TMI Blog2023 (7) TMI 740X X X X Extracts X X X X X X X X Extracts X X X X ..... Lending Rate ( PLR ) of 14.55% as notified by the State Bank of India for the year 2013. Accordingly, when the prime lending rate itself had increased over the years and stood at 14.55% for the relevant period, the comparable rate of interest could not be considered at erstwhile rates in a dynamic interest rate environment. Hence, the interest rate of 13.5% paid by the assessee to its AEs being comparable to the prevailing PLR cannot be said to be excessive. We find support from the decision of Cotton Naturals (I) Pvt. Ltd. [ 2015 (3) TMI 1031 - DELHI HIGH COURT] - Also, the facts on record show that the AE, SKCPL had itself paid interest at the rate of 12.75% to SBI during the relevant year and therefore the interest rate of 13.5% i.e. 12.75% plus mark-up (as amended with effect 01.04.2013) charged from the AEs was fair reasonable. The ld. D/R, could not controvert this factual matrix. Decided against revenue. - I.T.A. No. 200/Kol/2023 And I.T.A. No. 201/Kol/2023 - - - Dated:- 13-7-2023 - Shri Sanjay Garg, Hon ble Judicial Member And Dr. Manish Borad, Hon ble Accountant Member For the Assessee : Shri Akkal Dudhewala, FCA For the Revenue : Shri G.H. Sema, CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LC ) in favour of Axis Bank, Hong Kong by pledging its assets. From the copy of the SBLC placed at pages 40-47 of the Paperbook, it is noted that the SBLC was principally issued by SCKPL. The assessee was only a signatory to the said SBLC in the capacity of being the SPV-shareholder of IDPL. The assessee did not assume any risk in as much as none of its assets were pledged towards this SBLC. The facts on record show that SCKPL had charged a corporate guarantee fee @ 1% from IDPL and the appellant out of abundant caution had charged 0.2% towards corporate guarantee fee. It is therefore noted that the CG fee charged by SKCPL and the assessee towards the joint SBLC issued in favour of IDPL was 1.2, and the same was claimed to be at arm s length. The Ld. TPO however did not agree to the same and benchmarked the arm s length corporate guarantee fee in the hands of the assessee separately and independent of SCKPL at 1.63% which worked out to Rs. 1,33,973/-. Taking note that the appellant had charged 0.2% from the AE, i.e. Rs. 17,500/-, the Ld. TPO made a net adjustment of Rs1,16,472/-. Aggrieved by this order of the TPO, the assessee preferred an appeal before the Ld. CIT(A) who deleted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PL. Although the assessee was not assuming any risks nor had it pledged any assets or collateral, nor was the assessee the principal/borrower in the SBLC, it is however noted to have charged a guarantee commission of 0.2% for being a signatory to this SBLC document. It is therefore noted that SKCPL along with the assessee had charged a total guarantee commission of 1.2% (1% by SCKPL 0.2% by the assessee) from IDPL towards this SBLC. On these given facts, therefore, the action of the Ld. TPO disregarding the guarantee commission of 1% charged by SCKPL from IDPL, while benchmarking the impugned transaction in question, is found to be fundamentally flawed. 8. We note that the Ld. CIT(A) had rightly taken note of the above facts and circumstances and held that the holding company, i.e. SCKPL, that had actually provided the guarantee along with the assessee, had in aggregate charged 1.2% (1% by SCKPL 0.2% by the assessee), which exceeded the reasonable rate of commission of 0.5%, as held in a series of rulings, and thus no upward adjustment was warranted. The relevant findings of the Ld. CIT(A) reads as follows: Grounds 2, 3 and 4 These pertain to the upward adjustmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IDPL's holding company. In my considered opinion, the AE is an entity that does not have sufficient financial strength to borrow a loan on its own. The AO/TPO has not disputed - in fact they have agreed with this fact- that no lender would give a loan to the AE without the support of the parent and also the holding company through a guarantee. The reason and intention behind the providing of this guarantee, by the appellant, as well by the holding company, to its admittedly wholly owned subsidiary company - the AE - for the purpose of advancing the business interests of the appellant as well as of the holding company and to protect their business interests, must be taken into consideration before venturing into evaluation of ALP in such contexts. The intention of the appellant here is plainly not to make this a commercial venture and to earn a profit out of the transaction, but to protect and support its own investments and commercial ventures by means of providing support to its own subsidiary. The approach adopted by AO/TPO to arrive at arm's length rate for guarantee fee is not sustainable without first taking into account the above factors and the structure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 85/Mum/2009 and ITA No.1725/Mum/2009) Mumbai ITAT 0.38% 6 Manugraph India Ltd Mumbai ITAT directed the AO/TPO to adopt the 0.5% as guarantee commission charges in respect of the guarantee provided by the assessee for obtaining the loan by the AE. (ITA No. 4761/Mum/2013) Mumbai ITAT 0.50% 7 Aditya Birla Minacs Worldwide Ltd ITAT directed The learned TPO to adopt 0.5% as guarantee commission charges in respect of the guarantee provided on behalf of its AEs (ITA No. 4761/Mum/2013) Mumbai ITAT 0.50% 8 Nimbus Communications Ltd ITAT directed AO to restrict the TP adjustment by re-computing the guarantee commission as 0.5% as ALP (ITA No 6816/Mum/2010, ITA No. 7105/Mum/2011 Mumbai ITAT 0.50% 9 Godrej Consumer Products Ltd. ITAT directed the AO to recompute the arm's length price of the corporate guaran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The facts of the case, as noted, are that the appellant had availed loan from its holding company, M/s SKCPL, and its director, Shri Jaideep Halwasiya, both of which carried interest of 13.5% during the year. The assessee had benchmarked the interest rate against the prevailing SBI PLR of 14.55% and therefore reported the same to be at arm s length. Ld. Assessing Officer referred the matter to the TPO for computing arm s length price in the said transactions. Ld. TPO observed that the assessee had paid interest at the rate of 11.5% to another party, M/s Silver Cross Marketing Pvt Ltd, and therefore held the interest paid to the AEs to be excessive and thus made the downward adjustment of Rs. 2,83,84,150/- viz., 13.5% - 11.5%. Aggrieved by the same, the assessee preferred an appeal before the Ld. CIT(A). On appeal the Ld. CIT(A) noted that the AE, SKCPL had sourced the loan advanced to the assessee from SBI. He observed that the interest rate charged by SBI from SKCPL was 12.75% and therefore in terms of the Cost Plus Method, the interest rate of 13.5% charged by SKCPL from the assessee was fair and reasonable. The Ld. CIT(A) further noted that the domestic PLR was the appropriate b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loan transaction with SCPKL should be accepted as being at arm's length and hence no transfer pricing adjustment was warranted. He has drawn my attention, in this regard, to the sanction letter from SBI, the loan creditor of SCPKL. A perusal of the same shows that interest charged by SBI from SCPKL was base rate plus 2.75%. The base rate in 2013 was 10%. Hence, interest @ 12.75% was paid to SBI during the year by the lender company. Now, since the cost of funds to the holding company itself was 12.75%, it cannot be expected to advance loans at a lower rate of interest. This, the appellant has contended, lends credence to accepting the interest rate of 13.5% as being at arm's length. Moreover, the appellant further points out that interest rate of 12.75% was charged by a third party i.e. a bank from its unrelated borrower i.e. SCPKL. Now since a third party in an independent transaction has charged interest rate of 12.75% from its borrower, so charging of interest by SCPKL from the appellant at 13.50% can safely be adopted as the ALP and benchmarked against the loan transaction between the appellant and its holding company. I find force in the arguments of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid @ 11.5% to M/s. Silver Cross Marketing Pvt. Ltd. (Silver Cross) treated as ALP by the TPO it is pointed out by the appellant that the said loan transaction pertains to a smaller principal of Rs. 9.5 crores (ledger enclosed) and hence the same does not constitute an appropriate benchmark against the loan from SCPKL which involves a huge principal of Rs. 157.85 crores. Moreover, the loan from M/s. Silver Cross was obtained in earlier FYs when the interest rates were lower. Even the loan from SCPKL was obtained @ 9.5% in earlier FY i.e. as per agreement dated June, 2011. However, because of the rise in interest rates the interest rate was scaled up to 13.5% w.e.f. from April 2013. Similarly, I find that the loan from Shri Jaideep Halwasiya was initially @ 10.5% which was later modified to 13.5% in FY 2013-14. The records clearly indicate that the ALP of 11.5% pertains to a different time period when the interest rates were lower. Hence, the same cannot be taken as an appropriate benchmark. Further, it is an accepted fact that more often than not, interest rates are pegged, directly or indirectly, to the credit worthiness of the borrower. A perusal Of the Audited A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. in earlier years and the rate of interest @ 9.5% was fixed in the year itself. we find the loan was Rs. 9.5 crores which according to assessee is small as compared to loan in the present appeal is of Rs. 115 crores, interest rate was not revised and continued to remain the same as per the terms of agreement. We find force in the arguments of Ld.AR, the loan from M/s SCPKL was linked to a floating rate loan taken by M/s SCKPL, is subjected to change based on the rate charged by the bank. Therefore, in our opinion, the comparable i.e., M/s Silver Cross Marketing Pvt. Ltd, cannot be considered as a comparable for determination of arm's length price in the present case. 15. Following the above findings, the Ld. CIT(A) had rightly found that Ld. TPO was incorrect on facts and in law in benchmarking the interest paid by the assessee to AEs with the interest paid to M/s Silver Cross Marketing Private Limited. Coming back to the determination of ALP, the assessee has placed on record the Prime Lending Rate ( PLR ) of 14.55% as notified by the State Bank of India for the year 2013 at Pages 31 to 32 of the Paper book. Accordingly, when the prime lending rate itself had increase ..... X X X X Extracts X X X X X X X X Extracts X X X X
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