TMI Blog2017 (3) TMI 1333X X X X Extracts X X X X X X X X Extracts X X X X ..... l change. The RBI in its prudential norms has given windows for the pricing of interest and the spread. Based on the RBI guidelines, the term up to 5 years, can have spread of 300 bps and beyond 5 years, it can be 500 bps. Taking the clue from this guideline, we can come to understand that the assessee has properly allowed its AEs to adopt the spread of 500 bps. In our considered view, the relevant issue is to charge the interest on international transaction based on the LIBOR or any other rates which are the basis for negotiation between the contracting parties and the rates of interest or spread cannot be the same for all the international loans irrespective of their terms, risk etc. No infirmity in the order of the DRP in deleting the adjustment made on interest on ECB/FRD and accordingly, we uphold the order of the DRP and dismiss the grounds raised by the revenue. - Decided in favour of assessee. - ITA No. 399/Hyd/2016 - - - Dated:- 24-3-2017 - SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER For The Revenue : Shri P. Chandra Sehkar For The Assessee : Shri K.R. Vasudevan and Shri Ujjwal Tiwari ORDER PER S. RIFAUR RAHM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions: As per the audited statement of accounts the financials of the taxpayer are as under: Description Amount (Rs.) Operating Revenue 585,253,806 Operating cost 888,484,694 Operating Profit -303,230,888 OP/OC -51.81 OP/OR -34.13 TPO has made ALP adjustment on the payment of interest on a) Fully Convertible Debentures (FCD) b) External Commercial Borrowings (ECB) 2.4 Interest on Fully convertible Debentures (FCD): During the TP proceedings, the assessee submitted that assessee has issued 1.7 crore unsecured fully convertible debentures (FCD) of ₹ 10/- each, aggregating ₹ 17 crores to Devgen Singapore for a maximum period of 15 years. Based on the terms of FCD s, fixed interest rate of 4% for years 1 and 2, then 12% from 3 to 5 would be payable. Interest rate for year 6 to 15 would be on a mutually agreed basis. It is also resolved that after a maturity period of 5 years or after mutually agreed period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 48,62,000 Excess paid ₹ 19,38,000 Accordingly, TPO made the ALP adjustment to the extent of ₹ 19,38,000/-. 2.6 Interest paid on External Commercial Borrowings (ECB): During FY 2008-09, the assessee borrowed sum aggregating SGD 24.3 million from Devgen, Singapore. The agreement was entered into on December 15, 2008 and duration of the agreement is till July 15, 2014. The loan was borrowed at a fixed interest rate 5.94 percent per annum, which was determined at 3 months SIBOR + 500 basis points at the date of disbursement of loan i.e. 2nd February, 2009. For the purposes of this borrowing, assessee falls under automatic approval route prescribed by the ECB/FCCB guidelines, the above borrowing has been permitted by the RBI and has been allotted a loan registration No. 2008709 vide approval No. DSIM/BPSD/4886/04.61.19/2008-09. 2.7 The assessee submitted before the TPO that assessee has compared ECB interest rate 5.94% against LIBOR. The same was explained in assessee s TP Memorandum in para 5.2 (refer page 227 of paper book II). Based on the TP Memorandum, the assessee considered the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length and also considered the fact that assessee has not incurred any potential loss by borrowing money from AE. 4.1 As regards, interest on FCB, the DRP deleted the interest adjustment of ₹ 19,38,000/- holding that the interest paid for the AY at 4% is much less than the interest charged by independent bank in respect of working capital loss. Further, the DRP has relied on the decision of ITAT Bangalore bench in the case of M/s Logix Micro Systems Ltd. ( ITA No. 524/Bag/2009) wherein it was held that interest at 5% to be considered to be arm s length with regard to receivables from foreign AEs. 5. Aggrieved with the above order, the revenue is in appeal before us raising the following grounds of appeal: 1. The order of DRP is erroneous both in law and facts of the case. 2. The DRP erred in deleting the adjustment made on interest on ECB/FRD without properly appreciating the facts as to why the interest rate is taken as LIBOR/SIBOR. 6. Ld. DR submitted that the assessee has borrowed ECB/FRD from its AEs since it is an international transaction, the interest has to be paid based on LIBOR/SIBOR. He substantiated the findings of the TPO in his order and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6/Mum/2010 2. Tricom India Ltd., ITA No. 322/Mum/2014 3. Apollo Tyres Ltd. Vs. ACIT, ITA No. 616/Coch/2011 4. M/s Aithent Technologies Pvt. Ltd., ITA No. 3647/Del./2007 5. M/s Siva Industries Holdings Ltd. Vs. ACIT, ITA No. 2148/Mds/2010. 6. M/s Cotton Natuals (I) Pvt. Ltd. Vs. DCIT, ITA No. 5855/Del./2012. 7. Vijay electrical Ltd. Vs. Addl. CIT, ITA No. 1140 1159/Hyd/2013. 8. Tooltech Global Engineering Pvt. Ltd. Vs. DCIT, ITA No. 273/PN/2014 9. TTK Prestige Ltd. Vs. ACIT, ITA No. 1257/Bang./2011 10. Kohinoor Foods Ltd., Vs. ACIT, ITA No. 3688 to 3691/Del/2012. 8. In the rejoinder, ld. DR submitted that assessee has not submitted any document in support of adopting 500 basis points before the TPO. The TPO has adopted 200 basis points relying on the case laws, which were before him. 9. Considered the rival submissions and perused the material facts on record as well as the decisions cited. While passing the order, the AO/TPO relied on the following decisions of the ITAT, Hyderabad. 9.1 M/s Four Soft Ltd., Vs. DCIT, ITA No. 1495/Hyd/2010 for AY 2006-07, order dated 9th September, 2011. The coordinate bench in this case has held as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIB OR would come into play. In the circumstances, we are of the view that it LIB OR 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 LIB OR rate for 1-4-2005 to 31-3-2006 is 4.42 per cent and the assessee has charged interest at 6 per cent which is higher than the LlBOR 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 . 4.5 In the case of CIT Vs. Tech Mahindra Ltd. 46 SOT 141 (Mum) tribunal held that When there is a choice between the interest rate of a currency other than the currency in which transaction has taken place and the interest rate in respect of the currency in which transaction has taken place, in our considered view, the latter should be adopted. In Siva Industries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnished at page 91 of paper book, few of loans provided in AY 2003-04 and 2004-05 in the case of Arubindo and Arubindo Farmo industria Farmaceutica Ldta and loans obtained from Axis bank and Federal Bank where the rate of interest paid was LIBOR +2.1% and LIBOR +3.25%. On these loans Assessee seems to have advanced at LIBOR +3% to Aurbindo whereas rate of interest received in Aurobindo Farmo industria Farmaceutica LTDA is 13.06%. Therefore, to the extent of advances which were given at a rate lesser than the rate at which those are obtained, the AO is directed to examine and if so, the rate of interest paid should be considered as ALP in order to determine the interest received. With these directions, this ground considered partly allowed. 9.3 In the case of Dr. Reddy s Laboratories Ltd. Vs. Addl. CIT, [2014] 48 Taxmann.com 374 (Hyd.), the coordinate bench has held as under: 11. We have considered the rival contentions. Since the assessee has accepted 7 per cent. in the earlier years. The Tribunal felt that 7 per cent is reasonable and accordingly LIBOR l inked interest was not considered. The issue in Four Soft Ltd. (supra) relied upon by the assessee is not about bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the LIBOR rate at that point of time was 1.24% with the spread of 500 bps, it comes to 5.24%, which is less than 4% charged by the assessee. With regard to ECB, the bench marking has to be done on External CUP at the rate available in the international market. The assessee has already considered this aspect and compared the LIBOR and SIBOR rates at that point of time and considered the SIBOR based rate with 500 bps is favourable to the assessee. Accordingly, the assessee has adopted SIBOR + 500 bps as the ALP. 9.6 The ld. DR has vehemently put forth his argument for adopting 500 bps instead of adopting 200 bps as adopted by TPO. We found that there is no basis for adopting one spread of 200 bps in the judicial pronouncement nor it is prudent in the banking sector. In our considered view, we cannot adopt the 200 bps as universal rate for all types of loan. The loans are categorized as long term and short term i.e. working capital loan. We observe that the banks are adopting the 200 bps on working capital loans as spread and higher rates beyond 500 bps on the long term loans such as term loans. The Pricing of Interest on term loans are determined based on the security, net wort ..... X X X X Extracts X X X X X X X X Extracts X X X X
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