TMI Blog2021 (10) TMI 1327X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A), the assessee has cited the RBI Master Circular and submitted that interest rate on foreign currency working capital loan for a period in excess of 180 days. We are of the opinion that no markup for transaction cost should be applied on LIBOR rate for benchmarking of the international transaction; however, appropriate markup for credit rating should be applied depending on credit rating of AE. The Assessing Officer in assessment year 2008-09 and 2009-10 has not given any justification for applying markup of 400 points for credit rating and, therefore, in the interest of justice, the issue in dispute is restored to the file of the Learned Assessing Officer for deciding limited issue of markup for credit rating over LIBOR rate of interest after taking into consideration criteria for credit rating during relevant period. The grounds of the appeal of the assessee for both the assessment years are accordingly allowed for statistical purposes. - ITA Nos. 2682 & 2683/Del/2013 - - - Dated:- 8-10-2021 - SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER Appellant by Sh. Ajay Vohra, Sr. Adv. And Sh. Abhishek Aggarwal, Adv. Respondent by Sh. Bhagwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up of 500 basis points over the Libor rate without any justification as to how the same was computed. The Appellant craves leave to add, alter, amend and / or modify any of the grounds of appeal on or before at any time of hearing. The Appellant prays for appropriate relief based on the above grounds of appeal and the facts and circumstances of the case. 3. Briefly stated facts of the case are that the assessee is a telecom equipment manufacturer, supplying indoor and outdoor wireless enhancement solutions such as RF repeaters, optical distributed antenna solutions, IP cellular backhaul systems, etc. 3.1 The assessee established a subsidiary, namely, Shyam Telecom Inc (In short STI or AE) in United States of America (USA) in the year 2005 which deals in telecom equipment manufactured by the assessee and promotes its brand globally. 3.2 STI, being a relatively new entity in the USA, it required working capital and for this purpose it relied on parent company i.e. the assessee. Accordingly, the assessee during financial year 2006-07 (assessment year 2007-08), advanced a loan of ₹ 14,95,77,721/- to STI . During the assessment year 2008-09, the assessee charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to its AE is using the same money for its own business in India (reducing the borrowing costs at home). On verification from the appellant during the course of the hearing, it is noticed that on an average, the assessee is paying interest at the rate of 14.75% to SBI on cash credits and at the rate of 12% to Syndicate Bank for term loans. It must be remembered that the credit rating of the assessee in India is not the same as the credit rating of its AE in foreign market. From this angle also, the interest rates of LIBOR + 700 LIBOR + 500 basis points for AY 2008-09 2009-10 respectively seems very reasonable. It is also necessary to note that assessee itself has charged interest during these two years. Therefore, only relevant question is that at what rate interest should be charged? The question is not whether interest should be charged at all, as the appellant accepts that interest is chargeable. As the CUP method results into a single rate of interest, no further reduction on account of proviso to Section 92C(2) on such rate is applicable. Perot Systems (supra) is relied in this regard. The calculation of 3 years LIBOR rate is not applicable since a single year d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the FCNR loan advanced by the Power Finance Corporation to the Indian company i.e. Jindal Thermal Power Company Ltd. of US$ 44.50 million. Interest charged in the said case was US LIBOR plus 350 basis points for a company which had been given BB+ credit rating. However, full facts like the nature of transaction; risk factors etc. are not elucidated. He has also referred to the Bank of Baroda website that the rate of interest on FCNR loan were between 350-650 basis points over LIBOR for the FY 2006-07. TPO held that in view of the financial health of the subsidiary AE, interest rate could be taken as the average of six months LIBOR plus 400 basis points. On the question of transaction cost, it was stated that it was mandatory for the bank to insist that the borrower must book forward contracts to hedge their position. The TPO referred to the premium payable for undertaking the said hedging transactions and added a cost of 3% per annum as premium, which should have been paid. At the same time, the TPO acknowledged that the taxpayer was not in the business of lending or borrowing money and observed that the taxpayer's risk was higher in advancing loan to a single customer, vis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me being not good, the assessee has advanced loan to the AE, so if in comparable situation, a bank in India sanction a loan to any entity in USA in uncontrolled manner transaction, then credit rating of the loan recipient entity should be taken into account. The AO has followed earlier AY 2007-08 and has not taken into consideration credit rating of the AE in the year under consideration, which has to be based on specific information and not on the basis of assumption. Before the Ld. CIT(A), the assessee has cited the RBI Master Circular and submitted that interest rate on foreign currency working capital loan for a period in excess of 180 days should be as under: S. No. Relevant Year Interest Rate (per annum) 1. 2006 LIBOR + 3% p.a. 2. 2008 LIBOR + 3% p.a. 3. 2009 LIBOR + 505% p.a. Average LIBOR + 3.83% p.a. 6.4 In view of the above, we are of the opinion that no markup for transaction cost should be appl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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