TMI Blog2012 (5) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee against the order dated 19/9/2011 of the ACIT 2(3), Mumbai (hereafter referred to as the AO) passed under section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (the Act). 2. In ground Nos. 1 to 4 the assessee has challenged the order of the AO whereby the AO made an addition of Rs. 1.76 crores consequent to a transfer pricing adjustment to international transaction of interest free loan given by the assessee to one its Associate Enterprise (AE). 3. The assessee is a company. It is engaged in the business of manufacture of indoor plastic, rendering engineering services, supply chain management services and administrative support for joint venture companies. The assessee entered into international transactions with its AE and in terms of section 92 of the Act supported the price paid in respect of the international transaction by filing the necessary Form 3CEB. There is no dispute regarding the price charged by the assessee in respect of international transactions set out in form 3CEB filed by the assessee. The TPO noticed that the Assessee had also made advances of Euro 26,25,000/-to its wholly owned subsidiary a German Company by name TACO Kunstsofftechnik GMBH (h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... child parts and export the same to TKT; and - TKT to manufacture big parts, assemble the same with child parts imported from the assessee and sell the same to Ford Europe. As mentioned the above business arrangement was aimed to ensure smooth functioning of the assessee's business, providing better customer service considering the geographical proximity of TKT to Ford Europe, savings in costs, etc. 6. The Assessee highlighted the fact that existence of TKT was essential for the assessee's achievement of business objectives related to Ford, it was very much in the assessee's interest that TKT was adequately funded and operational. Accordingly it was a decision made purely on commercial grounds to fund TKT through interest-free debt for following reasons: - Need of funds to help TKT manage its working capital requirements for manufacture of big parts; - Start-up stage of both Assessee and TKT in respect if business with Ford Europe; - Estimation of loss in the entire value chain during the initial years, considering the 1arning curve, operational inefficiencies, stringent European quality norms, etc; - Interest cost would have resulted in increasing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational transaction. The TPO proposed to apply the Comparative Uncontrolled Price (CUP) method as the most appropriate method and in this regard applied the lending rate applicable in India by Banks. As regards the rate of interest proposed to be applied by the TPO, the assessee submitted that the geography that needs, to be considered for adopting a comparable rate is the geography in which the loan has been consumed and on the geography from which the loan has been granted. In this connection, the assessee contended that the Comparable Uncontrolled Price ("CUP") method proposed to be adopted by the AO/TPO as the most appropriate method requires fulfillment of stringent requirements. Accordingly, for the purpose, of undertaking comparability analysis for arriving at arm's length interest rate, it is pertinent to take into consideration the interest rates prevailing in the geography in which the loan has been consumed i.e. in Germany, as differences in geographic markets would also influence the reliability of the comparison under this method. It was contended that it would be important to look at options available to TKT for raising funds in Germany and not in India. 10. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t would have been charged taking into account credit worthiness of the AES, margins, security or any other consideration relevant for deciding the financial solvency of the borrower. 12. The Assessee had submitted that if at all any ALP has to be determined then the LIBOR rates should alone be adopted. On the above submission, the TPO held that LIBOR is a rate of reference for inter bank transactions, is primarily for Pound Sterling transactions, though it is used as a rate of reference by a few other currencies (not including INR) also. It is also generally the norm that LIBOR is for maturities ranging from overnight to one year. It is applicable, evidently, for contributions in the currency concerned and not for the cost of producing one currency by borrowing in another currency and accessing the required currency via the foreign exchange markets. The TPO therefore held that LIBOR is not the rate of consideration for loans where a currency is to be bought - whether bought in the market or transacted through a bank - i.e. is not applicable where the currency of the origin country of loan is not the currency in which the loan is finally extended. In the Indian scenario, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery existence was threatened( the AE has subsequently been liquidated). It was argued that if the Appellant had charged interest, the same would have to be written off upon the AEs liquidation. The loan granted to the AE was in the nature of "quasi equity" and thus, notional interest should not be computed. It was submitted that the selection of the CUP method is not in accordance with the Indian Transfer Pricing Regulations as the Ld. A.O/DRP has failed to conduct the analytical process enshrined in the Indian Transfer Pricing Regulation (ITPR) for the selection of the most appropriate method. The application of the CUP method by the ld. AO/DRP is not in accordance with the ITPR on the following counts: - The ld. AO/DRP has not conducted any benchmark and failed to identity any comparable uncontrolled transaction for identifying the arm's length interest rate. - The additional 2.25% interest charged is without any basis. - The ld. AO/DRP has failed to identify an international transaction wherein the rat at which an unrelated party would lend money to another unrelated entity under similar business circumstances. - The interest rate charged by a domestic bank c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt when interest free funds are given to AE which is a non-resident. We are unable to agree with such argument. Chapter X of the Act dealing with Special Provisions relating to Avoidance of Tax was introduced w.e.f. AY 02-03 by the Finance Act, 2001. Prior to such introduction Sec.92 of the Act was the only section dealing with Transfer pricing. Those provisions and Rules made thereunder did not give sufficient powers to the Revenue authorities to find out whether the foreign companies/non-residents operating in India or earning income in India were being taxed on their Indian income on an arm's length basis. The legislative intent behind the introduction of detailed transfer pricing provisions is brought out in para 55.6 of CBDT Circular No. 14/2001 on provisions relating to Finance Act, 2001, which interalia states: "The basic intention underlying the new transfer pricing regulations is to prevent shifting out of profits by manipulating prices charged or paid in international transactions, thereby eroding the Country's tax base." Sec.92 of the Act lays down that any income arising from an international transaction shall be computed having regard to the arm's length price. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility to tax can arise only when there is income. No tax can be charged as notional income on accrual. Further reliance has been placed upon the ruling of Authority for Advance Rulings delivered in the case of Veneburg Group B.V. v. CIT 727 of 2006 for the proposition that in the absence of any income, Transfer Pricing provisions being machinery provision shall not apply. It has further been argued that Transfer Pricing document maintained by the assessee clearly mentioned that these loans/advances are in the nature of quasi-equity and hence the transaction of granting interest free loan is at arm's length. The loan agreements mentioned that these are interest free loans. Reliance in this regard is placed upon the decision of Delhi Tribunal in the case of Sony India Ltd. 114 ITD 448 Para 100 that "under fiscal loans actual transaction as entered between the parties is to be considered. Authorities have no right to re-write the transaction unless it is held that it sham or bogus or entered into by the parties to avoid and evade taxes." Further reference has been made to para 1.37 of 1995 of OECD guidelines for the proposition that it is legitimate to consider that economic subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame centre or direction or control (associated enterprise) maintain commercially or financially relation with other. In such a situation, the possibility exist that by way of intervention from the centre or otherwise, business conditions must be accepted by the acting units which differs from those which in the same circumstances would have agreed upon between un-related parties. The aim is to examine whether there is anomaly in the transaction which arise out of special relationship between the creditor and the debtor. Hence the contention of having actually not earned any income cannot come to the rescue of the assessee in this scenario. The case laws from the Apex Court cited by the Id. Counsel of the assessee are in the context of the proposition that only the real income has to be taxed and interest free advances can be given by companies (domestic) to their subsidiaries on the ground of commercial expediency. But these decisions are not in the context of Chapter-X of the IT Act which relates to special provision relating to computation of income from international having regard to arm's length price. Other case laws cited by the assessee are not germane to the facts of this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at case was a a joint venture between Mahindra Mahindra Limited (Indian company) and British Telecommunications (UK Company), was engaged in rendering of software services relating to telecommunication, internet technology and engineering etc. During the previous year, the taxpayer had extended credit beyond the stipulated credit period to its AE based in USA without charging any interest on such extended credit period. During the assessment proceedings, the Transfer Pricing Officer (TPO) rejected taxpayer's arguments and determined the arm's length interest for such extended credit period to US AE at the rate of 10 percent per annum. The TPO determined this rate based on the rate of interest charged by the taxpayer on Euro denominated loan granted to its German AE. The resultant transfer pricing adjustment amounted to INR 1.87 crores. The Assessing Officer (AO) adopted the adjustments made by the TPO. Aggrieved by the decision of the AO, the taxpayer filed objections before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) confirmed the transfer pricing adjustment, however, restricted the same to 2 percent based on the USD LIBOR rate plus 80 basis point mark-up. Aggr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational rate fixed being LIBOR would come into play. In the circumstances, we are of the view that it LIBOR rate which has to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the Associated Enterprises. As it is noticed that the average of the LIBOR rate for 1.4.2005 to 3 1.3.2006 is 4.42% and the assessee has charged interest at 6% which is higher than the LIBOR rate, we are of the view that no addition on this count is liable to be made in the hands of the assessee. In the circumstances, the addition as made by the Assessing Officer on this count is deleted." 19. In the present case the AE is a German company. Eurobior rates are based on the average interest rates at which a panel of more than 50 European banks borrow funds from one another. There are different maturities, ranging from one week to one year. These rates are considered to be the most important rate in the European money market. The interest rates do provide the basis for the price and interest rates of all kinds of financial products like interest rate swaps, interest rate futures, saving account and mortgages. We find that the RBI in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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