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2015 (7) TMI 211 - AT - Income TaxTransfer pricing adjustment - determination of arm s length price u/s. 92 in respect of an international transaction entered into by the assessee with its AE - whether determination of arm s length price (ALP) u/s. 92 of the Act in respect of an international transaction entered into by the assessee with its AE? - Held that - In the matter of determination of ALP in respect of a loan transaction, LIBOR rate of interest should be the interest rate applied for determining the ALP. See Four Soft Limited vs DCIT, 2011 (9) TMI 634 - ITAT HYDERABAD and M/s Siva Industries & Holdings 2011 (5) TMI 451 - ITAT, CHENNAI . In the present case, it is not disputed by the Revenue that the interest rate charged by the assessee in the international transactions was much higher than the LIBOR rates. It is also not in dispute before us that the decisions rendered by the Chennai Bench of the Tribunal in the case of Siva Industries & Holdings Ltd. (supra) has not been overruled or any other contrary decision has been taken on the issue by any Benches of the Tribunal. In such circumstances, we are of the view that the stand taken by the AO for rejecting the plea of the assessee referred to above is unsustainable. In view of the above conclusions, we are of the view that the interest charged in the loan transaction in question has to be held to be as at arm s length - Decided in favour of assessee.
Issues Involved:
1. Determination of Arm's Length Price (ALP) u/s. 92 of the Income-tax Act, 1961 for international loans given to associated enterprises (AEs). Issue-wise Detailed Analysis: 1. Determination of Arm's Length Price (ALP) u/s. 92 of the Income-tax Act, 1961 for international loans given to associated enterprises (AEs): The primary issue in this appeal concerns the determination of the arm's length price (ALP) for interest charged by the assessee on loans given to its associated enterprises (AEs) located in the USA, Singapore, and Australia. The assessee had charged interest rates of 10% per annum on these loans, which were provided for capital investment and business development. The Transfer Pricing Officer (TPO) considered corporate bonds issued by companies in India as comparables, arguing that corporate bonds carry both interest and credit risks, unlike government bonds. The TPO categorized the loans as high-risk, similar to BB-rated corporate bonds, and computed an interest rate of 17.26%. The assessee contended that the loans were provided to 100% subsidiaries and thus the risks associated with third-party lending did not apply. The assessee argued that the loans were given for business reasons and were convertible into equity, emphasizing that the loans were funded from surplus cash, not borrowed funds. The assessee relied on judicial precedents, arguing that the ALP for international loans should be determined using LIBOR rates, which are internationally recognized. The TPO rejected the use of LIBOR rates, stating that the decisions supporting LIBOR had not attained finality. The TPO applied a 17.26% interest rate, resulting in an ALP of Rs. 1,15,01,312 compared to the Rs. 67,16,992 charged by the assessee, leading to an adjustment of Rs. 47,84,320. The Dispute Resolution Panel (DRP) upheld the TPO's approach, leading to the present appeal before the Tribunal. The assessee reiterated its arguments, emphasizing the appropriateness of using LIBOR rates and the geographical differences between the associated enterprises and the comparables selected by the TPO. Upon review, the Tribunal considered judicial precedents, including decisions from the ITAT Bangalore Bench and Mumbai Bench, which supported the use of LIBOR rates for determining ALP in international loan transactions. The Tribunal noted that the interest rates charged by the assessee were higher than LIBOR rates and that the decisions cited by the assessee had not been overruled. The Tribunal concluded that the ALP for the international loan transactions should be determined based on LIBOR rates, as these are internationally recognized and adopted. Consequently, the interest charged by the assessee was deemed to be at arm's length, and the appeal was allowed. Conclusion: The Tribunal allowed the appeal, holding that the interest charged by the assessee on international loans to its associated enterprises was at arm's length when compared to LIBOR rates. The adjustment made by the TPO was deemed unsustainable, and the interest rates applied by the assessee were upheld.
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