2019 (9) TMI 1684 - AT - Income Tax

TP adjustment - adjustment on account of the interest on loan - bench marking of the interest on loan at US LIBOR - DRP held the interest at US LIBOR Plus 500 basis points - assessee arguing that the mark up of 500 basis points added to the LIBOR is not justified, since entities are under the same management and control, which reduced the risk factors - HELD THAT - There is no dispute that the assessee advanced the interest free loan to its wholly owned subsidiary. In the first round of litigation, TPO reckoned the notional interest as per PLR and was confirmed by the Ld. DRP. In the second round of litigation TPO bench marked the interest on loan at SBI PLR plus 300 basis points, whereas, Ld. DRP, while following their own finding for the AY 2002-03 made it US LIBOR plus 500 basis points. It is not the case of the assessee that the facts involved in the matter are different from those involved for the AY 2002-03. It is not the case of the assessee that the findings of the Ld. DRP for the AY 2002-03 are in any way disturbed in any subsequent proceedings. Thus LIBOR with mark up cannot be found fault with, having regard to the facts of the case of the assessee. However, we find that the mark up of 500 basis points to the US LIBOR appears to be unjustifiable. We consequently, accept the alternate plea of the assessee and find that the bench marking of the interest on loan at US LIBOR plus 170 basis points would meet the ends of justice, and, accordingly, direct the Ld. TPO to recompute the notional interest at US LIBOR plus 170 basis points. Appeal of the assessee Allowed in part.

Summary

Issues:
1. Adjustment of notional interest on loans given to wholly owned subsidiary.
2. Determination of Arm's Length Price for international transactions.
3. Application of LIBOR rate in transfer pricing analysis.
4. Justifiability of mark-up on LIBOR rate in transfer pricing.

Analysis:
1. The appeal concerned M/s Aithent Technologies Pvt. Ltd. disputing the adjustments made by the Ld. TPO and Ld. AO regarding notional interest on loans given to its wholly owned subsidiary, Aithent Inc., USA. The initial adjustment suggested by the Ld. TPO was contested by the assessee, leading to subsequent adjustments and appeals.

2. The issue of determining the Arm's Length Price for international transactions was central to the case. The Ld. TPO recommended adjustments based on PLR rates and benchmarking interest on loans and software development services. The Ld. DRP confirmed these adjustments, leading to further appeals and re-computations of the ALP.

3. The application of LIBOR rate in transfer pricing analysis was a key point of contention. The Ld. DRP applied a mark-up of 500 basis points to the LIBOR rate for determining the notional interest, which was challenged by the assessee. The debate revolved around whether the LIBOR rate without any mark-up is applicable to non-banking entities.

4. The justifiability of the mark-up on the LIBOR rate in transfer pricing was extensively argued by both parties. The assessee contended that the mark-up of 500 basis points was not justified due to reduced risk factors in transactions with wholly owned subsidiaries. The Ld. AR proposed an alternative mark-up of 170 basis points, which was accepted by the Tribunal to meet the ends of justice.

5. The Tribunal ultimately allowed the appeal in part, directing the Ld. TPO to recompute the notional interest at US LIBOR plus 170 basis points, acknowledging the specifics of the case and the justifiability of the mark-up. The judgment was pronounced on 2nd September 2019, settling the dispute regarding the adjustment of notional interest on loans given to the wholly owned subsidiary.