2015 (11) TMI 1264 - AT - Income Tax

Transfer pricing adjustment - whether for the benchmarking of the transaction of loan the interest rate for 6 months LIBOR 150 Basis Points for a period for more than 5 years is appropriate or not? - Held that - So far as the basis adopted by the TPO we agree with the observation and finding of the CIT(A) that manner in which credit rating has been assigned to the AE is not a correct approach because there is no specific information with regard to the AE and making assumption of various factors for giving the credit rating actually destroys the estimation of risk assumed. Since both lender and the borrower are overseas based therefore it would not be appropriate to use domestic interest rate to benchmarking interest charged on account of such loan transactions. In absence of any independent study carried on by the assessee or any independent CUP rate applied by the TPO based on comparables the approach of the CIT(A) to follow the guidelines of the Reserve Bank of India appears to be correct approach for benchmarking the ALP. The aforesaid finding of CIT(A) is thus affirmed and we do not find any reason to deviate from such a conclusion. Accordingly the order of the CIT(A) on this score is affirmed and the grounds raised by the revenue stands dismissed. - Decided in favour of assessee.

Summary

Issues:
1. Benchmarking loan transaction with RBI guidelines on external commercial borrowings.
2. Rejection of TPO's method in benchmarking loan transactions with domestic corporate bonds.
3. Application of Comparable Uncontrolled Price (CUP) method in determining interest rate for international transactions.

Analysis:
1. The primary issue in this case was whether the benchmarking of the loan transaction should be based on RBI guidelines on external commercial borrowings. The Revenue challenged the CIT(A)'s decision to use 6 months LIBOR + 150 Basis Points for a period of more than 5 years. The Tribunal agreed with the CIT(A) that the credit rating assigned to the associated enterprise (AE) by the Transfer Pricing Officer (TPO) was not based on specific information, leading to a distorted risk estimation. Since both lender and borrower were overseas, domestic interest rates were deemed inappropriate. The Tribunal upheld the CIT(A)'s decision to follow RBI guidelines for benchmarking the arm's length price (ALP) of the transaction, dismissing the Revenue's appeal.

2. Another issue raised was the rejection of the TPO's method in benchmarking the loan transactions with domestic corporate bonds. The TPO had applied a 20.72% interest rate based on the credit rating of the AE. However, the CIT(A) found this approach flawed as it lacked specific information and relied on assumptions, leading to an incorrect risk assessment. The Tribunal concurred with the CIT(A)'s reasoning and affirmed that the TPO's method was not appropriate. The decision to use RBI guidelines for benchmarking was upheld, resulting in the dismissal of the Revenue's appeal.

3. The application of the Comparable Uncontrolled Price (CUP) method in determining the interest rate for international transactions was also a key issue. The CIT(A) directed the Assessing Officer to adopt 6 months LIBOR + 150 basis points and LIBOR + 250 basis points based on RBI guidelines. The Tribunal supported this decision, emphasizing the lack of independent CUP rates for benchmarking the transaction. Without any independent study or comparable rates, the RBI guidelines were considered a suitable benchmark for determining the ALP. Consequently, the Tribunal affirmed the CIT(A)'s order, dismissing the Revenue's grounds of appeal.

In conclusion, the Tribunal upheld the CIT(A)'s decision to benchmark the loan transaction based on RBI guidelines, rejected the TPO's method, and supported the application of the CUP method in the absence of independent rates, resulting in the dismissal of the Revenue's appeal.