9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2017 (3) TMI 191 - AT - Income TaxTPA - loans and share application money advanced by the assessee to its AE - ALP of international transaction of interest-free loans and share application advanced by the assessee to its AE by applying net margin of 2.3% - Held that - We have observed that the Hon ble Bombay High Court in the case of CIT v. Tata Autocomp Systems Limited (2015 (4) TMI 681 - BOMBAY HIGH COURT) has held that in case the tax-payer advances loans to its AE in Germany , then rate of interest for TP purposes shall be applied based upon the rates prevailing in the Germany where loans are consumed. Thus we hold that the rates applied by the authorities below based on net margin on borrowing costs of the assessee to compute ALP of international transactions of the assessee in granting interest-free loans and share application money cannot be sustained and the matter is set aside and restored back to the file of the A.O. for de-novo determination of the ALP of international transaction of assessee with AE on merits w.r.t. to loans and share application money advanced by the assessee to its AE
Issues Involved:
1. Upward adjustment on account of interest on loans and share application money given by the appellant to its Associated Enterprises (AEs). 2. Application of Fixed Deposit rate of interest at 8.90% by the Transfer Pricing Officer (TPO). 3. Consideration of RBI guidelines and LIBOR rates for benchmarking the transaction. Issue-Wise Detailed Analysis: 1. Upward Adjustment on Account of Interest on Loans and Share Application Money: The appellant contested the upward adjustment of ?15,50,59,824/- made by the CIT(A) on account of interest on loans and share application money given to its AEs. The appellant argued that the adjustment was based on the TPO's own calculations and assumptions, applying a Fixed Deposit rate of interest at 8.90%. The appellant claimed that this interest rate was prejudicial and against natural justice. 2. Application of Fixed Deposit Rate of Interest at 8.90% by the TPO: The TPO noted that the appellant had advanced loans and share application money to its AEs without charging any interest except for a 5% interest rate on loans to Geodesic Hong Kong Ltd., based on LIBOR plus 200 basis points. The TPO proposed an interest rate of 20.72% for the current year, similar to the previous assessment year. However, the TPO eventually applied a net interest margin rate of 2.3% on the interest rate of 6.6%, resulting in an 8.9% interest rate for determining the arm's length price (ALP) of the transactions. 3. Consideration of RBI Guidelines and LIBOR Rates for Benchmarking the Transaction: The appellant argued that the LIBOR Plus method should be used for determining the ALP, citing various judgments where LIBOR was considered an appropriate benchmark for foreign currency loans. The appellant also referenced RBI guidelines for calculating interest rates on export credit in foreign currency on a LIBOR Plus basis. The TPO, however, applied a different method, considering the appellant's borrowing cost of 6.6% on zero-coupon bonds and adding a net margin rate of 2.3%. Tribunal's Decision: The tribunal noted that the appellant had raised ?640 crores through zero-coupon convertible bonds, convertible into shares after five years, with an option for the lender to get interest at 6.6% if not converted. The TPO's application of an 8.9% interest rate for determining the ALP was based on this borrowing cost. The tribunal referred to the Bombay High Court's decision in the case of Tata Autocomp Systems Limited, which held that the rate of interest for transfer pricing purposes should be based on the rates prevailing in the country where the loans are consumed. Conclusion: The tribunal set aside the orders of the authorities below and restored the matter to the AO for de-novo determination of the ALP of the international transaction of interest-free loans and share application money advanced by the appellant to its AEs. The AO was directed to consider the ratio of the Bombay High Court's decision and provide the appellant with an opportunity to present necessary evidence and explanations. The appeal was allowed for statistical purposes.
|
