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2015 (11) TMI 741 - AT - Income TaxTransfer Pricing Adjustment on account of interest on loans advanced to Associate Enterprise - Held that - On the loan given to its AE, the assessee has charged interest rate worked out on the basis of six months at LIBOR 2%, which worked out at 3.75%. This Arm s Length interest was benchmarked by using Internal CUP on the basis of rate of interest paid on loans by the assessee availed from State Bank of India. However, the TPO has arrived at ALP 14.736% by taking the interest rate based on average yield rate of DB rated points based on data collected from CRISIL. The DRP has reduced the said interest rate by holding that domestic cost of borrowing mark-up of 3% should be applied which works out 9.90%. The applicability of interest rate based on LIBOR had come-up for consideration before the Tribunal in the case of the assessee in AY 2008-09 wherein, the Tribunal relying upon the decision of Everest Kento Cylinder Ltd. (2015 (5) TMI 395 - BOMBAY HIGH COURT) had directed the Assessing Officer /TPO to adopt LIBOR 2% as Arm s lengths interest. Thus, following the earlier year s precedence, we also hold that interest rate charged by the assessee on the loan given should be benchmarked with LIBOR 2% as Arm s Length and, therefore, no adjustment is called for.- Decided in favour of assessee. Transfer Pricing Adjustment on account of Corporate Guarantee given by the assessee to the overseas bank in favour of its AE - Held that - The Tribunal in AY 2008-09 has held that Arm s Length Guarantee Commission should be benchmarked by taking the rate of 0.5%. hus, rate of 0.5% is wholly justified on the present case also. Disallowance u/s 14A - Held that - As disallowance u/s 14A is restricted to the calculation part wherein the interest paid on loan taken for investment in foreign subsidiary has to be excluded. Based on that, the aggregate working of disallowance needs to be worked out. Accordingly, we direct the Assessing Officer to verify the calculation given by the assessee as incorporated to give consequential relief. - Decided partly in favour of assessee. Legal claim with regard to DRUPA Exhibition expenses - Held that - In view of the facts narrated by the Ld. Counsel, we direct the Assessing Officer to allow 1/4th of the exhibition expenses in this year also consistent with the treatment given by the Assessing Officer in AY 2009-10 - Decided in favour of assessee.
Issues Involved:
1. Transfer Pricing Adjustment on account of interest on loans advanced to Associate Enterprise. 2. Transfer Pricing Adjustment on account of Corporate Guarantee given by the assessee to the overseas bank in favor of its AE. 3. Disallowance u/s 14A. 4. Legal claim regarding DRUPA Exhibition expenses. 5. Initiation of penalty proceedings u/s 271(1)(c). Detailed Analysis: 1. Transfer Pricing Adjustment on account of interest on loans advanced to Associate Enterprise: The assessee had provided a loan to its AE and charged interest at LIBOR + 2%, which worked out to 3.75%. The TPO, however, determined the ALP interest rate at 14.736% based on data from CRISIL. The DRP directed the TPO to consider the domestic cost of borrowing plus a 3% markup, resulting in an ALP of 9.90%. The Tribunal, following its earlier decision and the decision in the case of Everest Kento Cylinder Ltd., upheld that LIBOR + 2% should be used as the Arm's Length interest rate. Therefore, the adjustment was not warranted, and the ground was allowed in favor of the assessee. 2. Transfer Pricing Adjustment on account of Corporate Guarantee given by the assessee to the overseas bank in favor of its AE: The assessee provided a corporate guarantee to its AE without charging any fee. The TPO benchmarked the guarantee fee at 6%, while the DRP adjusted it to 2% based on Safe Harbour Rules. The Tribunal, referring to its earlier decision and the case of Everest Kento Cylinder Ltd., held that a 0.5% rate for the guarantee fee was justified. Thus, the ground was allowed in favor of the assessee. 3. Disallowance u/s 14A: The assessee had earned dividend income exempt from tax and initially disallowed Rs. 30,00,370/- under Rule 8D. The AO recalculated the disallowance to Rs. 1,13,00,469/-, which the DRP reduced to Rs. 28,51,891/-. The Tribunal directed the AO to exclude interest on loans taken for investments in foreign subsidiaries and to verify the revised calculation provided by the assessee, potentially reducing the disallowance to Rs. 26,63,594/-. Thus, the ground was partly allowed. 4. Legal claim regarding DRUPA Exhibition expenses: The AO disallowed three-fourths of the exhibition expenses in AY 2009-10, treating them as enduring in nature. For the current year, the AO did not allow the remaining one-fourth. The Tribunal directed the AO to allow one-fourth of the expenses consistent with the treatment in AY 2009-10. Thus, the ground was allowed in favor of the assessee. 5. Initiation of penalty proceedings u/s 271(1)(c): This ground was deemed premature and was dismissed. Revenue's Appeal: The grounds raised by the Revenue mirrored those of the assessee regarding the interest rate and corporate guarantee fee adjustments. The Tribunal dismissed the Revenue's appeal, upholding the decisions favoring the assessee for both issues. Conclusion: The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed. The Tribunal upheld the use of LIBOR + 2% for interest benchmarking and a 0.5% rate for the corporate guarantee fee, directed a recalculation for the disallowance u/s 14A, and allowed the claim for DRUPA Exhibition expenses.
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