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2014 (12) TMI 349 - AT - Income TaxTransfer pricing adjustment Determination of ALP - Payment of interest on loans raised from associated enterprises Held that - The loans have been availed by the assessee from Goodyear Tyre and Rubber Co. an associated enterprise based in USA - assessee has made a payment of interest in respect of the three loans - Regarding the technical knowhow loan, the details are that the assessee company entered into a technical assistance and license agreement with its associated enterprise on 21.06.1994 for provision of technical assistance in manufacturing of Earthmover tyres, Radial tyres, Radial passenger tyres, etc. - assessee was required to pay a lump sum technical knowhow fee of USD one crore - assessee paid interest to its associated enterprises - The assessee benchmarked the aforesaid transaction of payment of interest by applying Comparable Uncontrolled Price (CUP) method as the most appropriate method and thus justified that the payment of interest was at an arm s length price - The stand of the assessee was that interest charged on technical knowhow loan and foreign currency cash loan @ 12% was lower than the Prime Lending Rate (PLR) of interest charged by the State Bank of India at the relevant point of time, i.e. 12.25% - 13.25% - the TPO is justified in saying that the transactions involve loan liabilities in foreign currency and it is not a domestic borrowing so as to compare the transaction of payment of interest with the domestic Prime Lending Rate of the Indian banks. Whether it is relevant to consider the stated rate of interest of 12% or the effective rate of interest for the purpose of benchmarking the transaction with comparable cases Held that - The terms and conditions of the agreement approved by the RBI in relation to technical knowhow and foreign currency cash loans, which have been succinctly noted by us in the earlier part of this order, clearly establish that in the initial period of nine years there was a moratorium on interest payment and that assessee was not required to incur any interest costs - It is only subsequent to the moratorium period, assessee was to incur interest cost and that too, during the period of repayment of loans - it would be appropriate to compute effective rate of interest in respect of international transaction of loan entered into with the associated enterprise before carrying out the exercise of benchmarking such international transactions vis- -vis the arm s length price/interest of the comparable uncontrolled transactions - while computing the yearly effective rate of interest in respect of loans what is being sought is the factoring of the terms and conditions of the loan agreements - the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Relying upon DCIT vs. Hitachi Home & Life Solutions (India) Ltd. 2014 (9) TMI 278 - ITAT AHMEDABAD - wherein the royalty paid by the assessee at 3.75% to the associated enterprise was sought to be benchmarked thus, the addition with respect to the interest paid on Technical knowhow and foreign currency cash loans on the ground that the effective rate of interest incurred by the assessee is lower than the arm s length rate of interest considered by the TPO is to be set aside Decided in favour of assessee. Adjustment of ECB raised by assessee ECB loan raised for financing working capital requirements - Held that - The comparable uncontrolled transactions i.e. the transaction between the associated enterprise and M/s J.P. Morgan Chase Bank provides a direct benchmark for the purposes of determining the arm s length price of payment of interest in respect of ECB loans - while applying CUP method, it is appropriate that the amount charged in an controlled transaction is examined with the amount charged in an uncontrolled transaction - the transaction brought out by the assessee qualifies the tests Reference made to Tecnimont ICB P. Ltd. and another Versus Additional Commissioner of Income-tax and another 2013 (9) TMI 595 - ITAT MUMBAI wherein the context of the clause (i) of rule 10B(e) of the Rules, the rule itself provides that a preference shall be given to internal comparable uncontrolled transaction vis- -vis external comparable uncontrolled transaction - since the rate of interest paid by the assessee to its associated enterprise in respect of ECB loan is lower than the rate of interest paid by the associated enterprise to M/s J.P. Morgan Chase bank, the transaction of payment of interest on ECB loan raised from the associated enterprise is at an arm s length price - the addition on account of interest paid on ECB loan is directed to be deleted. Depreciation on assets forming part of block assets but not used during the period disallowed Held that - As decided in assessee s own case decided in Asstt. Commissioner of Income Tax Versus South Asia Tyres Ltd., Good Year South Asia Tyres Pvt. Ltd. 2014 (10) TMI 288 - ITAT PUNE - the claim of the assessee for depreciation was allowed by the Tribunal the order of the Tribunal continues to hold the field and therefore following the precedent the assessee has to succeed on this aspect also the AO is directed to allow appropriate relief to the assessee Decided in favour of assessee. Addition towards impost of capital goods Held that - CIT(A) rightly was of the view that having a Global Transfer Pricing Policy does not mean that the markup stated in the Policy is automatically justified - the reasonableness of the markup has to be established. 10% markup over and above the cost of capital goods to AE cannot be said to be on lower side under any parameter of comparison - the evidences or certificate certifying the actual cost of incidental expenses as stated by the appellant like handling, warehousing, insurance, freight, etc. were not produced before the AO nor before the TPO - the adjustment on account of excess price paid over and above the ALP, considering 10% as the reasonable range of markup to the AE is upheld Decided against assessee.
Issues Involved:
1. Transfer pricing adjustment related to interest on loans from associated enterprises. 2. Disallowance of depreciation on assets not used during the relevant year. 3. Addition related to the import of capital goods. Detailed Analysis: 1. Transfer Pricing Adjustment Related to Interest on Loans from Associated Enterprises: The primary issue in the appeals for assessment years 2005-06, 2006-07, and 2007-08 concerns the addition made by the Assessing Officer (AO) on account of transfer pricing adjustment while determining the arm's length price (ALP) of interest on loans from associated enterprises. The AO/TPO compared the interest rates charged by the associated enterprise with the rates prescribed by the Reserve Bank of India (RBI) for External Commercial Borrowing (ECB) and proposed adjustments. The assessee argued that the terms and conditions of the loans, including interest rates, were approved by the Government of India and the RBI, and thus should be considered at arm's length. The assessee also contended that the TPO's methodology was flawed, as it compared specific approved rates with general ECB rates, and did not account for the effective interest rate over the loan's entire period, including the initial moratorium period. The Tribunal agreed with the assessee, emphasizing that the effective interest rate, considering the moratorium period, was lower than the ALP determined by the TPO. The Tribunal also noted that the interest rates were approved by the RBI and hence should be considered arm's length. Consequently, the Tribunal deleted the additions related to the transfer pricing adjustments for the interest on loans. 2. Disallowance of Depreciation on Assets Not Used During the Relevant Year: The AO disallowed depreciation amounting to Rs. 7,59,723 on assets forming part of the block of assets but not used during the relevant year. The Tribunal noted that this issue had been addressed in the assessee's favor in earlier assessment years (2002-03 to 2004-05) by the Tribunal. Following this precedent, the Tribunal directed the AO to allow the depreciation claim. 3. Addition Related to the Import of Capital Goods: For assessment year 2005-06, the AO made an addition of Rs. 5,48,472 towards the import of capital goods, questioning the markup on the cost of capital goods to the associated enterprise. The CIT(A) upheld this addition, noting the absence of evidence to justify the markup. The Tribunal affirmed the CIT(A)'s decision, as the assessee failed to present credible arguments or evidence to counter the addition. Separate Judgments Delivered: The Tribunal delivered a consolidated order for the appeals, addressing each issue comprehensively. The appeals for assessment years 2006-07 and 2007-08 were allowed, the appeal for assessment year 2005-06 was partly allowed, and the appeals of the Revenue for assessment years 2005-06 and 2007-08 were dismissed. Conclusion: The Tribunal's judgment provided relief to the assessee by deleting the transfer pricing adjustments related to interest on loans and allowing the depreciation claim on unused assets. However, the addition related to the import of capital goods for assessment year 2005-06 was upheld. The decision emphasized the importance of considering effective interest rates and government approvals in transfer pricing cases.
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