2017 (3) TMI 1333 - AT - Income Tax

TPA - ALP adjustment on the payment of interest on Fully Convertible Debentures (FCD)/External Commercial Borrowings (ECB) - DR adopted 500 bps instead of adopting 200 bps as adopted by TPO - Held that - Assessee has borrowed the loan from its AEs in terms of FCD and ECB. For the purpose of FCD the bench marking has to be done considering the internal as well as external CUP . Obviously the interest charged is better than internal CUP . We found that there is no basis for adopting one spread of 200 bps nor it is prudent in the banking sector. We cannot adopt the 200 bps as universal rate for all types of loan. The loans are categorized as long term and short term i.e. working capital loan. We observe that the banks are adopting the 200 bps on working capital loans as spread and higher rates beyond 500 bps on the long term loans such as term loans. The Pricing of Interest on term loans are determined based on the security net worth ratings term of loan etc. The more risk involved the pricing decision of the banks will change. The RBI in its prudential norms has given windows for the pricing of interest and the spread. Based on the RBI guidelines the term up to 5 years can have spread of 300 bps and beyond 5 years it can be 500 bps. Taking the clue from this guideline we can come to understand that the assessee has properly allowed its AEs to adopt the spread of 500 bps. In our considered view the relevant issue is to charge the interest on international transaction based on the LIBOR or any other rates which are the basis for negotiation between the contracting parties and the rates of interest or spread cannot be the same for all the international loans irrespective of their terms risk etc. No infirmity in the order of the DRP in deleting the adjustment made on interest on ECB/FRD and accordingly we uphold the order of the DRP and dismiss the grounds raised by the revenue. - Decided in favour of assessee.

Summary

Issues Involved:
1. Adjustment on the payment of interest on Fully Convertible Debentures (FCD).
2. Adjustment on the payment of interest on External Commercial Borrowings (ECB).

Detailed Analysis:

1. Adjustment on the Payment of Interest on Fully Convertible Debentures (FCD):

The assessee issued 1.7 crore unsecured fully convertible debentures (FCD) of ?10 each, aggregating ?17 crores to Devgen Singapore, with a fixed interest rate of 4% for the first two years, and 12% from the third to the fifth year. The average rate of interest paid by the assessee to the AE was 8.8% per annum. The TPO observed that the interest rate should be compared with LIBOR/SIBOR under the Comparable Uncontrolled Price (CUP) method. The average one-year SIBOR during the year was 0.86%, much less than the interest paid by the taxpayer, necessitating an adjustment. The TPO worked out the ALP of interest on FCD as ?48,62,000, resulting in an excess payment of ?19,38,000, which was adjusted accordingly.

2. Adjustment on the Payment of Interest on External Commercial Borrowings (ECB):

The assessee borrowed SGD 24.3 million from Devgen Singapore at a fixed interest rate of 5.94% per annum, determined at 3 months SIBOR + 500 basis points. The TPO observed that the interest to be paid on ECB should be compared with the PLR prevailing in the country which extended the loan, not India's PLR. The average 3-month SIBOR during the year was 0.50%, necessitating an adjustment. The TPO worked out the ALP of interest on ECB as ?37,60,672, resulting in an excess payment of ?51,74,685, which was adjusted accordingly.

Appeal and Decision:

The assessee appealed to the DRP, which deleted the interest adjustments made by the TPO. The DRP held that the interest paid for the AY at 4% on FCD was much less than the interest charged by independent banks for working capital loans. Regarding ECB, the DRP observed that the interest rate of 5.94% was reasonable and within the arm’s length, given that the interest paid to the bank (considered as internal CUP) was at 11.7%.

Revenue's Appeal:

The Revenue appealed against the DRP’s order, arguing that the interest rate should be based on LIBOR/SIBOR as per various judicial pronouncements. The Revenue contended that the DRP erred in deleting the adjustments without properly appreciating the facts.

Tribunal's Analysis and Conclusion:

The Tribunal considered the rival submissions and various judicial pronouncements. It noted that in international transactions, the LIBOR-based interest rate is generally adopted. The Tribunal found that the assessee had benchmarked the interest rates based on LIBOR/SIBOR and that the spread of 500 basis points was within the RBI guidelines. The Tribunal observed that the interest rates and spreads cannot be universally fixed and should be determined based on the terms, risk, and other factors of the loan.

The Tribunal upheld the DRP’s order, finding no infirmity in deleting the adjustments made on interest on ECB/FCD. The appeal of the Revenue was dismissed.

Conclusion:

The Tribunal dismissed the Revenue’s appeal, upholding the DRP’s decision to delete the adjustments made on the interest payments on FCD and ECB, finding that the assessee’s interest rates were within the arm’s length and in compliance with RBI guidelines. The decision emphasized the importance of considering the specific terms and conditions of international loans in determining the arm’s length price.