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2009 (10) TMI 638 - AT - Income TaxTransfer pricing Adjustment - Interest free loan extended to the associated concerns as at arm s length - commercially expediency for assessee to advance interest free loans to the AEs and that since no interest has actually been charged, there is no real income exigible to tax - The assessee extended two foreign currency loans to its associated enterprises - scrutiny of international transaction to determine whether or not the same it as arm s length. TPO held that the international transactions undertaken by the assessee, in relation to the interest free loan were not at arm s length and undertook an upward adjustment to income for all the three financial years. In addition to the adjustment made by the TPO, the AO also made adjustment u/s 14A. HELD THAT - 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. The first objection of the TPO is that no two persons in normal business situation would grant interest free loan to the other persons. This is a fairly settled position . The assessee s contention in this regard is that no one would have given the AEs loan at that point of time as they were in a start-up stage and that debt ratio was not comfortable. Now, even if one is to accept this argument, there is no case for not providing or charging any interest, if assessee is coming to the rescue of the AEs. We have not come across any feature in the agreement to accept the contention of the counsel that loan was quasi-capital. It is also not the case that there was any technical problem that loan could not have been contributed as capital originally if it was actually meant to be capital contribution. If the assessee s contention that whenever interest free loan is granted to associated enterprises, there should not be any adjustment is accepted, it will tantamount to taking out such transactions from the realm of section 92(1) and section 92B of the IT Act. Lending or borrowing money between two associated enterprises comes within the ambit of international transaction and whether the same is at arm s length price has to be considered. The question of rate interest on the borrowing loan is an integral part of arm s length price of determination in this context. Thus, clearly the assessee contention seeks to add text to the clear legal position as embodied in statute. Such an interpolation is not permissible, that when an interest free loan is given to the AEs, income on account of interest cannot be attributed from the point of view of arm s length consideration. Argument of the TPO is that one of the AEs is situated in a tax heaven and not charging of the interest by the assessee from the AEs, would result in higher income in the hands of the AEs, and the income of the assessee in India would reduce by the corresponding amount - Thus this would bring down the overall tax incidence of the group by shifting profit from Indian jurisdiction to Bermuda which is a tax heaven country with zero rate of tax on corporate profit. It is a classic case of violation of transfer pricing norms where profits are shifted to tax heavens or low tax regimes to bring down the aggregate tax incidence of a multi-national group. Further as observed by the TPO even if profits are sufficient it is not mandatory to declare dividend the same may be retained as profit in Bermuda for further investment in group companies. We find considerable cogency in this argument. As rightly observed by the ld. CIT(A) RBI s approval does not put a seal of approval on the true character of the transaction from the perspective of transfer pricing regulation as the substance of the transaction has to be judged as to whether the transaction is at arm s length or not. Decided in favour of revenue. Valuation of LIBOR rate - Whether Assessing Officer/TPO/CIT(A) has erred by not providing the appellant the benefit of 5 per cent range as provided by the proviso of section 92C(2)? - HELD THAT - We find ourselves in agreement that no more one price has been used for each transaction. Only one LIBOR rate has been applied which has been adjusted for some basis points as required. This cannot be equated with more than one price in respect of each transaction. Hence, we uphold the ld. CIT(A) s order on this issue. In the result, all the three appeals filed by the assessee are dismissed.
Issues Involved:
1. Determination of whether interest-free loans extended to associated enterprises were at arm's length. 2. Applicability of the 5% range benefit under the proviso to section 92C(2) of the Income-tax Act, 1961. Detailed Analysis: Issue 1: Arm's Length Nature of Interest-Free Loans Facts of the Case: - The assessee, engaged in designing and developing technology-enabled business solutions, extended foreign currency loans to its associated enterprises in Bermuda and Hungary. - The Transfer Pricing Officer (TPO) deemed these interest-free loans not at arm's length, resulting in upward adjustments to the assessee's income for multiple assessment years. - The Assessing Officer (AO) also made adjustments under section 14A of the Income-tax Act for certain years. Assessee's Arguments: - The loans were quasi-equity, extended to start-ups with no significant business activities. - The intent was to earn dividends, not interest, and the loans were approved by the RBI. - Hungarian thin capitalization rules treated the loans as equity, not debt. TPO's Conclusions: - No unrelated party would extend an interest-free loan, as it involves foregoing income and undertaking significant risk. - The transactions were structured to shift profits to Bermuda, a tax haven, reducing the overall tax incidence of the group. - The loans were used for investments in group entities, suggesting profit shifting rather than genuine business necessity. CIT(A)'s Findings: - The transactions were debt simpliciter, as evidenced by loan agreements, repayment terms, and the nature of the loans. - The OECD guidelines and Hungarian thin capitalization rules did not support the assessee's contention. - RBI approval did not determine the true character of the transaction from a transfer pricing perspective. Tribunal's Decision: - The Tribunal upheld the TPO's and CIT(A)'s findings, emphasizing that the loans were not at arm's length. - The Tribunal rejected the assessee's argument that the absence of actual income meant no tax liability, noting that transfer pricing provisions aim to ensure arm's length pricing in international transactions. - The Tribunal found that the loans were structured to shift profits to a tax haven, violating transfer pricing norms. Issue 2: Applicability of 5% Range Benefit Assessee's Contention: - The assessee argued for the benefit of a 5% range under the proviso to section 92C(2) of the Income-tax Act. CIT(A)'s Findings: - The CIT(A) found that the 5% range benefit was not applicable as only one price (LIBOR rate adjusted for basis points) was determined for each transaction. Tribunal's Decision: - The Tribunal agreed with the CIT(A) that the 5% range benefit was not applicable because more than one price was not determined for each transaction. - The Tribunal upheld the CIT(A)'s order on this issue. Conclusion: The Tribunal dismissed all three appeals filed by the assessee, upholding the findings of the TPO and CIT(A). The interest-free loans to associated enterprises were not at arm's length, and the 5% range benefit under section 92C(2) was not applicable.
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