2018 (8) TMI 442 - AT - Income Tax

Transfer pricing adjustment - addition on account of the International Transaction in the nature of interest on loans granted to Associated Enterprises of the assessee - tested party - Held that - This issue is covered in favour of the assessee and against the Revenue by the decision of Co-ordinate Bench of Tribunal in assessee s own case for A.Y. 2009-10 2017 (11) TMI 639 - ITAT DELHI wherein held there is an inherent inconsistency in the view taken by the TPO because, if at all the ALP interest in so far as the assessee is concerned is the interest rate expected by an Indian lender, then irrespective of the fact of Nor Pearl Knitweard Limited, Bangladesh obtained loan at Bangladesh at any rate less than this expected rate, he should not have accepted. The tested party in the case of Nor Pearl Knitwear Limited, Bangladesh and in the case of other two concerns is the assessee only. In respect of the same tested party the TPO cannot adopt two different yardsticks. Shifting of the testing parties in the same breath is not permissible. We, therefore, in this set of circumstances agree with the Ld. AR that since loans or advances in case of the two other concerns also in foreign currency, and all the three persons stand in the same footing, as such, the same treatment has to be given to them equally. With this view of the matter, we direct the AO to re-compute the ALP of the interest at 6% in respect of House of Pearl Fashions Limited, USA AND Multination Textile Group Limited, Maritius also. - Decided in favour of the assessee

Summary

Issues:
Challenge against addition of interest on loans granted to Associated Enterprises (AEs) - Determination of Arm's Length Price (ALP) - Comparison with previous judgments - Application of interest rates based on LIBOR plus mark-up - Discrepancy in ALP calculation by Assessing Officer (AO) and Dispute Resolution Panel (DRP).

Analysis:
The appeal was filed against the assessment order challenging the addition of interest on loans granted to AEs. The assessee, engaged in the garment business, had extended loans to AEs in dollar denomination. The Transfer Pricing Officer (TPO) determined the ALP of interest at 14.88% based on the SBI PLR for the relevant year. The DRP directed the AO to determine the ALP using the SBI base rate plus 150 basic points. The AO made an addition of the interest component, leading to the appeal.

The assessee argued that the issue was covered by a previous ITAT judgment in their favor for AY 2009-10. They justified the interest rates charged to AEs based on LIBOR plus mark-up. The TPO proposed an ALP adjustment based on the SBI prime lending rate, leading to a higher ALP. The assessee contended that the AO's ALP calculation was excessive and cited various judgments supporting their position.

The Tribunal found in favor of the assessee, citing a previous decision in their own case for AY 2009-10. The Tribunal agreed with the assessee's argument regarding the interest rates charged to AEs and directed the AO to re-compute the ALP at 6% for the relevant AEs. The decision was based on consistency in treatment among AEs and the application of LIBOR plus mark-up for determining ALP.

The Tribunal allowed the appeal, following the precedent set in the previous judgment. The decision highlighted the importance of consistent treatment among AEs and the application of appropriate interest rates based on international transaction norms. The appeal was decided in favor of the assessee, emphasizing the need for ALP calculations to be in line with international standards and previous judicial interpretations.