2018 (8) TMI 743 - AT - Income Tax

Transfer pricing - arms length interest rate on loan for loan given to Associated Enterprise. - Held that - CIT(A) has rightly held, the arm s length interest rate for a financing transaction in France should take into account only the average French interest spread and not the average European interest spread as admittedly the conditions in entire European financial market are not the same. Determination of arms length price on the corporate guarantee provided by the appellant company to the banks on behalf of Associated Enterprise - Held that - the issuance of corporate guarantees were in the nature of shareholder activities- as was the uncontroverted claim of the assessee, and, as such, could not be included in the provision for services under the definition of international transaction under section 92B of the Act. We have also held, taking note of the insertion of Explanation to Section 92B of the Act, that the issuance of corporate guarantees is covered by the residuary clause of the definition under section 92B of the Act but since such issuance of corporate guarantees, on the facts of the present case, did not have bearing on profits, income, losses or assets , it did not constitute an international transaction, under section 92B, in respect of which an arm s length price adjustment can be made. Decided against the revenue.

Summary

Issues Involved:
1. Arm's length interest rate on loans to Associated Enterprise.
2. Determination of arm's length price on corporate guarantees provided by the appellant company to banks on behalf of Associated Enterprise.

Issue-wise Detailed Analysis:

1. Arm's Length Interest Rate on Loans to Associated Enterprise:

The Assessing Officer (AO) challenged the CIT(A)'s decision to reduce the arm's length interest rate on loans given to an Associated Enterprise from 4.31% to 2.40%. The CIT(A) considered the average spread over LIBOR charged in France (163 basis points) instead of the whole European region (273 basis points). The CIT(A) also rejected the inclusion of a 100 basis point addition for foreign exchange risk, stating that exchange fluctuations are inherent in comparable transactions. The Tribunal agreed with the CIT(A)'s reasoning, emphasizing that the arm's length interest rate should reflect the specific economic conditions of France rather than the broader European market. Consequently, the Tribunal upheld the CIT(A)'s decision to set the arm's length interest rate at EURO LIBOR plus a 163 basis point markup, resulting in a 5.75% rate.

2. Determination of Arm's Length Price on Corporate Guarantees:

The AO contested the CIT(A)'s deletion of an addition of ?3,01,66,650/- related to the arm's length price of corporate guarantees provided by the appellant company to banks on behalf of its Associated Enterprise. The Tribunal referenced a coordinate bench decision in Micro Ink Ltd Vs ACIT, which held that corporate guarantees do not constitute an 'international transaction' under Section 92B of the Income Tax Act unless they have a bearing on the profits, income, losses, or assets of the enterprise. The Tribunal noted that the issuance of corporate guarantees in this case was akin to shareholder activity and did not impact the appellant company's profits, income, losses, or assets. Therefore, the Tribunal upheld the CIT(A)'s decision to delete the addition made by the AO, concluding that the corporate guarantees did not warrant an arm's length price adjustment.

Conclusion:

The Tribunal dismissed the appeal filed by the AO and the cross-objection filed by the assessee, confirming the CIT(A)'s order. The Tribunal's decision was based on a comprehensive analysis of the arm's length interest rate for loans to the Associated Enterprise and the nature of corporate guarantees, aligning with the principles established in prior cases and the specific economic context of the transactions.