TMI Blog2013 (6) TMI 174X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions. As decided in Siva Industries and Holding Ltd. vs. ACIT [2011 (5) TMI 451 - ITAT, CHENNAI] that the assessee had given the loan to the associate enterprise in U.S. dollars, and in such a situation when the transaction was in foreign currency, and the transaction was an international transactions, then the transaction would have to be looked upon by applying the commercial principles in regard to international transactions. In such a situation domestic prime lending would have no applicability and the international rate fixed being LIBOR rate would have to be adopted. Also see M/s Four Soft Ltd., Hyderabad vs. DCIT Supra [2011 (9) TMI 634 - ITAT, Mumbai], Dy. C.I.T. vs. Tech. Mahindra [2011 (6) TMI 140 - ITAT, MUMBAI], Tata Autocomp Systems vs. ACIT [2012 (5) TMI 45 - ITAT MUMBAI]. As the assessee has arrangement, for loan with Citi Bank, for less than 4%. However, for loan provided to its AE’s it has charged 4% p.a. interest. Hence, adjustment suggested by the TPO is not warranted. As assessee’s profits are exempt u/s. 10B, hence, there is no case that assessee would benefit by shifting profits outside India as relying on Philips Software Centre P Ltd. vs. ACI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and in law in ignoring the contention of the appellant that for the purpose of determining the rate of interest the currency in which the loan has been advanced has to be taken into consideration and the rate of interest cannot be based on the PLR rate of Reserve Bank of India in respect of Indian Rupees. 7. On the facts and circumstances of the case, the Hon'ble DRP has erred both on facts and in law in ignoring the contention of the appellant that the interest rate in respect of international transaction in foreign currency has to be in accordance with LIBOR. 8. On the facts and circumstances of the case, the Hon'ble DRP has erred both on facts and in law in the contention of the appellant that the adjustment on account of transaction cost by the TPO is per se on wrong assumption of facts. 9. On the facts and circumstances of the case, the Hon'ble DRP has erred both on facts and in law in ignoring the contention that this loan having been advanced at a fixed rate way back in the year 2002 and 2003, the interest rate cannot be varied or changed in the year under consideration. 10(i) That the above said addition has been made ignoring the detailed transfer pricing stu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it is to be seen that what the assessee would have earned by giving loans in the Indian market. It cannot be compared with the rate of interest that the AE would have paid to some third party. The TPO held that the assessee cannot be compared to the Barclays Bank. That one has to see what the independent parties in comparable transactions would do i.e. if the same loan transactions takes place between two independent entities, what they would expect in terms of compensation for the loan transaction entered into between them. The Assessing Officer issued notices and obtained details from the tax payer. Assessing Officer observed that the tax payer has not submitted the financials of the subsidiary in the U.S. TPO summarized his views as under:- The above arguments of the Department can be summarized as under:- a) The tax payer has extended loan to its associated enterprise at 4%. b) Lending or borrowing is not one of the main businesses of the taxpayer. c) Two independent enterprise in the similar circumstances as that of the tax payer and its subsidiary would have charged arm s length interest as compensation for the financial facility provided by one party to another k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to arrive at the interest charged at arm s length. 3.5 TPO further observed that Indian companies go for External Commercial Borrowings as the interest rates on ECB loans are generally cheaper than the prevailing interest rates in the domestic market. That thus as can be seen that while borrowing money by X (in India) from Y (outside India), the interest rates are benchmarked with LIBOR and the interest rate above Libor is decided by the stand alone credit rating of X. That on the contrary, no company in India would like to invest in the form of loan outside India and that also without security as the interest returns in India would be higher than those prevailing in developed markets. Thus, while lending money by X (in India) and Y (Outside India), the interest rates would be benchmarked against those prevailing in India for investing in corporate bonds (which are without security). Thus the benchmarking rate for lending would be different from that of borrowing. 3.6 Assessing Officer further observed that if loan given to foreign entity is to be benchmarked with LIBOR or FCNR loan rates, then following is the manner in which the arm s length price would be arrived at: i) T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4% INR 5,13,01,800/- Arms Length Interest Rate 17.26% p.a. Arms length price @ 17.26% p.a. on the amount of Rs. 5,13,01,800/- Rs. 88,54,691/- 6.2 Price received vis-a-vis the Arms Length Price : The price charged by the tax payer at Rs. NIL in the form of interest to its Associated Enterprises is compared to the Arms Length Price or interest as under:- Arms length interest - Rs. 88,54,691/- Interest received - Rs. 20,52,072/- Shortfall being adjustment u/s 92CA- Rs. 68,02,619/- The above amount of Rs. 68,02,619/- is treated as an adjustment u/s. 92CA. 4. Against the above order the Assessee filed objections before the DRP. 5. The assessee inter-alia submitted that the comparison has to be made with respect of advance or loan in USA and not based on Indian conditions. The comparison could also be with rate of interest being paid by the multinational companies or banks in respect of money borrowed from India. After considering the various objections of the assessee the DRP concluded as under:- 7.2 We have examined the issue and we agree with the TPO that no security was offere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The CUP method was chosen to bench mark the sale of apparel as well as interest received on loans. 3. The case was referred to the Transfer Pricing Officer. The Ld. TPO vide its order dated 28.10.2011, determined the arm's length price. In its order, the Ld.TPO accepted the arm's length price determined by the assessee in respect of the sale of apparel to the Associated Enterprises. However, in respect of interest on the loan advanced by the assessee to its Associated Enterprise @ 4% per annum was considered to be not at arm's length. The Ld. TPO by making comparison with uncomparables like government bonds and the amount advanced by the Indian banks in foreign currency to entities in India and by making arbitrary additions of transaction cost, security and risk etc. to such rate determined the arm's length rate of interest at 17.26% per annum and proposed an addition of RS.68,02,619/-. 4. The assessee carried the matter to DRP and made detailed submissions (PB Pg 278-293). The DRP ignoring all the contentions surprisingly held that loan is in Indian currency hence LIBOR is not the relevant rate and ordered that PLR (Prime Lending Rate of RBI for FY 2007-08 be applied. AO acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Tribunal held that the assessee had given the loan to the associated enterprises in US dollars, and assessee was also receiving interest from the associated enterprises. Once the transaction between the assessee and the associated enterprises was in foreign currency and the transaction was an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If that was so, then the domestic prime lending would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, the view that LIBOR rate had to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the associated enterprises was to be upheld. As it was noticed that the average of the LIBOR rate for 1-4- 2005 to 31-3-2006 is 4.42 per cent and the assessee had charged interest at 6 per cent which was higher than the LIBOR rate, no addition on this count was liable to be made in the hands of the assessee. In the circumstances, the addition made by the Assessing Officer on this count was deleted. 5.3 In the case of M/s Four ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase was 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 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 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 ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis 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 preshipment 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 LIB OR, 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. 6.0 DRP makes a wrong (reverse) comparison of a loan availed by Indian entity in India 6.1 The DRP has misdirected itself by observing that is Indian Currency. As is evident from the agreements (PB Page 162-167) the loan is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the taxpayer in this case. The L1BOR for two years are given below: 1 Year USOR Month 2002 2003 Jan 2.420% 1.477% Feb 2.496% 1.368% Mar 3.006% 1.340% Apr 2.613% 1.362% May 2.634% 1.221% Jun 2.251% 1.201% Jul 2.070% 1.279% Aug 1.943% 1.471% Sep 1.813% 1.286% Oct 1.664% 1.455% Nov 1.705% 1.487% Dec 1.447% 1.458% 8.4 At that time the rate of interest was declining. Hence it was in the best interest to go for fixed rate of interest. At that time, rate of interest was much less than 4% in USA for which comparable was also provided. In the present case, Cotton Natural (I) Pvt Ltd. has also arrangements for loan with Citi Bank for less than 4%. However, for the loan provided to its AEs, it has charged 4% p.a. interest. Another 'group company also had taken loan from Citi Bank at less than 4%. It is not the case of revenue that the agreement is SHAM or TAX AVOIDANCE agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocument, the liability to tax depends upon the meaning and content of the language used in accordance with the ordinary rules of construction. 9.4 In ClT v. B.M. Kharwat [1969J 72 ITR 603 the Supreme Court again reiterated that the legal effect of a transaction cannot be displaced by probing into the substance of the transaction. It was further held that the taxing authorities were bound to determine the true legal relation resulting from a transaction, where the legal relation was recorded in a formal document or it had to be gathered from evidence and the conduct of the parties to the transaction. 9.5 Very recently in a landmark decision, Hon'ble Supreme Court in the case of Vodafone International Holdings B. V. vs. UOI [2012] 17 taxmann.com 202 (SC) held that when, it comes to taxation of a Holding Structure, at the threshold, the burden is on the Revenue to allege and establish abuse, in the sense of tax avoidance in the creation and/or use of such structure(s). In the application of a judicial anti-avoidance rule, the Revenue may invoke the "substance over form" principle or "piercing the corporate veil" test only after it is able to establish on the basis of the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Delhi Tribunal held that lending or borrowing money between two associated enterprises comes within the ambit of international transaction and whether same is at ALP, has to be considered. It was held that not charging of interest on loan by assessee from AEs resulted in higher income in hands of AEs and income of assessee in India was reduced by corresponding amount. Hence, it made loan transaction in question violative of TP provisions as mentioned under section 92B and the contention of having actually not earned any income could not come to the rescue of assessee. 10.2 In this case one of the arguments of the TPO was that one of the AEs was situated in a tax heaven and not charging of the interest by the assessee from the AEs, would result in higher income in the hands of the AEs, and the income of the assessee in India would reduce by the corresponding amount. Thus, this would bring down the overall tax incidence of the group by shifting profit from the Indian jurisdiction to Bermuda which was a tax heaven country with zero rate of tax on corporate profit. Hence, as per Hon'ble Tribunal, it was a classic case of the violation of transfer pricing norms where profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charged in intra-group transactions. The CBDT circular explains the objective of this provision in following manner: "The new provision is intended to ensure that profits taxable in India are not understated (or losses are not overstated) by declaring lower receipts or higher outgoings than those which would have been declared by persons entering into similar transactions with unrelated parties in the same or similar circumstances. 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. The new section 92 is, therefore, not intended to be applied in cases where the adoption of the ALP determined under the regulations would result in a decrease in the overall tax incidence in India in respect of the parties involved in the international transaction. 10.8 Hence, erosion of Indian tax base is one of the prime objectives behind insertion of new TP Provisions. In the present case, as discussed above, there is no erosion of tax base in India. 10. Ld. Departmental Representative relied upon the order of TPO and the DRP. 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at interest rate at 17.26% would be fair and reasonable. 13. Before the DRP assessee inter-alia contended that comparison has to be made with respect of advance or loan in USA and not based on Indian conditions. The comparison could also be with rate of interest being paid by the multinational companies or banks in respect of money borrowed from India. However, the DRP agreed with TPO s point of view. But, it held that further addition on account of security is not needed. It opined that Arm s length interest rate may be taken as the PLR of RBI for the financial year 2007-08. In accordance with the above decision, the TPO adopted 13.25% as the rate of arms length interest rate. 14. We note that CUP method is the most appropriate method in order to ascertain arms length price of the international transaction as that of the assessee. We agree with the assessee s contention that where the transaction was of lending money in foreign currency to its foreign subsidiaries the comparable transactions, therefore, was of foreign currency lended by unrelated parties. The financial position and credit rating of the subsidiaries will be broadly the same as the holding company. In such a sit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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