2013 (11) TMI 806 - ITAT MUMBAI

Arm Length Price - Interest free loans to the sister concern by the Assessee-company - AE's who are 100% subsidiaries - The Assessee's case is that it has actually not earned any interest and it was commercially expedient to extend these interest free loans – Held that:- This is not a case of ordinary business transaction. The question relates to scrutiny of international transaction to determine whether or not the same it as arm's length. The principle of transfer pricing aims at determining the pricing in the situations of cross-border international transactions, where two enterprises which are subject to the same centre or direction or control (associated enterprise) maintain commercially or financially relation with other. In such a situation, the possibility exist that by way of intervention from the centre or otherwise, business conditions must be accepted by the acting units which differs from those which in the same circumstances would have agreed upon between unrelated parties. The aim is to examine whether there is anomaly in the transaction which arise out of special relationship between the creditor and the debtor. Hence the contention of having actually not earned any income cannot come to the rescue of the assessee in this scenario – Decided against the Assessee.

Rate of interest to be charged for computation of Arms Length Price of an International transaction – Held that:- Since the issue of LIBOR has been considered and decided by the Tribunal in various cases as relied upon by the assessee, therefore, to maintain the rule of consistency, followed the decision of the coordinate Benches of this Tribunal, and accept LIBOR for benchmarking interest on interest free loans to AEs. Since the LIBOR is a rate applicable in the transactions between the banks and further the loans advanced by the bank to clients are secure by security and guarantee; therefore, a loan which has been advanced without any security or guarantee as in the case of the assessee has to be benchmark by taking the Arm's Length interest rate as LIBOR plus - The appropriate rate would be LIBOR plus 2% - Directed to determine the Arm's Length interest by considering the LIBOR plus 2% on the monthly closing balance of advances during the financial year relevant to the AY under consideration.