2018 (8) TMI 757 - HC - Income Tax

Transfer pricing - arms length interest rate on loan - loan given to Associated Enterprise - Arms length price on corporate guarantee - Held that - the assessee considered the markup on the basis of the average spread over LIBOR charged in whole European region. The learned CIT(A) as well as the learned ITAT has also considered the submission on behalf of the Revenue that even the condition prevailing in the country was required to be considered as the same has also been dealt with and considered for which necessary observations are made in para 4.3 itself. - no substantial question of law in this issue. Appeal admitted on the following ground Whether the Appellate Tribunal has substantially erred in law in deleting the addition of 3, 01, 66, 650/being Arms length price on corporate guarantee?

Summary

Issues:
1. Whether the Appellate Tribunal erred in restricting the arms length interest rate on a loan from 4.31% to 2.40% for a loan given to an Associated Enterprise?
2. Whether the Appellate Tribunal erred in deleting the addition of ?3,01,66,650 as the Arms length price on a corporate guarantee?

Analysis:

Issue 1:
The Revenue challenged the ITAT's decision on the arms length interest rate for a loan to an Associated Enterprise. The CIT(A) had restricted the rate to 2.40%, considering factors like RBI approval and foreign exchange risks. The CIT(A) emphasized determining the arms length price based on the average spread over LIBOR charged in France, where the Associated Enterprise was located. The TPO's addition for foreign exchange risk coverage was also addressed. The ITAT upheld the CIT(A)'s decision, noting the relevance of the country's conditions in determining the interest rate. The Court agreed with the ITAT's reasoning, dismissing the appeal as no substantial legal question arose.

Issue 2:
Regarding the deletion of the addition for the Arms length price on a corporate guarantee, the Court admitted the appeal for further consideration, as it was already under review in a separate case. Therefore, the judgment on this issue was pending further examination.

In conclusion, the Court upheld the decision on Issue 1 while deferring the judgment on Issue 2 for additional review. The detailed analysis considered various legal arguments, including RBI approval, foreign exchange risks, and the location of the Associated Enterprise in determining the arms length interest rate.