2013 (11) TMI 806 - AT - Income Tax

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.

Issues Involved:
1. Assessment of Income.
2. Transfer Pricing Adjustment.
3. Addition of Payment Made to Credence Analytics.
4. Double Addition by Disallowing Purchase and Disallowance u/s 40(a)(ia).

Issue-wise Detailed Analysis:

1. Assessment of Income:
The assessee contended that the Assessing Officer (AO) erred in assessing the income at Rs. 4,15,33,050/- instead of the returned income of Rs. 3,36,14,278/-. This issue was not specifically addressed in the judgment.

2. Transfer Pricing Adjustment:
The core issue in this appeal was the transfer pricing adjustment of Rs. 53,43,272/- related to the interest on working capital advances given to Associated Enterprises (AEs).

2.1 Background:
The assessee, engaged in software development and web designing services, had given loans of Rs. 15.65 crores to its AEs in the USA, Singapore, and Bahrain. The AO referred the matter to the Transfer Pricing Officer (TPO) for computation of Arm's Length Price (ALP).

2.2 Assessee's Contention:
The assessee argued that the advances were working capital loans given on a cost-plus-zero margin basis, as the AEs provided business without any cost to the company. The assessee claimed no interest was charged due to commercial considerations and control over its AEs.

2.3 TPO's Findings:
The TPO proposed benchmarking the loans at the LIBOR (London Inter Bank Operative Rate) plus a 3% markup, asserting that in an uncontrolled comparable situation, such advances would bear interest. The TPO relied on the Tribunal's decision in M/s Perot Systems TSI v. DCIT.

2.4 DRP's Decision:
The Dispute Resolution Panel (DRP) disagreed with the TPO's use of LIBOR for outbound loans, suggesting that the interest rate should align with Indian financial systems. The DRP benchmarked the interest rate at 14% per annum based on the yield on BBB-rated corporate bonds in India, considering the AEs as having very high risk.

2.5 Tribunal's Analysis:
The Tribunal considered the rival submissions and relevant material. It upheld the transaction as an international transaction subject to ALP determination. It emphasized that the transaction must be tested against a comparable uncontrolled transaction to determine the ALP.

2.6 Determination of ALP:
The Tribunal noted that the most appropriate method for determining the ALP is the Comparable Uncontrolled Price (CUP) method. It acknowledged the decisions of various Tribunals supporting the use of LIBOR for benchmarking interest on loans to AEs.

2.7 Final Decision:
To maintain consistency with previous Tribunal decisions, the Tribunal accepted LIBOR plus 2% as the appropriate rate for benchmarking interest on interest-free loans to AEs. It directed the AO/TPO to determine the ALP interest by applying LIBOR plus 2% on the monthly closing balance of advances during the financial year.

3. Addition of Payment Made to Credence Analytics:
The assessee did not press this ground during the hearing, and it was dismissed as not pressed.

4. Double Addition by Disallowing Purchase and Disallowance u/s 40(a)(ia):
Similarly, the assessee did not press this ground, and it was dismissed as not pressed.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the AO/TPO to determine the ALP interest at LIBOR plus 2% on the monthly closing balance of advances. The other grounds were dismissed as not pressed.

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