2018 (6) TMI 962 - AT - Income Tax

Determination of ALP for interest of loan - whether assessee had entered into international transaction with its associated enterprises in which Arm s Length Price is applicable? - Held that - TPO/Assessing Officer has grossly erred in applying notional interest @11% (i.e. cost of procurement of funds by assessee @5% 600 basis points) whereas the cost of procurement of similar funds from third part was LIBOR 600 basis points which comes at 7.20%. ( that is prevailing USD LIBOR rate which was 1.2% plus 600bps). Therefore we are of the view that the interest rate of 8% charged by the assessee from its AE should be at arm s length. That being so we decline to interfere in the order passed by the ld CIT(A) his order on this issue is hereby confirmed and grounds of appeal raised by the Revenue is dismissed. Upward adjustment - TPO applying CUP method without assigning any reasons for rejecting the TNMM as the most appropriate method (MAM) - Held that - Business strategies market penetration increase or save its market share are relevant and material factors determining prices and profit. All these factors have to be taken into consideration while eliminating the material effects which warrants some kind of reasonable accurate adjustments - thus selective application of CUP Method by TPO is ad hoc and without any cogent basis hence the entire approach followed by the Ld. TPO in rejecting the TP study memorandum of assessee for application of TNMM method is unjustified. For the reasons set out above we find no infirmity in the order passed by the ld CIT(A). - Decided against revenue

Summary

Issues Involved:
1. Deletion of upward adjustment in transfer pricing for Assessment Year 2011-12.
2. Deletion of upward adjustment in transfer pricing for Assessment Year 2012-13.

Issue-Wise Detailed Analysis:

1. Deletion of Upward Adjustment in Transfer Pricing for Assessment Year 2011-12:
The Revenue's primary grievance was the deletion of an upward adjustment of ?48,94,738/- made by the Transfer Pricing Officer (TPO) in respect of interest on a loan given by the assessee to its associated enterprise (AE), Emami International FZE Ltd. The TPO had determined the Arm's Length Price (ALP) of the interest rate at 11% per annum, which included the assessee's cost of funds at 5% plus a risk premium of 600 basis points (bps). The assessee had charged interest at 8% per annum and benchmarked this rate using the Comparable Uncontrolled Price (CUP) method, referencing the London Interbank Offered Rate (LIBOR) plus a margin.

The CIT(A) deleted the adjustment, noting that the cost of 1-year LIBOR during the period was below 1.2%, and the loan was advanced at a much higher rate of 8%. The CIT(A) also pointed out that the TPO had accepted the same rate of notional interest in prior and subsequent assessment years without any further adjustments. The Tribunal upheld the CIT(A)'s decision, emphasizing the principle of consistency and the need for adjustments to account for differences in financial conditions and market circumstances. The Tribunal also referenced several judicial precedents supporting the use of LIBOR as a benchmark for foreign currency loans.

2. Deletion of Upward Adjustment in Transfer Pricing for Assessment Year 2012-13:
The Revenue's grievance for the assessment year 2012-13 involved the deletion of an upward adjustment of ?3,51,30,741/- made by the TPO. The TPO had rejected the Transactional Net Margin Method (TNMM) applied by the assessee and instead used the CUP method to benchmark the sale of finished goods to AEs. The TPO compared the prices of products sold to AEs with those sold to non-AEs and made adjustments based on perceived differences.

The CIT(A) disagreed with the TPO, noting that the CUP method was not appropriate due to significant differences in market and economic conditions across different countries. The CIT(A) highlighted that the TPO failed to make necessary adjustments for these differences and ignored the stringent comparability requirements of the CUP method. The Tribunal upheld the CIT(A)'s decision, emphasizing that the TPO had not provided cogent reasons for rejecting the TNMM method and had selectively applied the CUP method without proper adjustments. The Tribunal also noted the principle of consistency, referencing prior years where the TNMM method was accepted without dispute.

Conclusion:
The Tribunal dismissed the Revenue's appeals for both assessment years, upholding the CIT(A)'s decisions to delete the upward adjustments in transfer pricing. The Tribunal emphasized the importance of consistency, proper comparability analysis, and necessary adjustments to account for differences in financial and market conditions.