TMI Blog2020 (7) TMI 394X X X X Extracts X X X X X X X X Extracts X X X X ..... ength price afresh. Needless to direct that before making fresh calculation/ computation the AO/TPO shall grant opportunity of hearing to the assessee. Grounds of appeal are allowed for statistical purpose. Adjustment on account of upfront fee cost and administrative expenses on loan given to foreign AEs - TPO/AO to workout adjustment by taking consolidated rate of 0.25% of upfront fee for loan granted by assessee and deleted the addition of administrative charges - HELD THAT:- While benchmarking international transaction, an element of income, expenses, or in apportionment of any contribution to any cost, must be embedded in it. In case of lending or borrowing of money, the determination of arm and spice is made on the basis of income, expenses, interest, allocation or apportionment or any contribution to any cost element is rooted in the transaction which may have bearing on the profit or loss of the assessee. In our humble view, in case of capital financing the usual element is the interest earned or incurred. We have noted that the case of assessee throughout the proceeding is that the loans were provided from assessee s own fund and that no expenses were incurred. The TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justify the arm's length nature of the aforesaid transaction and applying Comparable Uncontrolled Price ('CUP') as the most appropriate method. 4. erred in confirming the action of the AO that interest of ₹ 47,55,918 should have been charged by the Appellant from its Associated Enterprise CAE') - Mercator Offshore Limited ('MOL') as against NIL charged by the Appellant from MOL. 5. erred in confirming the action of the AO that interest of ₹ 18,37,94,251 should have been charged by the Appellant from its AE - Mercator Lines Singapore Pte Limited ('MLS') as against ₹ 13,68,29,245 charged by the Appellant from MLS. 6. erred in confirming the action of the AO that interest of ₹ 1,03,93,334 should have been charged by the Appellant from its AE - MLS as against NIL charged by the Appellant from MLS. 7. erred in enhancing the action of the AO that interest of ₹ 3,39,117 should have been charged by the Appellant from its AE - Mercator International Pte Limited ('MIL') as against NIL charged by the Appellant from MIL. 8. erred in considering the all in cost ceiling External Commercial Borrowings CECB') ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee-company filed its return of income for Assessment Year 2007-08 on 29.10.2007 declaring total income at ₹ 13,62,32,257/-. Along with the return of income, the assessee furnished report under Form 3CEB and reported international transaction with its Associates Enterprises (AEs) in the following manner: S.No. Nature of Transactions FY 2006-07 Method adopted by the assessee FY 2005-06 1 Providing vessels on voyage charter basis to AE (fees received from AEs). 22,25,55,236 TNMM 7,90,22,750 2 Availing vessels on voyage charter basis from AE (fees paid to AEs) 45,48,88,369 TNMM 20,22,26,410 3 Providing loans to AEs (paid to AEs) 76,21,08,121 CUP/TNMM 273,36,75,000 4 Receipt of interest from AEs 13,68,29,245 CUP/TNMM 14,70,27,397 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... encies for obtaining credit rating or for documentation etc. It was further stated that a lot of function are performed/efforts are put in by bankers for providing loan and hence upfront fees and administrative charges are charged by them. The assessee has not carried out any function performed by Bank and earned upfront fees and administrative charges are not charged. The assessee in alternative contention submitted that in case of adjustment and upfront fees is made; the same should be restricted to .25% of the loan amount, being the rate at which the DBS Bank charged upfront fees from assessee. The contention of assessee was not accepted by TPO. The TPO held that in assessee s case, the SBI charged upfront fees of .75% on loan amount and DBS Bank had charged fees .25%, thereby the TPO considered .50% as upfront fees on the said amount thereby the TPO worked out the upfront fees and administrative charges at ₹ 4.32 crore in its order dated 27.10.2010. The TPO passed the rectification order and reduced the upfront fees and administrative charges to ₹ 3.15 crore vide its order dated 09.12.2010. On service of draft assessment order, the assessee filed its response and co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction for granting interest free loan. The TPO made the adjustment of ₹ 7.29 crore on account of interest by adopting 7.75% to SBI Prime Lending rate. Before the ld. CIT(A), the assessee stated that internal CUP is available. The ld. CIT(A) upheld the order of TPO and also observed that granting of loan to AE cannot be considered as shareholder activities and that no documentary evidence has been furnished by assessee and held that no part of those loan have been converted into equity at all. However, the ld. CIT(A) granted part relief to the assessee by directing the Assessing Officer to compute the ALP on interest on loan granted by assessee to its AE by adopting the rate prescribed by RBI for External Commercial Borrowing (ECB) i.e. six month libor + 200 basic point for loan with average maturity period and six month libor +300 basic point for loan with average maturity purpose more than five years. The ld. AR of the assessee submits that the ld. CIT(A) erroneously used ECB rate as per the RBI Circular. RBI Circular is applicable to the ECB and trade credit availed by residents, whereas the assessee has provided loan to its non-resident AE and thus, the RBI Circular rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Nill 07.02.2007 to 31.03.2007 14. During the Transfer Pricing assessment, the TPO asked the assessee for justification as to why no interest is charged on the loans provided to AE. The assessee filed its detailed reply and contended that the AE suffered losses and its commercial operation had not started, thus, the AEs were not in a position to pay the interest. The assessee has set up AE in Singapore to expand its business operation abroad and sustaining its overseas subsidiaries and managed financial difficulties and have achieved the said purpose, the assessee has provided loan. It was also contended that the activity is a shareholder activity and not charging of interest was justified. The loan is provided from assessee is internal accrual and no cost is incurred in providing the said fund. The explanation furnished by the assessee was not accepted by the TPO. The TPO concluded that the assessee has not proved that the internal accrual was used to provide the loan. The alternative plea of assessee about the loan availed by AE in Singapore from independent third party should be considered as an internal CUP for the purpose of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee cost and administrative expenses on loan given to foreign AEs was made by TPO, however, on appeal the ld CIT(A) directed the TPO/AO to workout adjustment by taking consolidated rate of 0.25% of upfront fee for loan granted by assessee and deleted the addition of administrative charges. The ld AR for the assessee further submits that generally upfront fees and administrative charges are generally charged by the banks to recover certain costs incurred in providing loans, viz fees paid to professional valuer for obtaining valuation certificate, fees paid to experts for review of financial statements, fees paid to rating agencies for obtaining credit rating of the borrower, fees paid to professional for vetting the documents submitted by the borrower, the commission paid to agents/ financial intermediaries if any, expenses incurred for managing the loans account, they work monthly stock statements, dated statements and interim financial statements etc. Further, banks also prepare/vet the financial projections of the borrower, carry out due allegiance and prepare a report on the financial viability before providing loans. The assessee is not in the business of financing. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rative charges at ₹ 4.32 crore in its order dated 27.10.2010. The TPO passed the rectification order and reduced the upfront fees and administrative charges to ₹ 3.15 crore vide its order dated 09.12.2010. Before learned CIT(A) the assessee made similar submission as made before TPO/AO as well as before this bench. The learned CIT(A) after considering the submission of assessee restricted the upfront fees to .25% of the loan amount and the administrative charges on loan to AE was deleted. 21. In our view while benchmarking international transaction, an element of income, expenses, or in apportionment of any contribution to any cost, must be embedded in it. In case of lending or borrowing of money, the determination of arm and spice is made on the basis of income, expenses, interest, allocation or apportionment or any contribution to any cost element is rooted in the transaction which may have bearing on the profit or loss of the assessee. In our humble view, in case of capital financing the usual element is the interest earned or incurred. We have noted that the case of assessee throughout the proceeding is that the loans were provided from assessee s own fund and th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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