2018 (8) TMI 1192 - AT - Income Tax

Transfer pricing - arm s length price (ALP) adjustment - notional interest granted on loan - Article 11(2) of the India-Finland Double Tax Avoidance Agreement (DTAA) - benchmarking the transaction at SBI Prime Lending Rate and not LIBOR - Held that - Article 9 is attracted in this case. The transfer prising adjustment on account of interest is to be taxed by including the same in the profits of the assessee as it is not accrued by reason of conditions made and imposed between the Associate Enterprises. - Article 11, does not apply, as no interest accrues or arises in this case and the question of payment of such interest simply does not arise. What is sought to be taxed is a Transfer Pricing adjustment which is permitted under Article 9 which talks about accrual and not payment. - In this case there is no obligation to pay interest. The learned council for the assessee projects a scenario which would never ever arise in the facts of this case and claims that, interest can be taxed only on payment, in view of Article 11. Such an argument is flawed. - Decided against the assessee. Regarding benchmarking the transaction - Held that - The loan in question in this case has been given in US Dollars. Though the loan has been consumed in India, the repayment has to be made in US Dollars. - LIBOR has to be applied while benchmarking the international transaction in question. In view of the above discussion, this issue is decided in favour of the assessee.

Summary

Issues involved:
1. Admission of additional grounds of appeal.
2. Applicability of the India-Finland Double Tax Avoidance Agreement (DTAA) on interest income.
3. Benchmarking of the interest rate for Transfer Pricing (TP) adjustments.

Issue-wise detailed analysis:

1. Admission of additional grounds of appeal:

The assessee sought to introduce additional grounds of appeal, arguing that these grounds were legal issues going to the root of the matter and did not require fresh investigation into facts. The Revenue opposed this, contending that the additional grounds were essentially a review of the Special Bench's decision and were a dilatory tactic. The Tribunal held that Ground No. 1A was an offshoot of Ground No. 1 already adjudicated by the Special Bench and thus could not be admitted. However, Ground No. 4A, concerning the application of LIBOR instead of SBI Prime Lending Rate for benchmarking, was admitted as it related to the quantification of the Arm's Length Price (ALP) adjustment and did not require fresh fact-finding.

2. Applicability of the India-Finland DTAA on interest income:

The assessee argued that under Article 11(2) of the India-Finland DTAA, interest income could only be taxed on a receipt basis, not on an accrual basis. The Revenue countered that the Special Bench had already addressed this issue, determining that the ALP adjustment was necessary for the interest-free loan. The Tribunal upheld the Special Bench's decision, stating that the DTAA did not apply as no interest accrued or arose in this case. The Tribunal emphasized that Article 9 of the DTAA, which deals with associated enterprises and transfer pricing adjustments, was applicable. Therefore, the additional ground 1A was dismissed on both admissibility and merits.

3. Benchmarking of the interest rate for TP adjustments:

The assessee contended that the loan, denominated in US Dollars, should be benchmarked using the LIBOR rate rather than the SBI Prime Lending Rate. The Revenue argued that the loan was consumed in India, justifying the use of the SBI Prime Lending Rate. The Tribunal referred to the Delhi High Court's decision in CIT vs. Cotton Naturals (I)(P) Ltd., which held that the interest rate should be the market-determined rate applicable to the currency in which the loan is to be repaid. Consequently, the Tribunal ruled in favor of the assessee, holding that LIBOR should be applied for benchmarking the international transaction. The matter was remitted back to the TPO for recomputing the ALP adjustment using LIBOR.

Conclusion:

The Tribunal allowed the assessee's appeals in part, admitting Ground No. 4A and ruling that LIBOR should be used for benchmarking the interest rate for TP adjustments. Ground No. 1A was dismissed both on admissibility and merits, upholding the Special Bench's decision that the DTAA did not preclude the ALP adjustment for the interest-free loan.