2020 (7) TMI 394 - AT - Income Tax

TP Adjustment - MAM Selection - adjustment on account of interest on loan/quasi equity by assessee - rejection of Transactional Net Margin Method as the most appropriate method to justify the arm's length nature of the aforesaid transaction and applying Comparable Uncontrolled Price ('CUP') as the most appropriate method - HELD THAT - Arm s length rate of interest in the case of loans advanced to the AE s is to be determined on the basis of rate of interest charged in the countries where loan is received/ consumed. Assessee in alternative submissions also submitted that internal CUP is available, for the purpose of benchmarking of transaction of interest free loan as the AEs also availed loan from DBS Bank Singapore and the documents evidencing the interest rate at 6.22% charged by DBS Bank is filed on record. Considering the submissions of assessee, we direct the AO/TPO to consider internal CUP of 6.22% for the purpose of benchmarking of international transaction of provision of interest free loans and recompute the arm s length price afresh. Needless to direct that before making fresh calculation/ computation the AO/TPO shall grant opportunity of hearing to the assessee. Grounds of appeal are allowed for statistical purpose. Adjustment on account of upfront fee cost and administrative expenses on loan given to foreign AEs - TPO/AO to workout adjustment by taking consolidated rate of 0.25% of upfront fee for loan granted by assessee and deleted the addition of administrative charges - HELD THAT - While benchmarking international transaction, an element of income, expenses, or in apportionment of any contribution to any cost, must be embedded in it. In case of lending or borrowing of money, the determination of arm and spice is made on the basis of income, expenses, interest, allocation or apportionment or any contribution to any cost element is rooted in the transaction which may have bearing on the profit or loss of the assessee. In our humble view, in case of capital financing the usual element is the interest earned or incurred. We have noted that the case of assessee throughout the proceeding is that the loans were provided from assessee s own fund and that no expenses were incurred. The TPO has not brought on record that while granting loan the assessee to its assessee has incurred, recovered or earned any expenses on account of upfront fees or administrative charges. Considering the aforesaid factual discussion, we direct the AP/TPO to delete the entire upfront fees and administrative charges. - Decided in favour of assessee.

Summary

Issues Involved:
1. Adjustment on account of interest on loans/quasi equity given by the appellant to its AEs.
2. Upfront fees and administrative charges on loans given by the appellant to its AEs.
3. Applicability of Transfer Pricing regulations to operations carried out through operating qualifying ships under the Tonnage Tax Scheme (TTS).

Detailed Analysis:

1. Adjustment on Account of Interest on Loans/Quasi Equity:
The primary issue was whether the CIT(A) was justified in upholding a transfer pricing adjustment of ?7,03,48,212 to the income of the appellant. The appellant had provided loans to its AEs and adopted the Transactional Net Margin Method (TNMM) to benchmark the transaction. The TPO rejected this method and applied the Comparable Uncontrolled Price (CUP) method, concluding that interest should have been charged at 7.35% (SBI Prime Lending rate). The CIT(A) partially agreed with the TPO but directed the AO to compute the ALP using the RBI's ECB rates (six-month LIBOR + 200 basis points for loans with average maturity and six-month LIBOR + 300 basis points for loans with longer maturity).

The appellant argued that the RBI circular is applicable to ECB and trade credit availed by residents, not non-resident AEs. The appellant also suggested using the internal CUP rate of 6.22% charged by DBS Bank Singapore. The tribunal found merit in the appellant's argument and directed the AO/TPO to consider the internal CUP rate of 6.22% for benchmarking and recompute the arm's length price afresh, ensuring the appellant is given an opportunity to be heard.

2. Upfront Fees and Administrative Charges on Loans:
The TPO had made an adjustment of ?3,15,79,348 on account of upfront fees and administrative charges. The CIT(A) directed the TPO/AO to use a consolidated rate of 0.25% for upfront fees and deleted the administrative charges. The appellant contended that such fees are typically charged by banks to cover costs incurred in providing loans, and since the appellant is not in the business of financing and did not incur such costs, no such fees should be charged. The tribunal agreed with the appellant, noting that the TPO did not provide evidence that the appellant incurred or recovered any expenses related to upfront fees or administrative charges. Consequently, the tribunal directed the AO/TPO to delete the entire upfront fees and administrative charges.

3. Applicability of Transfer Pricing Regulations to TTS Operations:
An additional ground of appeal was raised concerning the applicability of transfer pricing regulations to operations carried out through qualifying ships under the TTS. However, no submissions were made regarding this ground, and it was treated as not pressed and dismissed.

Conclusion:
The tribunal allowed the appellant's grounds related to the interest on loans and upfront fees/administrative charges for statistical purposes, directing a fresh computation based on internal CUP rates. The tribunal dismissed the revenue's appeal and upheld the deletion of administrative charges and the adjustment of upfront fees to 0.25%. The appeal regarding the applicability of transfer pricing regulations to TTS operations was dismissed as not pressed.