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TMI Blog2012 (5) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction 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 (hereinafter referred to as TKT). However, no interest was charged on the above loan and no separate TP analysis has been done in respect of this transaction nor was this international transaction referred to in Form 3CEB. The TPO called upon the assessee vide show cause, dated 22.10.2010, to show cause as to why the interest should not be charged on this transaction at the rate of 10.25%. 4. The Assessee submitted that the interest free loan was granted to TKT on account of business reasons and commercial expediency. The Assessee submitted before TPO that the business structure and the commercial rationale that led to the decision of the assessee to give interest free loan to its TPO can be understood from the manner in which it conducts its business in Germany. The assessee explained that Ford was an esteemed customer both in India a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age 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 the losses of TKT, and would have strained the availability of cash for day to day operations; and - The existence and survival of TKT being of strategic importance to the Assessee, from the perspective of its Ford business. Based on the above, the assessee contended that the loan was granted to TK purely on the basis of commercial expediency and for the purposes of the assessee's business with Ford Europe and thus no notional interest should be charged thereon. 7. Based on judicial decisions the assessee contended that lending of interest free funds to subsidiary is a normal and acceptable business practice and thus, the existence of such interest free loans does not mean that the transaction is non arms length, if genuine business reasons exist, then non-char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The TPO rejected the argument of the Assessee that the interest free loan was given to the AE owing to commercial considerations and therefore no adjustment/addition should be made. The TPO gave the following reasons for doing so: A. Lending or borrowing is not one of the main businesses of the Assessee. B. Two independent enterprises in the similar circumstances as that of the assessee and its subsidiary would have charged interest as compensation for the financial facility provided by one party to another keeping in view the financials of the subsidiary and no security being offered. But for the relationship between the assessee and its subsidiary, the assessee would have earned interest on the loan extended by it. C. The business prudence or necessity of ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her 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, therefore, such a loan, for extension of which dollars! pound sterling/euro etc. need to be purchased, cannot be governed by that rate. 13. The Assessee had relied on the Hon'ble Chennai Bench of ITAT ruling in the case of M/s. Siva Industries and Holding Ltd. v. ACIT (Infra) and of the Mumbai Tribunal in the case of DCIT v. Tech Mahindra Ltd. (Infra) wherein it was held that LIBOR rate would be the best benchmark to determine ALP when interest free loans are given in foreign currency to AE abroad. The TPO however rejected the stand of the Assessee by holding that the above aspects of LIBOR (set out in the earlier para) were not before the honourable ITAT when the decisions were taken. It is also seen that assessee has not demonstrated that a loan on similar terms including secu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty 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 cannot be considered to be comparable rate as the appellant is not in the business of granting loans. By way of alternative argument and without prejudice it was submitted that in a situation where an international loan was granted to an AE, EURIBOR based interest rate would have been the most appropriate comparable uncontrolled rate. The following judicial ruling supporting the assessee's contentions were cited. VVF Ltd. v. DCIT (ITA No.673/Mum/06) - Mumbai Tribunal; M/s. Siva Industries & Holding Ltd. v. ACIT (ITA No. 2148/Mds/2010) (Chennai Tribunal); DCIT v. Tech Mahindra Ltd. (ITA No. 1176/Mum/2010) (Mumbai Tribunal); M/s. Four Soft Limited v. DCIT (ITA No. 1495/Hyd/2010). It was submitted that third party international transactions of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 charge to tax under the Act is on the total income computed in accordance with the provisions of the Act. Sec.28 of the Act lays down the categories of income that are assessed as income from business or profession. Sec.29 lays down the manner of computation of income from business or profession. These are general provisions for computation of income from business applicable to all class of assessees. Provisions of Sec.92 in particular and Chapter X in general are special provisions dealing with computation of income in an international transaction. Those provisions will prevail over the general provisions. Generalia Specialibus Non Derogant (general provisions must yield to the specific provisions). Generally speaking, the sections in the Act do not overlap one another a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 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 substance of the transactions. The transactions has been said to be commercially expedient and loan granted to support the subsidiary and obtain returns in future. The assessee had full control over its subsidiary which reduce the credit risk. The loan had been duly granted by the approval of the RBI. The Income Tax Act, 1961 and OECD guidelines support the contention that the effect of government control/ intervention should be considered while determining the arm's length price. Under the thin capitalization rules, no deduction was allowable to the Hungary entity for payment of interest therefore, there existed impossibility of performance with regard to payment of Hungary entity. Economic circumstances of the subsidiaries did not warrant the charging of interest from subsidiaries. The Id. Counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest 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 case. Hence in our considered opinion they do not help the case of the assessee." 17. The aforesaid decision of the Tribunal is an answer to the argument of the Assessee before us that the impugned addition could not have been made by the AO at all. Respectfully following the said decision, we hold that the AO was well within his powers in making the impugned addition. The justification for the quantum of notional income considered as taxable in the hands of the Assessee is a matter which we will examine in the subsequent paragraphs. 18. On the issue as to what is quantum of addition that has to be made, we will proceed to examine the issue on the basis that CUP is the most appropriate method for determining ALP in the present case. It has been the argument on behalf of the Assessee that the TPO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res. 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. Aggrieved by the order of the CIT(A), that AO filed an appeal before the Tribunal. The Tribunal had that the TPO made an error in selecting the transaction of charging of interest to German AE on loan granted at the rate of 10 percent per annum as internal comparable. Following the position settled in case Skoda Auto India and Rule 10B(1)(a) of the Income-tax Rules, 1962, to be an internal comparable under the Comparable Uncontrolled Price (CUP) method, the transaction needs to occur between the taxpayer and an independent party. Even assuming that the adjustment for extended credit was necessary, USD LIBOR is more appropriate basis than the rate of interest on Euro denominated loan considering the fact that the AE is based in USA and commercial principles and practices related to USD denominated extended credit. The Tribunal has also ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urities, 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 respect of export credit to exporters at internationally competitive rates under the scheme of pre-shipment credit in foreign currency (PCFC) and Rediscounting of Export Bills abroad (EBR), has permitted banks to fix the rates of interest with reference to ruling LIBOR, EURO LIBOR or EURIBOR, wherever applicable and thereto appropriate percentage ranging from 1% to 2%. The reference to the said circular is at page -80 of the Assessee's paper book. In our view the claim of the Assessee to adopt EURIBOR rate as stated before the TPO is reasonable and deserves to be accepted. Following the ruling of the tribunal in the aforesaid cases, we are of the view that the claim made by the Assessee in this regard has to be accepted. The AO is directed to work out the TP adjustment accordingly. Gr.No.1 to 4 are thus partly allowed. 20. In Gr.No.5 the Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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