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TMI Blog2013 (6) TMI 174X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the international rate fixed being LIBOR should be taken as the benchmark rate for international transactions. As decided in Siva Industries and Holding Ltd. vs. ACIT [2011 (5) TMI 451 - ITAT, CHENNAI] that the assessee had given the loan to the associate enterprise in U.S. dollars, and in such a situation when the transaction was in foreign currency, and the transaction was an international transactions, then the transaction would have to be looked upon by applying the commercial principles in regard to international transactions. In such a situation domestic prime lending would have no applicability and the international rate fixed being LIBOR rate would have to be adopted. Also see M/s Four Soft Ltd., Hyderabad vs. DCIT Supra [2011 (9) TMI 634 - ITAT, Mumbai], Dy. C.I.T. vs. Tech. Mahindra [2011 (6) TMI 140 - ITAT, MUMBAI], Tata Autocomp Systems vs. ACIT [2012 (5) TMI 45 - ITAT MUMBAI]. As the assessee has arrangement, for loan with Citi Bank, for less than 4%. However, for loan provided to its AE’s it has charged 4% p.a. interest. Hence, adjustment suggested by the TPO is not warranted. As assessee’s profits are exempt u/s. 10B, hence, there is no case that assessee would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred both on facts and in law in ignoring the contention of the appellant that for the purpose of determining the rate of interest the currency in which the loan has been advanced has to be taken into consideration and the rate of interest cannot be based on the PLR rate of Reserve Bank of India in respect of Indian Rupees. 7. On the facts and circumstances of the case, the Hon'ble DRP has erred both on facts and in law in ignoring the contention of the appellant that the interest rate in respect of international transaction in foreign currency has to be in accordance with LIBOR. 8. On the facts and circumstances of the case, the Hon'ble DRP has erred both on facts and in law in the contention of the appellant that the adjustment on account of transaction cost by the TPO is per se on wrong assumption of facts. 9. On the facts and circumstances of the case, the Hon'ble DRP has erred both on facts and in law in ignoring the contention that this loan having been advanced at a fixed rate way back in the year 2002 and 2003, the interest rate cannot be varied or changed in the year under consideration. 10(i) That the above said addition has been made ignoring the detailed transfer p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d have earned by giving loans in the Indian market. It cannot be compared with the rate of interest that the AE would have paid to some third party. The TPO held that the assessee cannot be compared to the Barclays Bank. That one has to see what the independent parties in comparable transactions would do i.e. if the same loan transactions takes place between two independent entities, what they would expect in terms of compensation for the loan transaction entered into between them. The Assessing Officer issued notices and obtained details from the tax payer. Assessing Officer observed that the tax payer has not submitted the financials of the subsidiary in the U.S. TPO summarized his views as under:- "The above arguments of the Department can be summarized as under:- a) The tax payer has extended loan to its associated enterprise at 4%. b) Lending or borrowing is not one of the main businesses of the taxpayer. c) Two independent enterprise in the similar circumstances as that of the tax payer and its subsidiary would have charged arm's length interest as compensation for the financial facility provided by one party to another keeping in view the financials of the subsidiary and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 TPO further observed that Indian companies go for External Commercial Borrowings as the interest rates on ECB loans are generally cheaper than the prevailing interest rates in the domestic market. That thus as can be seen that while borrowing money by X (in India) from Y (outside India), the interest rates are benchmarked with LIBOR and the interest rate above Libor is decided by the stand alone credit rating of X. That on the contrary, no company in India would like to invest in the form of loan outside India and that also without security as the interest returns in India would be higher than those prevailing in developed markets. Thus, while lending money by X (in India) and Y (Outside India), the interest rates would be benchmarked against those prevailing in India for investing in corporate bonds (which are without security). Thus the benchmarking rate for lending would be different from that of borrowing. 3.6 Assessing Officer further observed that if loan given to foreign entity is to be benchmarked with LIBOR or FCNR loan rates, then following is the manner in which the arm's length price would be arrived at: i) The prevailing rate of interest for foreign currency loans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 88,54,691/- 6.2 Price received vis-a-vis the Arms Length Price : The price charged by the tax payer at Rs. NIL in the form of interest to its Associated Enterprises is compared to the Arms Length Price or interest as under:- Arms length interest - Rs. 88,54,691/- Interest received - Rs. 20,52,072/- Shortfall being adjustment u/s 92CA- Rs. 68,02,619/- The above amount of Rs. 68,02,619/- is treated as an adjustment u/s. 92CA." 4. Against the above order the Assessee filed objections before the DRP. 5. The assessee inter-alia submitted that the comparison has to be made with respect of advance or loan in USA and not based on Indian conditions. The comparison could also be with rate of interest being paid by the multinational companies or banks in respect of money borrowed from India. After considering the various objections of the assessee the DRP concluded as under:- "7.2 We have examined the issue and we agree with the TPO that no security was offered by the subsidiary and the main business of the assessee was not lending and borrowing money. We find that the AE being new did not have adequate credit rating in USA so the Indian parent company gave the loan; hence a tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the sale of apparel to the Associated Enterprises. However, in respect of interest on the loan advanced by the assessee to its Associated Enterprise @ 4% per annum was considered to be not at arm's length. The Ld. TPO by making comparison with uncomparables like government bonds and the amount advanced by the Indian banks in foreign currency to entities in India and by making arbitrary additions of transaction cost, security and risk etc. to such rate determined the arm's length rate of interest at 17.26% per annum and proposed an addition of RS.68,02,619/-. 4. The assessee carried the matter to DRP and made detailed submissions (PB Pg 278-293). The DRP ignoring all the contentions surprisingly held that loan is in Indian currency hence LIBOR is not the relevant rate and ordered that PLR (Prime Lending Rate of RBI for FY 2007-08 be applied. AO accordingly applied the PLR of 13.25% and made addition of Rs 47,45,416 which is subject matter of appeal. This is the only point of dispute. 5.0 Arm's Length Rate of Interest in case of amount advanced in foreign currency 5.1 The points ON THIS ISSUE which emerge from the decisions of Hon'ble Tribunal in various cases discussed herei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action would have to be looked upon by applying the commercial principles in regard to international transaction. If that was so, then the domestic prime lending would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, the view that LIBOR rate had to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the associated enterprises was to be upheld. As it was noticed that the average of the LIBOR rate for 1-4- 2005 to 31-3-2006 is 4.42 per cent and the assessee had charged interest at 6 per cent which was higher than the LIBOR rate, no addition on this count was liable to be made in the hands of the assessee. In the circumstances, the addition made by the Assessing Officer on this count was deleted. 5.3 In the case of M/s Four Soft Ltd, Hyderabad v. DCIT (ITA No.1495/HYD/2010), Hon'ble Tribunal held as below: "We have considered the rival submissions and perused the materials available on record. We do not find any merit in the arguments of the learned departmental representative as we find that the ALP is to be determined for the international transaction, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E based in USA without charging any interest on such extended credit period. During the assessment proceedings, the TPO rejected taxpayer's arguments and determined the arm's length interest for such extended credit period to US AE at the rate of 10 percent per annum. The TPO determined this rate based on the rate of interest charged by the taxpayer on Euro denominated loan granted to its German AE. The resultant transfer pricing adjustment amounted to INR 1.87 crores. The AO adopted the adjustments made by the TPO. Aggrieved by the decision of the AO, the taxpayer filed objections before the Commissioner of Income Tax (Appeals) [CIT(A)). The CIT(A) confirmed the transfer pricing adjustment, however, restricted the same to 2 percent based on the USD LIBOR rate plus 80 basis point mark-up. Aggrieved by the order of the CIT(A), that AO filed an appeal before the Tribunal. The Tribunal held that the TPO made an error in selecting the transaction of charging of interest to German AE on loan granted at the rate of 10 percent per annum as internal comparable. Following the position settled in case Skoda Auto India and Rule 10B(1(a) of the Income-tax Rules, 1962, to be,. an internal compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bills abroad (EBR), has permitted banks to fix the rates of interest with reference to ruling LIB OR, EURO LIBOR or EURIBOR, wherever applicable and thereto appropriate percentage ranging from 1% to 2%. The reference to the said circular is at page -80 of the Assessee's paper book. In our view the claim of the Assessee to adopt EURIBOR rate as stated before the TPO is reasonable and deserves to be accepted. Following the ruling of the tribunal in the aforesaid cases, we are of the view that the claim made by the Assessee in this regard has to be accepted. The AO is directed to work out the TP adjustment accordingly. 6.0 DRP makes a wrong (reverse) comparison of a loan availed by Indian entity in India 6.1 The DRP has misdirected itself by observing that is Indian Currency. As is evident from the agreements (PB Page 162-167) the loan is in US $ advanced to an entity even interest is to be computed in US$. Thus the application of PLR of RBI which is a bench mark for interest rate in rupee and that too in India is not correct. The DRP instead of making the comparison with the comparables, made a comparison with the loan advanced in India by an entity in foreign currency ignoring tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . At that time, rate of interest was much less than 4% in USA for which comparable was also provided. In the present case, Cotton Natural (I) Pvt Ltd. has also arrangements for loan with Citi Bank for less than 4%. However, for the loan provided to its AEs, it has charged 4% p.a. interest. Another 'group company also had taken loan from Citi Bank at less than 4%. It is not the case of revenue that the agreement is SHAM or TAX AVOIDANCE agreement. 9.0 Loan Agreement is valid and can't be ignored. 9.1 Business is done through agreements and contracts. What is paid or what is received by the assessee is dependent on the terms of agreements. The question may arise as to whether the Assessing Officer has power to disregard the agreement and disallow any payment even if the same is as per the terms of agreement. The Supreme Court in Union of India v. D. N. Revri & Co. AIR 1976 SC 2257 have observed that a contract being a commercial document between the parties must be interpreted in such a manner as to give efficacy to the same rather than to invalidate it, and that it would not be right while interpreting a contract entered into between the two parties to apply the strict rules of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 (SC) held that when, it comes to taxation of a Holding Structure, at the threshold, the burden is on the Revenue to allege and establish abuse, in the sense of tax avoidance in the creation and/or use of such structure(s). In the application of a judicial anti-avoidance rule, the Revenue may invoke the "substance over form" principle or "piercing the corporate veil" test only after it is able to establish on the basis of the facts and circumstances surrounding the transaction that the impugned transaction is a sham or tax avoidant. To give an example, if a structure is used for circular trading or round tripping or to pay bribes then such transactions, though having a legal form, should be discarded by applying the test of fiscal nullity. Similarly, in a case where the Revenue finds that in a Holding Structure an entity which has no commercial/business substance has been interposed only to avoid tax then in such cases applying the test of fiscal nullity it would be open to the Revenue to discard such inter-positioning of that entity. However, this has to be done at the threshold. In this connection, one may reiterate the "look at" principle enunciated in W.T. Ramsay Ltd. case (su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , would result in higher income in the hands of the AEs, and the income of the assessee in India would reduce by the corresponding amount. Thus, this would bring down the overall tax incidence of the group by shifting profit from the Indian jurisdiction to Bermuda which was a tax heaven country with zero rate of tax on corporate profit. Hence, as per Hon'ble Tribunal, it was a classic case of the violation of transfer pricing norms where profits were shifted to tax heavens or low tax regimes to bring down the aggregate tax incidence of a multinational group. 10.3 This is not the position in present case. While the substantial income of assessee is tax exempt u/s 10B, the AE is also not situated in tax heaven. There was no incentive to shift Indian income to AE. 10.4 Hon'ble Bangalore Tribunal in the case of Philips Software Centre (P.) Ltd. v. Asstt. CIT, Circle 12(2) [2008] 26 SOT 226 (Bang.) held that the basic intention behind introducing transfer pricing provisions in the Act is to prevent shifting of profits outside India and where an assessee is entitled to claim benefit under section 10A. transfer pricing provisions ought not to be applied. Hence, unless TPO/AO has establ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermined under the regulations would result in a decrease in the overall tax incidence in India in respect of the parties involved in the international transaction. 10.8 Hence, erosion of Indian tax base is one of the prime objectives behind insertion of new TP Provisions. In the present case, as discussed above, there is no erosion of tax base in India." 10. Ld. Departmental Representative relied upon the order of TPO and the DRP. 11. We have carefully considered the submissions and perused the records, we find that the assessee company in this case is a leading manufacturer of rider apparel. Assessee entered into international transaction as under:- Equestrian Apparel sold to JPC Equestrian Inc Rs. 48191540/- Loan provided to JPC Equestrian Inc 10,50,000 $ 12. As per the TP document, CUP method has been chosen to bench mark the sale of apparel as well as interest received on loan. The TPO accepted the assessee's submission qua sale of apparel that the same was at arms length. As regards interest the assessee mentioned that it has received interest at a rate of 4% which was comparable with the export packing credit rate obtained from independent banks in India. The TPO was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternational transaction as that of the assessee. We agree with the assessee's contention that where the transaction was of lending money in foreign currency to its foreign subsidiaries the comparable transactions, therefore, was of foreign currency lended by unrelated parties. The financial position and credit rating of the subsidiaries will be broadly the same as the holding company. In such a situation, domestic prime lending rate would have no applicability and the international rate fixed being LIBOR should be taken as the benchmark rate for international transactions. 15. The above view is duly supported by following case laws relied upon by the assessee's counsel. In Siva Industries and Holding Ltd. vs. ACIT Supra it was held by ITAT that the assessee had given the loan to the associate enterprise in U.S. dollars, and in such a situation when the transaction was in foreign currency, and the transaction was an international transactions, then the transaction would have to be looked upon by applying the commercial principles in regard to international transactions. In such a situation domestic prime lending would have no applicability and the international rate fixed being LIB ..... X X X X Extracts X X X X X X X X Extracts X X X X
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