2013 (6) TMI 174 - ITAT DELHI

Transfer pricing adjustment - whether DRP has erred in determining reasonable interest rate at 13.25% as against 4% determined and levied by the assessee in respect of loan advanced by it in US Dollar to its subsidiary company in U.S.A. - DRP ignored the contention of the appellant that the interest rate in respect of international transaction in foreign currency has to be in accordance with LIBOR - Held that:- CUP method is the most appropriate method in order to ascertain arms length price of the international transaction as that of the assessee. Thus agree with the assessee’s contention that where the transaction was of lending money in foreign currency to its foreign subsidiaries the comparable transactions, therefore, was of foreign currency lended by unrelated parties. The financial position and credit rating of the subsidiaries will be broadly the same as the holding company. In such a situation, domestic prime lending rate would have no applicability and the international rate fixed being LIBOR should be taken as the benchmark rate for international transactions.

As decided in Siva Industries and Holding Ltd. vs. ACIT [2011 (5) TMI 451 - ITAT, CHENNAI] that the assessee had given the loan to the associate enterprise in U.S. dollars, and in such a situation when the transaction was in foreign currency, and the transaction was an international transactions, then the transaction would have to be looked upon by applying the commercial principles in regard to international transactions. In such a situation domestic prime lending would have no applicability and the international rate fixed being LIBOR rate would have to be adopted. Also see M/s Four Soft Ltd., Hyderabad vs. DCIT Supra [2011 (9) TMI 634 - ITAT, Mumbai], Dy. C.I.T. vs. Tech. Mahindra [2011 (6) TMI 140 - ITAT, MUMBAI], Tata Autocomp Systems vs. ACIT [2012 (5) TMI 45 - ITAT MUMBAI].

As the assessee has arrangement, for loan with Citi Bank, for less than 4%. However, for loan provided to its AE’s it has charged 4% p.a. interest. Hence, adjustment suggested by the TPO is not warranted.

As assessee’s profits are exempt u/s. 10B, hence, there is no case that assessee would benefit by shifting profits outside India as relying on Philips Software Centre P Ltd. vs. ACIT [2008 (9) TMI 466 - ITAT BANGALORE-B] and Mumbai Tribunal in the case of I.T.O. vs. Zydus Altana Health Care P Ltd. [2010 (4) TMI 883 - ITAT MUMBAI].

As in the present case the loan agreement was for fixed rate of interest. The LIBOR to be accepted as the most suitable bench mark for judging Arms’ length price in case for foreign currency loan. Hence, adjustment as made by the TPO is not warranted. The rate of interest charged by the assessee for the loans transactions with the AE was Arms Length Price. Hence, no transfer pricing adjustment is called for. Assessee’s appeal is allowed.