2014 (12) TMI 967 - AT - Income Tax

Addition of interest on loan advanced to AE in AK Directions made by Dispute Resolution Panel-II, Mumbai u/s. 144C(5) to do the same Held that - In various decisions it has been held that to bench mark the interest charged by the Indian assessee to the AE, LIBOR Plus is considered as arm s length interest rate - the assessee is charging the interest from AE at the rate of 10% which is more than the interest rate paid by the assessee on the foreign currency loan from SBI at LIBOR 205 BPS - even if the arm s length interest adopted as 5.71% which is LIBOR 2.5%, the assessee s interest charged to the AE at the rate of 10% is more than the arm s length interest rate and accordingly no adjustment on account of arm s length of interest is warranted - the arm s length rate of interest would be taken as the interest on deposit in Bank thus, the interest charged by the assessee at the rate of 10% would be at arm s length and no adjustment is called for on this account - the interest charged by the assessee at the rate of 10% from its AE is at arm s length and the additions made is to be set aside Decided in favour of assessee. Adjustment of interest for delayed realization of sale from AE Held that - The TPO has verified the documents produced by the assessee and confirmed the non-charging of interest on delayed export receipts either from AE or non AE - due to the delay in realization of sales, the assessee has earned foreign exchange gain which is much more than the interest adjustment - the uniform policy of not charging the interest both from AE and non AE debtors was recognized and no adjustment on account of notional interest on the outstanding amount on export proceeds can be made - 80% of the total sales of the assessee is from non AE customers, when the assessee is not charging any interest from non AE then there is no case made out by the revenue that the assessee is doing any favour or giving any benefit to the AE by extending the credit period of realization of sales which is less than the internal CUP being the assessee allowing the credit period to the non-AE thus, the average collection period from AE is less than the average collection period from non AE thus, the order of the DRP is upheld Decided against revenue.

Summary

Issues:
1. Arm's length interest rate on loan advanced to AE in UK.
2. Adjustment on account of interest for delayed realization of sales from AE.

Issue 1: Arm's length interest rate on loan advanced to AE in UK:

The case involved cross-appeals against the assessment order for the A.Y. 2009-10 regarding an addition made on account of interest on a loan advanced to an associated enterprise (AE) in the UK. The Tax Authorities had challenged the interest rate charged by the assessee to its AE, considering the LIBOR rate inappropriate for benchmarking. The Dispute Resolution Panel (DRP) directed the Assessing Officer to re-compute the adjustment using the SBI PLR rate. However, the assessee argued that the interest charged was at arm's length, citing various decisions supporting the use of LIBOR for benchmarking. The Tribunal agreed with the assessee, stating that the interest charged was higher than the cost of funds borrowed, thus at arm's length. It held that the interest rate was reasonable, deleting the addition made by the Assessing Officer.

Issue 2: Adjustment on account of interest for delayed realization of sales from AE:

The Revenue raised grounds against the transfer pricing adjustment made by the Assessing Officer/TPO for delayed realization of sales from the AE. The TPO calculated an arm's length interest rate based on the average cost of the assessee's funds for the credit period extended to the AE. However, the DRP deleted this adjustment after considering the uniform business practice of not charging interest on delayed export receivables. The Tribunal upheld the DRP's decision, emphasizing that the assessee's policy of not charging interest on delayed payments was consistent. It also noted that the delay in realization resulted in foreign exchange gains exceeding any interest adjustment. Citing relevant case law, the Tribunal concluded that no adjustment for notional interest on outstanding export proceeds was warranted, as the uniform policy of not charging interest from both AE and non-AE debtors was accepted. Consequently, the appeal of the assessee was allowed, while that of the Revenue was dismissed.

In conclusion, the Tribunal's detailed analysis of the issues surrounding the arm's length interest rate on the loan advanced to the AE and the adjustment for delayed realization of sales from the AE resulted in a favorable outcome for the assessee, with the Tribunal ruling in their favor and dismissing the Revenue's appeal.