2021 (6) TMI 330 - AT - Income Tax

TP Adjustment - Benchmarking of interest receivable on loan given by the assessee to the subsidiary company in Germany - HELD THAT - Honourable Delhi High Court in Commissioner of income tax versus Cotton naturals India private limited 2015 (3) TMI 1031 - DELHI HIGH COURT has categorically held that the financial position and credit rating of the subsidiaries will be broadly the same as of the holding company. Therefore, there should not be any adjustment on account of capital risk. The honourable court also categorically held that where the transaction was of lending money in foreign currency to its foreign subsidiaries the comparable transactions therefore was of foreign currency lent by unrelated parties. When the learned CIT- A applied the decision of the honourable Delhi High Court for applying the rate of interest where the foreign currency is lent but did not apply this aspect of the decision. Therefore, when the assessee has charged higher interest on loan to subsidiary compared to the prevailing interest rate in the country in which the money is lent, CUP method undisputedly agreed by the parties as the most appropriate method, there is no reason to make any adjustment in the hands of the assessee on this count. Assessee has given comparable instances of the prevailing interest rate for short-term and long-term in Germany, which could not be disputed as a better comparable price. We allow ground number 1 of the appeal of the assessee (which is the solitary ground of appeal) and direct the learned transfer-pricing officer/assessing officer to delete the adjustment on account of arm s-length price of interest received on loan given to a wholly owned subsidiary in Germany. - Appeal of the assessee is allowed.

Summary

Issues: Benchmarking of interest receivable on loan given to subsidiary company in Germany.

Analysis:
1. The appeal was filed against the order of the ld CIT (A)-44, New Delhi for Assessment Year 2010-11, focusing on the benchmarking of interest receivable on a loan given to the subsidiary company in Germany.

2. The appellant challenged the adjustment made by applying 700 basis points above the LIBOR on the loan given to its German subsidiary, arguing that the interest rate charged was higher than the prevalent rate in Germany, making the adjustment unjustified.

3. The assessee, a solution provider for environmental control, declared income and entered into international transactions, leading to a reference to the TPO for determining the Arm's Length Price (ALP).

4. The TPO made an addition on account of outstanding receivables and interest charged on the loan to the subsidiary, resulting in a draft assessment order being passed.

5. The ld CIT (A) partially allowed the appeal, deleting the adjustment on outstanding receivables but retaining the interest at ALP at LIBOR +700 BPS, leading to the appellant challenging this part confirmation.

6. The appellant advanced a foreign currency loan to its German subsidiary, receiving interest at an effective rate of 6%, benchmarked using the Comparable Uncontrolled Price (CUP) method.

7. The ld TPO proposed an adjustment based on the State Bank of India prime lending rate and safe harbor rules, while the ld CIT (A) applied LIBOR +3.5% and added a markup of 700 basis points.

8. The appellant argued that the interest rate charged was already higher than prevailing rates in Germany, emphasizing no credit risk due to being a holding company, contesting the need for adjustments.

9. The ld DR contended that risk factors and market returns justified the application of LIBOR +700 basis points, supporting the ld CIT (A)'s decision.

10. The Tribunal considered the loan terms, prevailing interest rates in Germany, the subsidiary's acquisition, and the applicability of the CUP method, ultimately ruling in favor of the appellant.

11. Citing the decision in Commissioner of Income Tax v. Cotton Naturals India Pvt Ltd, the Tribunal held that no adjustment was warranted as the interest charged was higher than prevailing rates in Germany, aligning with the CUP method.

12. Consequently, the appeal of the assessee was allowed, directing the deletion of the adjustment on the interest received on the loan to the German subsidiary.

Conclusion:
The Tribunal's detailed analysis emphasized the alignment of the interest rate charged by the appellant with prevailing rates in Germany, justifying the rejection of adjustments and ruling in favor of the appellant regarding the benchmarking of interest receivable on the loan given to the subsidiary company in Germany.