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2016 (5) TMI 719 - AT - Income TaxTransfer pricing adjustment - whether the arm’s length interest rate arrived at by the TPO and endorsed by the DRP by adopting USD Corporate Bond Rate and LIBOR interest rate based on external commercial borrowing is justified in the present case or not? - Held that:- The TPO and DRP in our opinion have committed a fallacy, firstly, by considering the AE as a “tested party” and secondly, relying upon USD Corporate Bond Rates to benchmark the ALP of the interest rate because the interest rates for bonds or loan has to be seen from the point of view of borrowers creditworthiness and not the lender’s creditworthiness. Thus, the entire approach of the TPO/DRP in applying USD Corporate bond rates to benchmark the interest transaction in a blanket manner is not correct. We reject the TPO’s application of USD Corporate Bonds Rate as well as the LIBOR rate for benchmarking the interest transaction in this case. Though the assessee was required to benchmark its transaction by taking the financial year data for year 2009-10, but, if such a data were not available then it cannot be held that such a tenor adjustment for taking into time period cannot be made under CUP, if it has been made quite accurately taking into account the material factors relating to time of the transaction affecting the price. We though agree that, a high degree of comparability is required under CUP, but in absence of such a comparable data, a minor adjustment can be made to eliminate the material effect of time difference for arriving at a comparable uncontrolled price. Now before us, the assessee had filed two comparable transactions for the year 2009, that is, for the same financial year in the case of Shriram Transport Financial Company Ltd. and Tata Capital Ltd., wherein, for credit rating of AA Enterprises the coupon rate of interest per annum was between 11% to 12% for a tenor of 60 months. The yield on redemption is also around 11.25% to 12%. If for a credit rating company AA or AA(+) the interest rate is ranging between 11% to 12%, then in the case of the assessee which is admittedly BBB(-) credit rating company, 11.30% interest paid by the assessee to its AE is much within the arm’s length rate. This data/ document from public domain now made available before us is worth relying to benchmark and analyze the current transaction of coupon rate of interest paid/payable on CCDs issued by the assessee. Accordingly, we hold that 11.30% interest rate is at arm’s length price. Thus, in our conclusion, the transfer pricing adjustment made by the TPO and as confirmed by the DRP stands deleted - Decided in favour of assessee Disallowance under section 14A - Held that:- It is an admitted fact that assessee has not earned any exempt income. Once that is so, now in the wake of decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd. (2015 (9) TMI 238 - DELHI HIGH COURT ), no disallowance under section 14A can be made - Decided in favour of assessee Addition on account of interest accrued in respect of non-performing assets (NPAs) - Held that:- There is no infirmity in treating the interest income on NPAs on realization basis by the assessee qua the three parties, which is in conformity with the RBI guidelines. It is also admitted fact that assessee has shown this income in the subsequent year, hence the dispute is only with regard to timing. As regards interest component, on account of Kitply Industries Ltd, (fourth party) the assessee had submitted that the said portfolio was sold at a huge loss whereby the recovery was only ₹ 1 crores as against principal of sum of ₹ 120 crores in financial year 2012-13, that is, in subsequent financial years. If such a contention of the assessee is correct then no interest income can be taxed simply on the basis of accrual. On this account also the RBI guidelines will apply. Since, this aspect of the matter has not been considered either by the AO or by the DRP, therefore, same needs verification from the end of the AO to see whether the contention of the assessee is correct that the portfolio was sold at a huge loss in the financial year 2012-13 and no interest has been recovered. Thus, in view of our finding the decision of the AO in compliance with the direction of the DRP is reversed and the ground as raised by the assessee is treated as partly allowed for statistical purposes.
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