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2015 (7) TMI 211 - ITAT BANGALORE

2015 (7) TMI 211 - ITAT BANGALORE - TMI - Transfer pricing adjustment - determination of armís length price u/s. 92 in respect of an international transaction entered into by the assessee with its AE - whether determination of armís length price (ALP) u/s. 92 of the Act in respect of an international transaction entered into by the assessee with its AE? - Held that:- In the matter of determination of ALP in respect of a loan transaction, LIBOR rate of interest should be the interest rate applied .....

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upra) has not been overruled or any other contrary decision has been taken on the issue by any Benches of the Tribunal. In such circumstances, we are of the view that the stand taken by the AO for rejecting the plea of the assessee referred to above is unsustainable. In view of the above conclusions, we are of the view that the interest charged in the loan transaction in question has to be held to be as at armís length - Decided in favour of assessee. - IT(TP)A No.1504/Bang/2012 - Dated:- 29-6-2 .....

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etermination of arm s length price (ALP) u/s. 92 of the Act in respect of an international transaction entered into by the assessee with its AE. 3. During the financial year 2007-08, the assessee charged interest to the tune of ₹ 6,716,992 for the loans give to its AEs as follows:- Associated Enterprise Amount(Rs.) ILSL Holdings Inc 56,44,934 Indegene Fareast Pte Ltd. 507,115 Indegene Australia Pte Ltd. 564,943 The assessee had transferred funds to Indegene US and Indegene Singapore (borro .....

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all be renewed at the end of three years and the parties are free to extend it for a longer period upon mutual written agreement between them. • The Applicant(borrower) has the option to convert these funds to preference stock as per conditions to be specified in Shareholder s agreement as mutually decided at any time in future. • Initial tenor for the repayment will be three years and further expansion by mutual decision thereafter. • Indegene US and Indegene Singapore shall prom .....

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The terms and conditions of the agreement are as follows:- • The Assessee agreed to fund AUD 500,000 to Indegene Australia. Indegene Australia can request and use the funds in trances any time as per its requirements. • The agreement would be in force and effective from the date of the agreement and shall be renewed at the end of three years and the parties are free to extend it for a longer period upon mutual written agreement between them. • The Applicant(borrower) has the optio .....

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holding tax due to be paid shall be withheld by the said entity and paid to the appropriate authorities. 5. Accordingly, Indegene Australia had availed a loan of AUD 4,000/- in FY 2006-07 and AUD 210,000/- in FY 2007-08. Indegene Australia has repaid a portion of the said loan during the FY 2007-08. 6. Since the loan transaction between the Assessee and the aforesaid entities was an international transaction between two associated enterprises, the rate of interest charged for the loan has to pas .....

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ety level of the corporate bonds based on the grading issued by CRISIL and considered the loans given by the Assessee similar to corporate bonds falling within the grade of BB to D. The TPO was of the view that the risks in the loans given are too high for the Company and have considered the same to be in the grade of BB and corresponding interest rate was computed at 17.26%. 7. In this regard the Assessee submitted that the loans were provided to the 100% subsidiaries of the Company situated ou .....

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iaries. It was highlighted that the said loans were provided for business reason to infuse funding to the operations of the overseas subsidiaries and the subsidiaries were 100% subsidiaries of Indegene India and the loan agreement carried a clause that the same is convertible into equity as may be mutually decided by the parties. The loans were in fact provided to meet the business objectives of the Group as a whole and were towards achieving the Global business model as proposed to be implement .....

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n and not for the domestic loan. Hence, the comparable, in respect of foreign currency loan in the international market, is to be LIBOR based which is internationally recognized and adopted. It was argued that the TPO failed to appreciate the geographic differences between the associated enterprises and the comparables selected viz., the geographic and economic dissimilarity between the loans provided in India and outside India and also no suitable adjustment were made. It was also submitted tha .....

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Rate 2008 USA AAA 5.56% 5.63% BAA 6.48% 7.44% PLR 8.05% 5.09% Singapore PLR 5.33% 5.38% Australia Term Loans Unsecured 12.35% 14.00% 8. It was submitted that in view of the above, it can be seen that for the loan given to US and Singapore the Company has charged interest more than the prevailing lending rates in the respective geographies. In relation to loan given to Indegene Australia though the interest rates are lower than lending rates on term loans, however the loans forwarded to Indegene .....

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bmitted that considering the above rates as per the judicial precedent, the assessee has charged higher rate of interest from its subsidiaries. In view of the same the interest charged by the Company shall be considered to be at arm s length. 11. The TPO to whom the question of determination of ALP was referred to by the AO was of the view that adoption of LIBOR rates for the purpose of determining the ALP in respect of loan given in foreign currency has advocated in the decisions rendered by th .....

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20.72%). An unsecured loan is like an unrated bond and the risk is very high in such circumstances and so on. 7. The issue to be decided now is to determine as to where the case of the taxpayer falls in the grading range of BB to D, which as mentioned above, is for the cases where, either there is no safety or the safety is inadequate. Although, tile taxpayer s risk is very high, however, to be reasonable and fair to the assessee as well as its AE, it is proposed to apply the yield rates for BB .....

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Rs.1,15,01,312 Price received vis-à-vis the Arm s Length Price The price charged by the tax payer at ₹ 67,16,992/- in the form of interest to its Associated Enterprise is compared to the Arm s Length Price or interest as under: Arm s Length Interest Rs.1,15,01,312 Interest Received Rs.67,16,992 Shortfall being adjustment u/s. 92CA Rs.47,84,320 The above amount of ₹ 47,84,320 is treated as adjustment u/s. 92CA. The other international transactions are treated at Arm s Length in .....

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by the Assessee before the Tribunal. 14. The learned counsel for the Assessee, apart from reiterating the submissions as made before the AO, submitted that the DRP did not deal with the application of LIBOR rate of exchange and did not deal with the decisions referred to by the assessee in this regard. He pointed out that the DRP in this regard had merely expressed the view that the method of computation done by the TPO was correct and did not call for any interference. It was further contended .....

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e the LIBOR / EURO LIBOR / EURIBOR for the computation of interest rate on export credit in foreign currency extended to exporters. It was argued that the authorities below have not followed the decisions of the Tribunal referred to by the ld. counsel for the assessee for the reason that those decisions had not attained finality. The learned DR relied on the order of the DRP. 15. We have considered the rival submissions. In the case of Siva Industries & Holdings Ltd. (supra), identical issue .....

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Following are the relevant observations of the Tribunal:- 37. On the quantum of interest percentage that has to be added, we find the Mumbai Bench of the ITAT in the case of Tata Autocomp Systems Ltd. (supra) held as follows: 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 ado .....

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e in this regard finds support from the following rulings of the Tribunal VVF Ltd. VS. DCIT (supra), M/S. Siva Industries & Holdings Ltd. Vs. ACIT (Supra), DCIT Vs. Tech Mahindra Ltd. (supra) and M/S. Four Soft Ltd. VS. DCIT (supra). The Mumbai Tribunal in the case of Tech Mahindra (supra) held that the arm s length price in case of interest on extended credit period granted to an Associated Enterprise shall be determined on the basis of USD LIBOR and not on any other currency denominated lo .....

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in USA. The facts of the case were that the Assessee in that case 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 a .....

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ision 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 ann .....

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nd commercial principles and practices related to USD denominated extended credit. The Tribunal has also made a crucial point that the arm s length interest rate should be taken from the country of the borrower/debtor, i.e. the rate of interest to be used for benchmarking shall be the rate of interest in respect of the currency in which the underlying transaction has taken place in consideration of economic and commercial factors around the specific currency denominated interest rate. The afores .....

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ted Enterprises and which is the subsidiary company, is out of the funds of the assessee company. It is not borrowed funds. The assessee has given the loan to the Associated Enterprises in US dollars. The assessee is also receiving interest from the Associated Enterprises in Indian rupees. Once the transaction between the assessee and the Associated Enterprises is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applyin .....

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o 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 differ .....

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counting 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 .....

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