2020 (2) TMI 257 - AT - Income Tax

TP Adjustment - receipt of interest on loans and advance granted to AT S India - HELD THAT - In the instant case, the payment of interest made by AT S India to AT S Austria on the one hand and the receipt of interest by AT S Austria from AT S India on the other hand have taken place under the same agreement i.e. Loan Agreement and Distribution Agreement. In this scenario, if the arm s length interest rate is determined by the DRP at LIBOR plus 450 basis points in the hands of AT S Austria, then the international transactions under consideration would never be at arm s length in the hands of AT S India. Similarly, if the international transactions under consideration are accepted by the TPO to be at arm s length in the hands of AT S India, the same would never be at arm s length in the hands of AT S Austria. Thus, the international transactions under consideration would never be at arm s length both in the hands of AT S Austria and AT S India simultaneously. The Legislature has never shown an intention to treat the same international transaction in two different ways in the hands of two associated enterprises such that there would be arm s length price adjustment at least in the hands of one of the associated enterprises. Hence, the approach adopted by the DRP/TPO is not acceptable. We note that the assessee granted loan and advance to AT S India in foreign currency (Euro) and AT S India repaid principal / paid interest on loan and advance in foreign currency (Euro). Hence, in the instant case, Euro-LIBOR would be the appropriate benchmark that conforms to the arm s length standard under the CUP Method. The assessee applied the Euro-LIBOR rates prevailing during the relevant period for computation of interest payable by AT S India to the assessee and further added credit spread of 350 basis points (net of tax) for loan and 100 basis points for advance. Hence, the interest received by the assessee from AT S India is at arm s length under the CUP Method. In the assessee s case, the DRP did not mention in his order the comparability analysis prescribed under clause (a) of sub-rule (1) of rule 10B of the Income-tax Rules, 1962. The DRP did not bring on record any comparable uncontrolled transaction under the CUP Method for substantiating that the interest rate of LIBOR plus 450 basis points conformed to the arm s length standard under the CUP Method - we delete the upward adjustment to the income of the assessee. Arm s length price adjustment made by the AO in respect of recovery of information technology ( IT ) service cost from AT S India - payment made by AT S India to the assessee - HELD THAT - Assessee entered into IT Cost Pooling Agreement with its group companies including AT S India under which all the parties to the aforesaid agreement combined together for financing the object of arranging IT products and related services for all the parties to the aforesaid agreement. No third party (i.e. third party means entity not being party to the IT Cost Pooling Agreement ) was given access to the IT products and related services arranged by the assessee under the IT Cost Pooling Agreement . The costs incurred by the assessee for arranging IT products and related services were allocated to the parties to the aforesaid agreement on actual basis (i.e. without adding any profit element to the cost) using appropriate allocation keys mentioned in the aforesaid agreement. Thus, there was complete identity between the contributors to the IT cost pool and participators in the benefit under the aforesaid agreement i.e. both parties having been AT S group companies. The fund contributed by the group companies was not spent for any purpose which was not within the scope of the aforesaid agreement. The payment made by AT S India to the assessee is in the nature of reimbursement of cost, therefore we delete the addition ALP adjustment in respect of receipt of corporate guarantee fee from AT S India - HELD THAT - As the issue is squarely covered in favour of the assessee by the decision of the coordinate bench, in the case of M/s Emami Limited 2019 (5) TMI 1371 - ITAT KOLKATA , Assessment Year 2013-14 and there is no change in facts and law and the Revenue is unable to produce any material to controvert the aforesaid findings of the coordinate Bench. Respectfully following the above binding precedent, we delete the addition - Decided in favour of assessee

Summary

Issues Involved:
1. Arm's length price adjustment for interest on loans and advances.
2. Arm's length price adjustment for IT support service cost.
3. Arm's length price adjustment for corporate guarantee fee.

Detailed Analysis:

1. Arm's Length Price Adjustment for Interest on Loans and Advances:

The case involves AT&S Austria, a tax resident of Austria, which provided loans to its wholly-owned subsidiary, AT&S India. The interest rates on these loans were set at LIBOR + 350 basis points and LIBOR + 100 basis points, complying with RBI guidelines. The TPO initially determined the arm's length interest rate at 20.45% per annum, which was later reduced by the DRP to LIBOR + 450 basis points. The ALP adjustments were computed at INR 3,13,68,273/-.

The Tribunal noted that the TPO had accepted the arm's length nature of the interest payments under the CUP Method in the hands of AT&S India but made adjustments in the hands of AT&S Austria. The Tribunal referenced the Hon’ble Delhi High Court's decision in CIT vs. Cotton Naturals (I) (P) Ltd, which held that LIBOR is the appropriate benchmark interest rate for foreign currency loans. The Tribunal found that the DRP's approach of adding 450 basis points to LIBOR lacked a legal basis and directed the deletion of the ALP adjustment of INR 3,13,68,273/-.

2. Arm's Length Price Adjustment for IT Support Service Cost:

AT&S Austria entered into an IT Cost Pooling Agreement with its group companies, including AT&S India, to arrange IT products and services. The cost incurred was allocated on an actual basis without any profit element. The TPO made an upward adjustment of INR 9,48,760/- by applying a 2.65% markup, without specifying the method used for benchmarking.

The Tribunal referenced its earlier decisions in AT&S India’s own case, where similar payments were considered reimbursements and not income chargeable to tax in India. The Tribunal held that the recovery of IT costs was a reimbursement of expenses and not income, thus deleting the adjustment of INR 9,48,760/-.

3. Arm's Length Price Adjustment for Corporate Guarantee Fee:

The TPO made an adjustment of INR 9,72,959/- for corporate guarantee fees provided by AT&S Austria to AT&S India. The Tribunal referenced its decision in the case of M/s Emami Limited, where it was held that corporate guarantees are shareholder activities and not international transactions requiring a fee. The Tribunal noted that extending corporate guarantees was to protect the subsidiary's interests and not to earn income.

The Tribunal also referenced the ITAT Delhi's decision in Bharti Airtel Ltd. vs. ACIT, which held that corporate guarantees do not constitute international transactions under section 92B of the Act. Following these precedents, the Tribunal deleted the adjustment of INR 9,72,959/-.

Conclusion:

The Tribunal allowed the appeal of the assessee, deleting the ALP adjustments for interest on loans and advances, IT support service cost, and corporate guarantee fee. The judgment emphasized the application of the CUP Method and the appropriateness of using LIBOR as the benchmark interest rate for foreign currency loans, and recognized the nature of reimbursements and shareholder activities in transfer pricing adjustments.