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2021 (10) TMI 1327 - AT - Income TaxTP Adjustment - benchmarking of interest at LIBOR 700 points in assessment year 2008-09 holding that assessee is not a banker and in view of credit rating and transaction cost, the LIBOR needs to be marked up by 700 basis points - markup of 700 basis point in assessment year 2008-09 and markup of 500 points in assessment year 2009-10 over the LIBOR rate applied by the Assessing Officer for determination of arm s-length price of international transaction of interest - HELD THAT - In the instant case, the AE was a relatively new entity in the year under consideration and credit rating of the same being not good, the assessee has advanced loan to the AE, so if in comparable situation, a bank in India sanction a loan to any entity in USA in uncontrolled manner transaction, then credit rating of the loan recipient entity should be taken into account. AO has followed earlier AY 2007-08 and has not taken into consideration credit rating of the AE in the year under consideration, which has to be based on specific information and not on the basis of assumption. Before the Ld. CIT(A), the assessee has cited the RBI Master Circular and submitted that interest rate on foreign currency working capital loan for a period in excess of 180 days. We are of the opinion that no markup for transaction cost should be applied on LIBOR rate for benchmarking of the international transaction; however, appropriate markup for credit rating should be applied depending on credit rating of AE. The Assessing Officer in assessment year 2008-09 and 2009-10 has not given any justification for applying markup of 400 points for credit rating and, therefore, in the interest of justice, the issue in dispute is restored to the file of the Learned Assessing Officer for deciding limited issue of markup for credit rating over LIBOR rate of interest after taking into consideration criteria for credit rating during relevant period. The grounds of the appeal of the assessee for both the assessment years are accordingly allowed for statistical purposes.
Issues Involved:
1. Determination of arm's length interest rate on loans advanced to the associated enterprise (AE). 2. Justification for the markup over the LIBOR rate applied by the Assessing Officer. 3. Applicability of transaction cost and credit rating adjustments in determining the arm's length interest rate. Detailed Analysis: 1. Determination of Arm's Length Interest Rate: The primary issue revolves around the appropriate arm's length interest rate for loans advanced by the assessee to its US subsidiary (AE). For assessment year (AY) 2008-09, the assessee charged an interest rate of 8%, whereas for AY 2009-10, the rate was 3%. The Assessing Officer (AO) benchmarked the interest rates at 13% and 7.52% respectively, based on the LIBOR rate plus a markup. 2. Justification for Markup Over LIBOR Rate: The AO followed a methodology from AY 2007-08, which added 400 basis points for credit rating and 300 basis points for transaction cost to the LIBOR rate. This resulted in a final rate of LIBOR + 700 basis points for AY 2008-09 and LIBOR + 500 basis points for AY 2009-10. The assessee contested this markup, arguing that no enhancement over the charged rates was warranted given the prevailing LIBOR rates, Reserve Bank of India (RBI) guidance, and judicial precedents. 3. Applicability of Transaction Cost and Credit Rating Adjustments: The AO's rationale for the markup included considerations of the AE’s credit rating and transaction costs. The CIT(A) upheld this approach, noting that the assessee was not a banker and that the LIBOR needed to be marked up due to credit rating and transaction costs. However, the assessee argued that such adjustments were not justified, citing the Delhi High Court's decision in Cotton Naturals (I) Pvt. Ltd., which stated that transaction costs should be borne by the borrower, not the lender, and thus no markup for transaction cost was required. Findings and Conclusions: The Tribunal noted that the AO had not provided specific justification for the markup applied for credit rating in the relevant assessment years. The Tribunal referred to judicial precedents, including the Delhi High Court's ruling in Cotton Naturals (I) Pvt. Ltd., which held that transaction costs should be borne by the borrower and not the lender. Additionally, the Bombay High Court in Everest Kanto Cylinder Limited supported the use of the LIBOR rate without additional markups. Given these precedents, the Tribunal concluded that no markup for transaction cost should be applied on the LIBOR rate. However, an appropriate markup for credit rating should be considered based on specific information rather than assumptions. Consequently, the Tribunal restored the issue to the AO for reassessment, directing the AO to determine the appropriate markup for credit rating over the LIBOR rate after considering the relevant criteria for the credit rating during the period in question. Outcome: The appeals for AY 2008-09 and 2009-10 were allowed for statistical purposes, with the issue of markup for credit rating being remanded to the AO for further consideration. Order Pronounced: The order was pronounced in the open court on 8th October 2021.
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