TMI Blog2013 (6) TMI 420X X X X Extracts X X X X X X X X Extracts X X X X ..... interest receipts shown on loan given to AE - as per TPO as per the CUP method if it is benchmarked against LIBOR the interest rate declared by the assessee is higher and hence no adjustment is required - whether it is not in accordance with law - Held that:- The case of the assessee was that LIBOR as on 31.03.2008 was 2.49% against which the assessee has charged interest @ 6% p.a. Interest charged by the assessee is much higher than the corresponding arm's length LIBOR even from an Indian transfer pricing perspective. It is not in dispute that the loan has been denominated in US dollars. Though the D.R., for the first time, raised a contention that the assessee might have taken loan in the earlier year to advance the same to its AE in the earlier year, in fact neither the TPO nor the DRP has considered the aspect from that angle and the assessee consistently prayed before the tax authorities that the assessee has not incurred any interest cost on funds given to the AE as the source of fund is surplus available with the assessee. In the absence of any material to prove to the contrary, merely because some interest has been paid in the immediately preceding year, it cannot be assume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of Unit No. II and Unit No. III. The case of the assessee was that Units No. II III were set up in Software Technology Park. The units were validly formed during the Financial year 2000-01 2001-02 respectively with substantial new plant and machinery, new business contracts, new employees and new lines of business and hence, profit derived from the said units are to be considered under section 10A of the Act since they are new independent units. It was also submitted that the manner of registration with the STP authorities i.e. "expansion" of existing units is not relevant in this context since the only aspect that has to be seen is that whether the units are operating as independent units or not. 4. Pursuant to the opinion expressed by the DRP, the Assessing Officer observed that similar claim was rejected in assessee's own case for A.Y. 2005-06 and, the facts and issues being same for this assessment year, he preferred to follow his orders passed for earlier assessment years and accordingly held that Unit Nos. II III do not fulfill the conditions stipulated under section 10A(2) of the Act for the reason that they are merely expansion of already existing business. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of reallocating the expenses the AO should have first added back the expenses already allocated by the assessee and then proceeded to arrive at the expenses of each unit by taking the turnover, as otherwise it would amount to double allocation. The DRP observed that the allocation of expenditure as per assessee's statement has no basis since it was not adequately supported with evidence. The DRP, therefore, observed that the method adopted by the AO is fair and reasonable in the absence of any scientific basis followed by the assessee. However, the DRP noticed that there is some merit in the contention of the assessee with regard to the alternative contention i.e., if the expenses are to be reallocated then the AO should have first added back the expenditure that was already allocated by the assessee and then reallocate them based on the turnover criteria. The AO was asked to verify this issue at the time of passing an order under section 143(3) r.w.s. 144C of the Act. While passing the order, pursuant to the view taken by the DRP, the AO observed that the assessee has not been able to furnish the basis of allocation of expenses unitwise and hence the assessee's allocation of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... located by the assessee. It appears that the AO has not properly appreciated the issue. Since ground No. 2 is already set aside, we deem it fair and reasonable to set aside this issue also with a direction to the AO to reconsider the matter in accordance with law. Needless to observe that the assessee shall be given an opportunity of being heard and if the assessee has already allocated the expenditure the same has to be added back to the profits of the units and then only the reallocation process should begin. In this regard the assessee shall be given an opportunity of being heard. With these observations ground No. 3 is disposed of. 12. Vide ground No. 5 6 the assessee contends that the adjustments recommended by the TPO and DRP with regard to the interest receipts shown on loan given to AE is not in accordance with law. As per Form 3CEB report the assessee lent a sum of US$28,31,775 to C Cubed NV Netherlands (Antilles). The assessee's wholly owned subsidiary Pacific Horizon Limited, Mauritius holds 100% shareholding in C Cubed (Antilles) and hence the loan was stated to have been advanced to the Associate Enterprises (AE). The assessee company charged interest @ 6% p.a. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee is higher and hence no adjustment is required. 13. Not being satisfied with the case made out by the assessee the matter was referred to DRP which in turn observed that benchmarking the loan against LIBOR was correctly rejected by the TPO. The Committee was of the view that LIBOR is not the rate of consideration for loans where a currency is to be bought i.e. it 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, the loan given in dollars cannot be governed by that rate since the conversion is fraught with exchange risk at the time of repayment and the cost of conversion and the applicable rates at the time of extension also, against which the assessee needs to guard itself. Even for argument sake if LIBOR is sought to be considered as a rate of reference for loans originating out of India, in the opinion of the DRP, LIBOR would have to be adjusted for currency risk, country risk and forex market fluctuations even before it can be considered as a rate of reference. At the same time the DRP noticed that the rating given by the TPO is also not clear and further it no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compared to LIBOR rate the assessee charged higher rate of interest and at any rate the issue stands squarely covered by the decision of the ITAT "B" Bench Delhi in the case of Cotton Naturals (I) P. Ltd. vs. DCIT in ITA No. 5855/Del/ 2012 wherein, on identical circumstances, the Bench observed that the interest rate charged by the assessee for the loan transactions with AE was at arm's length hence no transfer pricing adjustment was called for. In this regard the Bench followed the decision of the ITAT Bangalore Bench in the case of Philips Software Centre (P) Ltd. vs. ACIT 26 SOT 226 (Bang). In the light of the aforecited decision, and following other decisions, the learned counsel strongly submitted that the issue stands squarely covered in favour of the assessee and hence no adjustment is required in the instant case:- i. Siva Industries Holding Ltd. vs. CIT 145 TTJ (Chennai) 497 ii. Siva Industries Holding Ltd. vs. CIT 26 taxmann.com 96 (Chennai) iii. Four Soft Ltd. vs. DCIT ITA No. 1496/Hyd/2010 15. On the other hand, the learned D.R. submitted that even in earlier years there were borrowings which are reflected from pages 126 of the paper book wherein payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inciples in regard to international transactions and under such a situation domestic rate would have no applicability. With regard to the decision of the Hon'ble Karnataka High Court staying operation of the order passed in the case of Philips Software Centre (P) Ltd., the learned counsel for the assessee submitted that if an order is stayed it is only vis- -vis that case and the other orders are not affected. At any rate, sans the decision of the ITAT Bangalore Bench, the matter was considered at length by the Delhi Bench in order to arrive at a conclusion that with regard to loans given in US dollars the LIBOR rate should be taken as benchmark. He thus submitted that it is not a fit case for making transfer pricing adjustments. 17. We have carefully considered the rival submissions and perused the record. The case of the assessee was that LIBOR as on 31.03.2008 was 2.49% against which the assessee has charged interest @ 6% p.a. In other words, interest charged by the assessee is much higher than the corresponding arm's length LIBOR even from an Indian transfer pricing perspective. It is not in dispute that the loan has been denominated in US dollars. Though the learned D.R., fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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