2015 (7) TMI 974 - AT - Income Tax

Transfer pricing adjustment - Applicability of interest rate - Held that - Assessee employed the CUP method for depicting that this international transaction was at arm s length price. The applicability of the CUP as the most appropriate method or the selection of comparable uncontrolled transaction has not been disputed by the TPO. - assessee paid interest to Bank of Nova Scotia @ 9% per annum, which has not been disputed by the TPO. He simply picked up the above extracted clause from the Sanction letter indicating that in the event of any default or untimely repayment by the assessee, penal interest will be charged by the bank @ 18.5%. The assessee s categorical statement before the TPO that there was no default committed by it in making repayment leading to payment of interest at such higher rate to the bank, has remained uncontroverted. It means that the assessee actually paid interest @ 9% during the year and no eventuality of paying interest @ 18.5% due to default or untimely repayment arose during the year. Since the CUP method talks of making a comparison of the international transaction with the actual price charged or paid in a comparable uncontrolled transaction, which is 9% in the present case, we cannot accept the view point of the authorities below in substituting the hypothetical price of 18.5%, which would have been paid in the case of an eventuality, that never occured. Actual interest paid by the assessee to its bank @ 9% per annum constitutes a comparable uncontrolled transaction. Since the assessee itself charged interest from its AE @ 9% on the amounts due, the same makes up arm s length price of the transaction not warranting any transfer pricing adjustment on this score - Decided partly in favour of assessee.

Summary

Issues:
1. Addition under section 40(a)(ia) and interest on late deposit of TDS.
2. Transfer pricing adjustment of interest receivable on loan advanced.

Analysis:
1. The appeal concerned an order by the AO for the assessment year 2007-08, where the first two grounds related to additions under section 40(a)(ia) and interest on late deposit of TDS were not pressed by the assessee and were dismissed. The remaining ground was against the transfer pricing adjustment of interest receivable on a loan advanced.

2. The facts revealed that the assessee reported two international transactions, with the dispute revolving around the arm's length price (ALP) determination of interest receivable on a loan advanced. The Comparable Uncontrolled Price method (CUP) was used to establish the ALP, with the reported value of the transaction at Rs. 80,18,588. The Transfer Pricing Officer (TPO) proposed an adjustment based on a hypothetical default scenario, resulting in a transfer pricing adjustment of Rs. 83,49,926. The Dispute Resolution Panel (DRP) upheld this adjustment, leading to the addition in the final assessment order.

3. The Tribunal noted that the CUP method was used by the assessee to demonstrate the transaction's compliance with the ALP. The dispute centered on the interest rate applied, with the TPO advocating for a higher rate based on a default scenario. However, the Tribunal emphasized that the actual interest paid by the assessee at 9% constituted a comparable uncontrolled transaction, rejecting the hypothetical 18.5% rate. As the ALP was deemed satisfactory, the Tribunal ordered the deletion of the addition.

4. The Tribunal highlighted the provisions of section 92C(1) of the Income-tax Act, emphasizing the need to determine the ALP for international transactions. It analyzed Rule 10B(1)(a) regarding the CUP method, emphasizing the importance of considering the actual price charged or paid in comparable uncontrolled transactions. By focusing on the factual payment of interest at 9%, the Tribunal rejected the notion of substituting a hypothetical higher rate, ultimately ruling in favor of the assessee and partially allowing the appeal.

5. In conclusion, the Tribunal set aside the transfer pricing adjustment, emphasizing the significance of actual transactions in determining the ALP under the CUP method. The judgment highlighted the importance of factual payments over hypothetical scenarios, ultimately leading to the deletion of the addition in dispute.