2021 (2) TMI 1317 - AT - Income Tax

TP Adjustment - applying LIBOR 2% interest rate on the monthly closing balance of advances to subsidiaries during the period relevant to the assessment year under appeal - HELD THAT - Both sides are unanimous in stating that the nature of transaction of advancing loans by assessee to its overseas AEs is identical to the one as in assessment year 2007-08. Co-ordinate Bench after considering the issue in detail held that advancing of loans to AEs is an international transaction and as regards determination of interest rate Tribunal held that LIBOR 2% on monthly closing balances of advances be applied for transaction to be at arm s length. Hon ble Bombay High Court 2017 (6) TMI 1087 - BOMBAY HIGH COURT in Income Tax Appeal No. 1869 of 2014 Tribunal was justified in directing the Assessing Officer to determine the Arm s Length interest by considering the LIBOR (London Inter Bank Operative Rate) plus 2% on the monthly closing balances of the advances The Hon ble High Court upheld the findings of the Tribunal on this issue and dismissed the appeal of Revenue. Since the issue has now been settled by the Hon ble Jurisdictional High Court in favour of the assessee we find no infirmity in the order of CIT(A) hence the same is upheld ergo the appeal of Revenue is dismissed sans merit.

Issues:
1. Determination of interest rate on working capital advanced by the assessee to its overseas Subsidiaries/Associated Enterprises (AEs).
2. Application of LIBOR + 2% interest rate on monthly closing balance of advances to subsidiaries.
3. Rejection of TPO's rate of benchmarking @11.17% based on the yield method.
4. Classification of loans advanced by assessee to AEs as short-term working capital requirement.
5. Consideration of comparable transactions and deletion of adjustment made by TPO.

Issue 1: Determination of interest rate on working capital advanced to overseas AEs:
The appeal by the Revenue challenged the order of Commissioner of Income Tax (Appeals) regarding the determination of interest rate on working capital advanced by the assessee to its overseas Subsidiaries/Associated Enterprises (AEs). The CIT(A) applied LIBOR + 2% on monthly closing balances of advances to subsidiaries, following a previous Tribunal order in the assessee's case for assessment year 2007-08. The Tribunal had ruled that loans advanced to AEs are international transactions subject to Arm's Length Price (ALP) regulations, with interest at LIBOR + 2% on monthly closing balances being deemed arm's length. The Revenue's appeal against this ruling was dismissed by the Hon'ble Bombay High Court, solidifying the Tribunal's decision.

Issue 2: Application of LIBOR + 2% interest rate on monthly closing balance of advances to subsidiaries:
The Revenue contested the application of LIBOR + 2% interest rate on the monthly closing balance of advances to subsidiaries by the CIT(A). The Tribunal, following previous decisions, upheld this method for determining the Arm's Length interest rate. The Hon'ble High Court also supported this approach, dismissing the Revenue's appeal and affirming the Tribunal's decision. Consequently, the CIT(A)'s order in this regard was upheld, leading to the dismissal of the Revenue's appeal.

Issue 3: Rejection of TPO's rate of benchmarking @11.17% based on the yield method:
The TPO had benchmarked the transaction by applying a rate of 11.17% on the advances, leading to an adjustment. However, the CIT(A) rejected this approach and directed the application of LIBOR + 2% interest rate on the monthly closing balances, in line with the Tribunal's previous rulings. The Tribunal's decision was further supported by the Hon'ble High Court, resulting in the rejection of the TPO's benchmarking method.

Issue 4: Classification of loans advanced by assessee to AEs as short-term working capital requirement:
The nature of the transaction involving loans advanced by the assessee to its overseas AEs was deemed similar to that in the assessment year 2007-08. The Co-ordinate Bench confirmed that these loans constituted international transactions. The Tribunal specified that LIBOR + 2% on monthly closing balances of advances should be applied to ensure arm's length pricing, based on the Tribunal's previous orders. This consistency in approach was crucial in determining the appropriate interest rate for such transactions.

Issue 5: Consideration of comparable transactions and deletion of adjustment made by TPO:
The CIT(A) did not bring in any comparable transactions and deleted the adjustment made by the TPO, as the Tribunal's previous decisions provided a clear framework for determining the arm's length interest rate. The Tribunal's reliance on LIBOR + 2% for benchmarking interest on loans to AEs was reinforced by the Hon'ble High Court, leading to the dismissal of the Revenue's appeal. The settled nature of the issue, as determined by the High Court, supported the CIT(A)'s decision and upheld the approach of applying LIBOR + 2% for determining the arm's length interest rate.

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