reasonably considered, leading to the dismissal of the appeal due to the absence of a substantial legal question.

This detailed analysis of the judgment highlights the key issues raised by the parties, the legal principles applied, and the reasoning behind the High Court's decision to dismiss the appeal.