2019 (3) TMI 2039 - AT - Income Tax

TP Adjustment - Interest paid by the assessee towards loan - assessee has paid interest at the rate LIBOR 3% p.a. as agreed with the AE - scope of rule of consistency - TPO has benchmarked the rate of interest for the assessee at the rate of LIBOR 0.77 percent and accordingly the excess interest was disallowed - HELD THAT - It is an undisputed fact that the assessee has paid interest on the money borrowed from its AE at the rate of LIBOR 300 basis points in the assessment year 2006-07 which was accepted by the TPO in the assessment framed u/s143(3) r.w.s. 92CA(3). Thus, the order of the TPO for the assessment year 2006-07 has reached its finality. Therefore, in our considered view the TPO cannot take different view until and unless there is a change in the facts and circumstances. There is also no ambiguity that the assessee has paid the interest in the year under consideration which was also there during the assessment proceedings for the assessment year 2006-07. As there was no change in the facts and circumstances, we are of the view that no disallowance on account of interest expenses for the year under consideration is warranted. We are of the considered opinion that the rate of interest paid by torrent pharmaceutical Ltd cannot be compared with the rate of interest on the money borrowed with the assessee. Thus we hold that the rate at which the interest paid by the assessee to AE is at arm's length and no adjustment is warranted. We also make clear that the finding should not be used /quoted as a precedent in other cases as we are allowing the appeal of the assessee on the basis of the rule of consistency. Hence, the ground of appeal of the assessee is allowed, and the ground of appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Deletion of addition on account of upward adjustment made by the TPO on interest paid by the assessee towards a loan.
2. Adoption and application of LIBOR + 2.8% as ALP interest rate versus LIBOR + 3% rate of interest paid by the assessee.
3. Consistency in applying the rate of interest accepted in previous assessment years.
4. Comparability of the interest rate with other companies.
5. The role of RBI guidelines in determining the arm's length price for interest rates.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Upward Adjustment:
The Revenue contested the deletion of Rs. 3,65,68,726/- resulting from an upward adjustment made by the TPO on interest paid by the assessee towards a loan. The assessee had taken a working capital loan of Rs. 186,67,00,000/- from its AE based in London, approved by the Reserve Bank of India. The TPO benchmarked the interest rate at LIBOR + 0.77%, disallowing the excess interest paid by the assessee. The Ld. CIT(A) rejected the TPO's comparable, Torrent Pharmaceuticals Ltd. (TPL), due to differences in operations, debt-equity ratio, and credit rating, and instead considered Chennai Container Terminal Pvt. Ltd. (CCTPL) as a comparable with adjustments, ultimately setting the interest rate at LIBOR + 2.80%.

2. Adoption and Application of LIBOR + 2.8% as ALP Interest Rate:
The assessee argued that the rate of LIBOR + 3% was agreed upon in a loan agreement with the AE and had been accepted in the previous assessment year 2006-07. The Ld. CIT(A) partially upheld this rate, reducing it to LIBOR + 2.80% after considering various factors like operational performance, debt-equity ratio, and credit rating. The Tribunal noted that the TPO had accepted the rate of LIBOR + 3% in the earlier year, and there was no change in facts and circumstances, thus no disallowance was warranted for the current year.

3. Consistency in Applying the Rate of Interest Accepted in Previous Assessment Years:
The Tribunal emphasized the principle of consistency, referencing the Supreme Court judgment in Radhasoami Satsang, which held that in the absence of any material change, the position accepted in earlier years should be maintained. As the TPO had accepted the rate of LIBOR + 3% in the assessment year 2006-07, the same should apply for the current year, considering no change in facts.

4. Comparability of the Interest Rate with Other Companies:
The Tribunal rejected the TPO's comparable, TPL, due to significant differences in business activities, debt-equity ratio, credit rating, and the nature of the loan. Instead, it accepted CCTPL as a more suitable comparable, with necessary adjustments for differences in debt-equity ratio, credit rating, and collateral requirements. The Tribunal noted that the Ld. CIT(A) had made adjustments on a consolidated basis rather than individually, but ultimately upheld the interest rate at LIBOR + 3% based on consistency.

5. The Role of RBI Guidelines in Determining the Arm's Length Price for Interest Rates:
The assessee argued that the interest rate was within the range specified by the RBI, and the Tribunal acknowledged that the rate of LIBOR + 3% was lower than the RBI's prescribed rate of LIBOR + 3.5%. The Tribunal considered this as a supporting factor for the assessee's position.

Conclusion:
The Tribunal allowed the appeal of the assessee, dismissing the Revenue's appeal. It held that the interest rate paid by the assessee to its AE at LIBOR + 3% was at arm's length, and no adjustment was warranted. The Tribunal emphasized the principle of consistency and noted that the finding should not be used as a precedent in other cases. The Revenue's appeals were dismissed, and the assessee's cross-objections were allowed.