2014 (1) TMI 1365 - AT - Income Tax

Arm s length price in relation to loan transactions with Associated enterprise - Held that - Decision of co-ordinate bench in Cotton Naturals (I) Pvt. Ltd. Versus vs. DCIT, Circle 3(1), New Delhi 2013 (6) TMI 174 - ITAT DELHI followed - CUP method is the most appropriate method in order to ascertain arms length price of the international transaction as that of the assessee - Where the transaction was of lending money in foreign currency to its foreign subsidiaries the comparable transactions was of foreign currency lended by unrelated parties - The financial position and credit rating of the subsidiaries will be broadly the same as the holding company - In such a situation, domestic prime lending rate would have no applicability and the international rate fixed being LIBOR should be taken as the benchmark rate for international transactions Decision in Siva Industries and Holding Ltd. vs. ACIT 2012 (10) TMI 890 - ITAT CHENNAI followed - Assessee s profits are exempt u/s. 10B - There is no case that assessee would benefit by shifting profits outside India - In this case the loan agreement was for fixed rate of interest - The LIBOR has been accepted as the most suitable bench mark for judging Arms length price in case for foreign currency loan The adjustment made by TPO is not correct Decided in favour of assessee.Decided against assessee.

Issues Involved:

1. Legality of the assessment order under Section 143(3) read with Section 144C of the Income Tax Act.
2. Validity of the income assessed by the AO.
3. Validity of the directions given by the Dispute Resolution Panel (DRP).
4. Determination of Arm's Length Price (ALP) for the interest rate on loans to an Associated Enterprise (AE).
5. Adjustments to the LIBOR rate for credit rating and transaction costs.
6. Additional grounds of appeal by the appellant.

Issue-wise Detailed Analysis:

1. Legality of the Assessment Order:
The appellant contested the assessment order dated 25.04.2011, claiming it was flawed both legally and factually. The Tribunal examined the procedural aspects and found no procedural lapses that would invalidate the assessment order under Section 143(3) read with Section 144C of the Income Tax Act.

2. Validity of the Income Assessed:
The appellant argued that the AO erred in assessing the income at Rs. 60,68,130/- against the declared income of Rs. 18,61,323/-. The Tribunal reviewed the assessment and found that the AO's calculations were based on the adjustments made by the Transfer Pricing Officer (TPO) and DRP.

3. Validity of DRP's Directions:
The appellant claimed that the DRP's directions were invalid as they did not consider the appellant's arguments and evidence. The Tribunal noted that the DRP had provided reasoning for its decisions, particularly concerning the interest rate adjustments. The Tribunal did not find any procedural violations by the DRP.

4. Determination of Arm's Length Price (ALP):
The primary issue was the addition of Rs. 42,06,807/- due to the difference in ALP determined by the TPO and the appellant. The appellant argued that the TPO's comparison should be based on international conditions rather than Indian conditions, as the loan was given to a foreign subsidiary. The Tribunal agreed with the appellant, referencing a previous order where it was held that the domestic prime lending rate was not applicable, and the LIBOR rate should be used as the benchmark for international transactions. The Tribunal found that the appellant's arrangement with Citi Bank for a loan at less than 4% supported the appellant's position.

5. Adjustments to the LIBOR Rate:
The DRP had adjusted the LIBOR rate by adding 400 basis points for credit rating and 300 basis points for transaction costs, arriving at a rate of 12.20%. The appellant argued that these adjustments were unreasonable. The Tribunal found that the AE's lack of adequate credit rating justified the 400 basis points adjustment, and the transaction costs justified the 300 basis points adjustment. However, the Tribunal noted that since the loan was given from shareholder funds, no further adjustment for security was necessary.

6. Additional Grounds of Appeal:
The appellant reserved the right to add, amend, or alter any grounds of appeal. The Tribunal did not find any additional grounds that required consideration.

Conclusion:
The Tribunal concluded that the appellant's issue was covered in its favor by a previous order of the Co-ordinate Bench, which held that the LIBOR rate should be used as the benchmark for international transactions. The Tribunal dismissed the Revenue's appeal, affirming that the rate of interest charged by the appellant for the loan transactions with the AE was at Arm's Length Price. The appeal of the Revenue was dismissed, and the order was pronounced in the open Court on 30th October 2013.

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