2012 (5) TMI 45 - AT - Income Tax

Addition made consequent to a transfer pricing adjustment to international transaction - interest free loan given to one its AE TPO determined the arm s length interest at the rate of 10 percent per annum based on the rate of interest charged by the taxpayer on Euro denominated loan granted to its German AE Held that - Assessee confirmed the transfer pricing adjustment - once the transaction between the assessee and the AE is in foreign currency and the transaction is an international transaction the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play - the average of the LIBOR rate for period in question is 4.42% and the assessee has charged interest at 6% which is higher than the LIBOR rate no addition on this count is liable to be made in the hands of the assessee Appeal partly allowed.

Summary

Issues Involved:
1. Transfer Pricing Adjustment for Interest-Free Loan
2. Determination of Arm's Length Price (ALP) for Interest
3. Applicability of LIBOR/EURIBOR Rates
4. Set-off of Unabsorbed Depreciation

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment for Interest-Free Loan:
The assessee challenged the addition of Rs. 1.76 crores made by the AO due to a transfer pricing adjustment related to an interest-free loan given to its Associate Enterprise (AE), TACO Kunstsofftechnik GMBH (TKT). The assessee argued that the loan was granted on account of business reasons and commercial expediency, highlighting the strategic importance of TKT for its business with Ford Europe. The assessee contended that lending interest-free funds to subsidiaries is a normal business practice and justified by genuine business reasons.

2. Determination of Arm's Length Price (ALP) for Interest:
The TPO proposed a 10.25% interest rate for determining the ALP, using the Comparative Uncontrolled Price (CUP) method and applying the lending rate applicable in India. The TPO rejected the argument that the interest-free loan was given due to commercial considerations and held that in an uncontrolled transaction, interest would have been charged. The TPO emphasized that the ALP rate should be based on the lender's transactions and not the borrower's geography.

3. Applicability of LIBOR/EURIBOR Rates:
The assessee argued that if interest were to be charged, it should be restricted to 4.15%, based on the EURIBOR rate. The TPO dismissed this, stating that LIBOR is not applicable for loans where the currency of the origin country is not the currency in which the loan is extended. The assessee cited various judicial rulings supporting the use of LIBOR/EURIBOR rates for determining ALP in international transactions. The tribunal agreed with the assessee, referencing cases like Tech Mahindra Ltd. and Siva Industries & Holdings Ltd., and directed the AO to adopt the EURIBOR rate for the TP adjustment.

4. Set-off of Unabsorbed Depreciation:
The assessee sought the set-off of unabsorbed depreciation of Rs. 6.68 crores against business income. Both parties agreed to remand this issue to the AO for fresh consideration, with a direction to allow the claim in accordance with the law.

Conclusion:
The tribunal partly allowed the appeal, directing the AO to work out the TP adjustment using the EURIBOR rate and remanding the issue of set-off of unabsorbed depreciation for fresh consideration.