2010 (1) TMI 781 - AT - Income Tax

Transfer pricing adjustment - interest free loans advanced by the assessee to its wholly owned foreign subsidiaries, Transfer Pricing Officer (TPO), adopted 14% p.a. as arms length interest on the sum advanced - TPO took into account details of borrowings by the assessee from different sources and came to the conclusion that since advances were made out of cash credit account with Citi Bank, it was appropriate to compute the ALP as the rates on which the assessee had borrowed money from the Citi Bank in the cash credit account - Held that - it would be appropriate to accept internal CUP, i.e. the rate at which the assessee has resorted to foreign exchange borrowings from the ICICI, as arms length price under CUP method. The fact, as painstaking brought on record by the authorities below that this loan from ICICI bank was not used for the purposes of remittance to subsidiaries as interest free loans has no bearing for the purposes of computing ALP of interest free loan, Assessing Officer directed to recompute the ALP in the light of our above directions, matter remanded to Ao. Deduction under section 80HHC - there was loss before taking into account incentives from export activities - Held that - matter remanded to Assessing Officer for fresh computation in accordance with the provisions of Section 80HHC. as mended by the retrospective amendment.

Summary

Issues:
1. Transfer pricing adjustment on interest-free loans to foreign subsidiaries.
2. Declining deduction under section 80HHC due to loss before incentives from export activities.

Transfer Pricing Adjustment on Interest-Free Loans:
The appeal was filed against the order passed by the Commissioner (Appeals) regarding the assessment under section 143(3) of the Income Tax Act for the assessment year 2002-03. The primary grievances of the assessee were twofold. Firstly, challenging the transfer pricing adjustment on interest-free loans given to its foreign subsidiaries, where the Transfer Pricing Officer (TPO) determined the arms length price at 14% p.a. Secondly, contesting the denial of deduction under section 80HHC due to a loss before considering incentives from export activities. The assessee argued that as they had sufficient interest-free funds, charging no interest on the loans was justified. The authorities considered the ALP under the Comparable Uncontrolled Price (CUP) Method, which remained unaltered. The Tribunal emphasized that under the CUP method, the focus is on prevailing prices in similar unrelated transactions, not on costs. The Tribunal concluded that the arms length price should be based on the rate at which the assessee borrowed foreign currency loans, i.e., internal CUP, leading to a direction for the Assessing Officer to recompute the ALP accordingly.

Deduction under Section 80HHC:
Regarding the denial of deduction under section 80HHC due to a loss before considering export incentives, the Tribunal directed the matter to be reassessed by the Assessing Officer in line with the provisions of Section 80HHC, as amended by the retrospective amendment. The Tribunal noted the submission of revised computation for a previous assessment year and instructed the Assessing Officer to examine the deduction for the current year following the same approach. Consequently, the issue of deduction under section 80HHC was also remanded to the Assessing Officer for fresh computation.

In conclusion, the appeal was allowed for statistical purposes, with the Tribunal upholding the assessee's contentions on the determination of the ALP for interest-free loans to foreign subsidiaries and directing reassessment by the Assessing Officer for both the transfer pricing adjustment and the deduction under section 80HHC.