2021 (4) TMI 1348 - AT - Income Tax

TP Adjustment - benchmarking the interest payment - assessee has considered arms length value of interest at the rate of 11.96% - whether differential amount of interest not be considered for adjustment under ALP? - HELD THAT - As the associate company invested in the assessee company by subscribing to fully convertible debentures considering the risk factors to invest in the start-up company like assessee company. It clearly indicate that it has invested only in fully convertible debentures and not regular debentures. It shows that the risk factor was already considered and mitigated to offset the risk element in investing in the assessee company, we are not in agreement with the submissions of the assessee that no Indian bank will invest in the start-up company like the assessee having the risk factors. It is not brought on record assessee has really approached any Indian bank for such proposal. It is in the interest of the associate enterprise to invest in the start-up companies, in which it has interest and wanted to expand the business in India. To invest in associated enterprise like assessee company, no parent company for that matter associate enterprises will analyze the risk factor similar to banks. As discussed above risk factor can never play an important element in benchmarking the transaction with the associate enterprises, it doesn t matter how risky the venture is. Benchmarking has to be done based on the prevailing market rate which a normal bank would lend money with the minimum risk. Since the assessee has already mitigated the risk by investing in the fully convertible debentures when the risk is already mitigated one more time the same risk element cannot be considered for bench marking on the interest payment also. We are in agreement with the findings of the Ld CIT(A) therefore the grounds of appeal raised by the assessee in both the appeals are dismissed. Appeals filed by the assessee are dismissed.

Summary

Issues Involved:
1. Determination of the arm's length price (ALP) for interest on fully convertible debentures (FCDs) issued to an associated enterprise (AE).
2. Rejection of the maximum lending rate of interest adopted by the assessee and selection of the average lending rate for transfer pricing adjustment.
3. Consideration of the specific facts of the assessee relevant to determining the ALP.
4. Appropriateness of using the average lending rate instead of the maximum lending rate given the difference in risk profiles.

Detailed Analysis:

Issue 1: Determination of the Arm's Length Price (ALP) for Interest on FCDs Issued to AE
The assessee issued fully convertible debentures to its AE with an interest rate of 12%. The Transfer Pricing Officer (TPO) observed that the assessee used the Comparable Uncontrolled Price (CUP) method, benchmarking the interest payable on these FCDs based on the Prime Lending Rate (PLR) data of Indian banks maintained by the Reserve Bank of India (RBI). The TPO found that the average PLR was 10.68%, not 11.96% as claimed by the assessee. Consequently, the TPO computed the ALP of the interest payable at 10.68% and recommended an adjustment of Rs. 46,351,555/-.

Issue 2: Rejection of the Maximum Lending Rate of Interest Adopted by the Assessee and Selection of the Average Lending Rate
The TPO rejected the assessee's use of the maximum interest rate, arguing that the average PLR of Indian banks should be used instead. This was because the average PLR considers both high and low-risk factors, making it a more appropriate comparable for transfer pricing purposes. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, noting that the assessee did not provide sufficient evidence to justify using the maximum interest rate for benchmarking.

Issue 3: Consideration of the Specific Facts of the Assessee Relevant to Determining the ALP
The assessee contended that its start-up status, lack of past performance, involvement in revamping distressed assets, and absence of collateral made it inherently risky, justifying a higher interest rate. However, the TPO and CIT(A) found that these factors were not sufficient to deviate from the average PLR. The CIT(A) noted that the assessee did not demonstrate how its risk profile was comparable to borrowers who received loans at maximum interest rates from Indian banks.

Issue 4: Appropriateness of Using the Average Lending Rate Instead of the Maximum Lending Rate Given the Difference in Risk Profiles
The CIT(A) argued that using the maximum interest rate was not appropriate for benchmarking the transaction, as it did not reflect the overall risk profile of borrowers. Instead, the average lending rate, which considers a broader range of interest rates, was deemed more suitable. The CIT(A) also noted that the assessee had adopted the average rate method from the assessment year 2008-09 onwards, indicating a shift in its benchmarking approach.

Conclusion:
The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, agreeing that the average PLR was the most appropriate comparable for benchmarking the interest on FCDs. The ITAT dismissed the assessee's appeals, stating that the risk factors were already mitigated by the nature of the fully convertible debentures and that the prevailing market rate should be used for benchmarking. The ITAT emphasized that the risk element should not be considered twice—once for the investment and again for the interest payment.

Order:
Both appeals filed by the assessee were dismissed. The order was pronounced in the open court on 22.04.2021.