2022 (6) TMI 664 - AT - Income Tax

TP adjustment - international transactions relating to loans advanced to the subsidiary company - assessee has offered rate of interest of 3.5% but AO chose to apply 13.87% - HELD THAT - The assessee has offered rate of interest of 3.5% on international transaction of loans advance to its AE. How this rate has been arrived at is not specified. AO has considered the same @ 13.87%. which was done on the basis of addition of 200 basis point on the interest rate of 12.30% being Indian bank, SBI Prime Lending Rate. We note that Hon'ble Delhi High Court has disproved the comparison with prevailing rates in Indian banking system for international transaction in the case of Cotton Naturals 2015 (3) TMI 1031 - DELHI HIGH COURT As decided in own case 2022 (5) TMI 819 - ITAT DELHI noted that LIBOR with certain markup was to be applied after taking into account the decision of Hon'ble Delhi High Court in case of Cotton Natural (I)(P.) Ltd. supra - Following the same, ITAT chose to remit the issue before them to the AO to consider appropriate LIBOR rate plus markup. The ITAT in the said case has taken note that the Ld. CIT(A) has applied LIBOR plus certain basis points on those years. Since IT AT in assessee's own case had earlier remitted the issue to the file of AO with certain directions, we find it appropriate to remit this issue to the file of AO. The AO shall follow the directions of the ITAT as referred above and decide accordingly. Appeal of the Revenue is allowed for statistical purposes.

Summary

Issues:
Transfer pricing adjustment on international transactions relating to loans advanced to subsidiary company for Assessment Year 2012-13.

Detailed Analysis:

Issue 1: Transfer Pricing Adjustment by AO
The Assessing Officer (AO) made a transfer pricing adjustment on international transactions related to loans advanced to the subsidiary company. The AO applied an interest rate of 13.87% instead of the 3.5% offered by the assessee. The AO based this decision on the Prime Lending Rate (PLR) of Indian banks, adding 200 basis points due to the perceived higher risk faced by the assessee compared to banks. The AO made a TP adjustment of Rs. 1,84,51,539 under section 92C(3) of the Act.

Issue 2: Appeal before CIT(A)
The assessee appealed before the Commissioner of Income Tax (Appeals) [CIT(A)], arguing that the AO's adjustment was not justified. The CIT(A) referred to previous decisions, including the Hon'ble Delhi High Court case of CIT vs. Cotton Naturals (I)(P.) Ltd. and the ITAT order in the case of Bharti Airtel vs. ACIT, where similar issues were decided in favor of the assessee. The CIT(A) allowed the grounds of appeal, deleting the TP adjustment made by the AO.

Issue 3: Appeal before ITAT
The Revenue appealed against the CIT(A)'s order before the Income Tax Appellate Tribunal (ITAT). The ITAT noted that the AO had applied the Indian bank's Prime Lending Rate (PLR) to determine the interest rate, which was disapproved by the Hon'ble Delhi High Court in the case of Cotton Naturals. The ITAT also considered previous decisions in the assessee's own case and remitted the issue back to the AO to apply the appropriate LIBOR rate plus markup.

Conclusion:
The ITAT allowed the Revenue's appeal for statistical purposes and remitted the issue back to the AO for reevaluation based on the directions provided. The decision highlighted the importance of correctly determining the arm's length interest rate in international transactions, considering relevant legal precedents and applying appropriate benchmarks.