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2016 (10) TMI 394 - AT - Income TaxTransfer pricing adjustment - determining Arm s Length Price (ALP) of the Imports made by the assessee - Held that - It is not disputed that the assessee is enjoying larger credit than printed in the invoice; it ranges 120 days to 240 days. In view of this, the price charged by AE to the assessee more than price charged to third parties. Hence, it is appropriate to be considered the extra credit period enjoyed by the assessee so as to determine the ALP. Further, it is also on record that for assessment year 2009-10, the TPO/AO had not made any adjustment towards this issue as there should be consistency in proceedings. Hence, in our opinion, the argument of ld.A.R to be upheld. Accordingly, we allow the ground taken by the assessee. Determining an ALP interest rate on the assessee s External Commercial Borrowing - Held that - There is a force in the argument of the Id. AR. The Assessing Officer cannot apply the implicit interest rate on India s External Debt, which is unadjusted industrial average. As held by the Special Bench of the Bangalore Bench in the case of Aztec Software & Technology Services Ltd. v. ACIT (2007 (7) TMI 50 - ITAT BANGALORE), we are of the opinion that the unadjusted interest rate in respect of India s External Debt cannot be applied in assessee s case. Since the assessee charged interest to its AE at LEBORE 2% which is appropriate the same is to be considered by TPO/AO and we are of the opinion that there is no adjustment required towards interest payment to its AE to determine ALP.
Issues Involved:
1. Determination of Arm’s Length Price (ALP) for imports by the assessee. 2. Determination of an appropriate ALP interest rate on the assessee’s External Commercial Borrowing (ECB). Issue-wise Detailed Analysis: 1. Determination of Arm’s Length Price (ALP) for Imports: The primary issue in the appeal was the determination of an erroneous Arm’s Length Price (ALP) for the imports made by the assessee. The assessee, Salcomp India, purchased critical raw materials from Salcomp Plc., Finland, which provided an extended credit period of 180 to 270 days, while receiving a shorter credit period from its third-party vendors. The assessee used the Comparable Uncontrolled Price (CUP) Method to substantiate the arm’s length nature of the international transaction. The Transfer Pricing Officer (TPO) proposed downward adjustments due to excess payment on purchases and interest paid on ECBs. The TPO observed that the price charged by the AE included a markup for the additional credit period enjoyed by the assessee. The TPO computed the adjusted CUP price by loading the CUP price with interest attributable to the credit period of 120 days at 11% and worked out the ALP value of purchases at US$ 61,75,658.70 against the actual purchase price of US$ 62,52,633.29, resulting in an excess purchase price of US$ 81,974, amounting to ?32,88,820.55. The Assessing Officer (AO) made corresponding additions based on the TPO's order. The assessee argued that the AO did not make any adjustments for similar purchases in the next assessment year (2009-10) and that the AO should not follow different standards for different years. The assessee also contended that the actual credit period should be considered rather than the period mentioned in the invoice. The Tribunal observed that the assessee enjoyed a larger credit period and that consistency in proceedings should be maintained. Consequently, the Tribunal upheld the assessee's argument and allowed the ground taken by the assessee. 2. Determination of an Appropriate ALP Interest Rate on External Commercial Borrowing (ECB): The second issue was the determination of an inappropriate ALP interest rate on the assessee’s ECB. The TPO had not provided an adequate opportunity for the assessee to be heard and relied on an inappropriate source to benchmark the ECBs. The TPO computed the adjustment using an incorrect time period and methodology without considering critical factors essential for determining the interest rate for a loan. The DRP observed that the statutory opportunity was given to the assessee and that the assessee had not substantiated which critical factor affected the interest rate. The AO made adjustments of ?23,15,746 for ECB-I and ?49,58,113 for ECB-III. The Tribunal noted that the interest paid by the assessee was in accordance with the LIBOR, which is accepted for benchmarking such transactions. The Tribunal cited various judgments, including the Special Bench of the Bangalore Tribunal in the case of Aztec Software & Technology Services Ltd. vs. ACIT, which held that unadjusted industry averages cannot represent arm’s length conditions. The Tribunal also referred to other cases where it was held that the LIBOR rate should be considered for international transactions. The Tribunal concluded that the AO cannot apply the implicit interest rate on India’s External Debt as it is an unadjusted industrial average. The Tribunal directed the AO/TPO to consider the LIBOR + 2% rate for determining the ALP interest rate, aligning with the rulings in similar cases. Consequently, the Tribunal found no adjustment required towards interest payment to the AE to determine the ALP. Conclusion: The appeal of the assessee was allowed, with the Tribunal upholding the arguments regarding the determination of ALP for imports and the appropriate interest rate for ECBs. The Tribunal emphasized consistency in proceedings and adherence to accepted benchmarking practices such as the LIBOR rate. The order was pronounced on 31st August 2016, at Chennai.
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