2015 (10) TMI 2624 - AT - Income Tax

Notional interest addition on the business advances given by an appellant to its Associated Enterprises (AE) - Held that - There is no dispute on the nature of loans as international transactions‟ in view of retrospective amendment by the Finance Act 2012 to section 92B of the Act relating to the definition of international transactions . Regarding the charging of interest on such interest free loans given to the subsidiaries, it is now decided issue, by virtue of the case of CIT vs. Tata Autocomp Systems Ltd 2015 (4) TMI 681 - BOMBAY HIGH COURT that the said loan amounts are required to be bechmarked considering the LIBOR of the Singapore and Hong Kong, as the case may be. Now the question is what is the rate of interest which constitutes ALP in this case. It is the decision of the coordinate Bench in the case of Melstar Information Technologies Ltd (2015 (5) TMI 70 - ITAT MUMBAI) that LIBOR 2% is followed by the Tribunal of Bombay Benches. No contrary decision of Bombay Benches of the Tribunal is brought to our notice by the Ld AR. Therefore, we are of the opinion that AO / TPO is directed to benchmark the impugned transaction by applying the arm‟s length rate of interest at LIBOR 2% and the LIBOR of the respective countries should be considered. Accordingly, this part of the ground is partly allowed. Considering rate of notional interest as 12 months average Libor 300 basis - Held that - On perusal of the loans given by the assessee and the date of return of the loans, we find no loan given by the assessee has exceeded one year. Minimum period of loan returned by the AEs is one month. Further, when the period of loans consumed by the AEs is not uniform for applying the uniform average of 12 months LIBOR on all these loans of that countries is prima facie not valid and appropriate. In these circumstances, we are of the opinion, considering the average of 6 months LIBOR of those countries, where loans are consumed, would meet the ends of justice. In any case, this issue was not addressed by the lower authorities during the relevant proceedings. As such, no judicial precedent is brought to our notice on this issue. Therefore, in our opinion, AO / TPO should verify the facts and give an opportunity to the assessee and decide the issue afresh.

Summary

Issues:
1. Whether notional interest on business advances given to Associated Enterprises (AEs) should be added under section 92CA(3).
2. Determination of the rate of notional interest as per Transfer Pricing provisions.

Issue 1:
The appeal addressed the addition of notional interest amounting to Rs. 1.16 Crs on business advances given by the assessee to its Associated Enterprises (AEs). The assessee argued that no interest should be charged on the loans as they were given out of its own funds collected through an Initial Public Offer (IPO) and were subsequently repaid without interest. The assessee contended that the loans were quasi equity and should only be benchmarked based on LIBOR of the respective countries where the loans were consumed. The Revenue, however, argued that Transfer Pricing provisions apply to all international transactions between AEs and that the interest rate should be benchmarked based on the prevailing rates in Singapore and Hong Kong, with an additional 2% charge over LIBOR. The Tribunal directed the AO/TPO to benchmark the transaction at LIBOR + 2% of the respective countries, partially allowing this ground of appeal.

Issue 2:
The second ground of appeal focused on the determination of the LIBOR period, whether 12 months average or a lesser number of months, for benchmarking the transactions. The TPO/AO/DRP had applied a 12-month average of LIBOR. The assessee argued for considering a shorter period based on the actual duration of loans returned by the AEs, which varied from 45 days to 184 days. The Tribunal observed that no loan exceeded one year, and the periods were not uniform, suggesting that applying a uniform 12-month LIBOR average may not be appropriate. It directed the AO/TPO to consider the average of 6 months LIBOR of the countries where the loans were consumed, allowing this part of the ground for statistical purposes.

In conclusion, the appeal was partly allowed for statistical purposes, with directions given to the AO/TPO for benchmarking the transactions at LIBOR + 2% and considering the 6-month average LIBOR for determining the interest rate.