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TMI Blog2013 (11) TMI 806X X X X Extracts X X X X X X X X Extracts X X X X ..... o the Associated Enterprises without looking into the facts of the case. 3. On the facts and circumstances of the case the learned Assessing Officer erred in making the addition of Rs.6,75,000/- being payment made by the Appellant to M/s Credence Analytics (I) Pvt. Ltd. at the end of the year and the same recorded by them on receipt of the same in F.Y. 2007-08. On the facts and circumstances of the case the learned Assessing Officer erred in making double addition of Rs.8,93,198/- by disallowing Purchase and also by making disallowance u/s 40(a)(ia). 3. Ground no.1 is general in nature and therefore, no specific finding is required. 4. During the course of hearing, the ld AR of the assessee has stated that the assessee does not press ground nos. 3 & 4 and the same may be dismissed as not pressed. The ld DR has no objection, if the ground nos.3 & 4 are dismissed as not pressed. 5. Accordingly, ground nos. 3 & 4 of the appeal of the assessee are dismissed, being not pressed. 6. The only ground left for our consideration and adjudication is ground no.2 which relates to transfer pricing adjustment of Rs. 53,43,272/- being interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention as before the TPO. The DRP found that the TPO erred in benchmarking interest rate on outbound loan with LIB0R. The DRP was of the view that only inbound loans i.e;. ECBs (External Commercial Borrowings) taken by the Indian entities from outside India are to be bench marked with LIBOR. In the case of outbound loan, as in the instant case, it is not appropriate to benchmark the interest with LIBOR, as interest applicable would be prevalent in Indian financial system. Thus, the DRP held that while lending money by Indian entity to outside Indian, the interest rate would be benchmarked against those prevailing in India for investing in corporate bonds without security. The DRP has given the reason that since the tested party is taxpayer, the prevalent interest that could have earned by the taxpayer by advancing a loan to an unrelated party in India with the same financial health as that of the taxpayer's AE is to be considered. Hence, the DRP took interest rate prevailing in India on corporate bond for benchmarking the loan transaction in question. The DRP treated the AE of the assessee equal to unrated bonds having very high risk. The yield on BBB rate accordingly was consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enchmarking of the transactions would be cost plus zero. The AEs of the assessee are not in any tax heaven country and therefore, the decision of the Delhi Benches of the Tribunal in the case of M/s Perot Systems TSI, relied upon by the TPO is not applicable in the facts of the assessee's case. 7.2 Alternatively, the ld AR of the assessee has submitted that while applying the transfer pricing principles and determining the ALP interest rate prevailing in the country, the borrower should be taken and used for benchmarking. He has further submitted that the interest rate to be used for benchmarking shall be the rate of interest in respect of the currency in which underlining transaction has taken place in consideration of economic and commercial factors around the specific currency. In support of his contention, he has relied upon the following decisions: (i) Tata Autocomp Systems Ltd v Asstt. CIT ITA No.7354/M/2011 (ii) Siva Industries & Holdings Ltd. v Asstt. CIT 145 TTJ 497(Chennai)Trib) (iii) Dy. CIT v. Tech Mahindra Ltd. 7.3 Thus, the ld AR of the assessee has submitted that the Tribunal in these dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or assets of such enterprises............................. 8.2 Thus, the transaction of advancing loans to the AEs undoubtedly falls within the meaning of international transaction as per section 92B. Even otherwise, the Tribunal in the case of Tata Autocomp Systems Ltd (supra) as relied upon by the assessee held in paras 16 & 17 as under: 16. Interest free loan extended to the associated concerns as at arm's length lending or borrowing money between two associated enterprises comes within the ambit of international transaction and whether the same is at arms length price has to be considered. The question of rate of interest on the borrowing loan is an integral part of arms length price re-determination in this context. The fact that the loan has the RBI's approval does not put a seal of approval on the true character of the transaction from the perspective of transfer pricing regulation as the substance of the transaction has to be judged as to whether the transaction is at arms length or not. The Delhi Bench of ITAT in the case of Perot Systems TSI (India) Ltd. v. DCIT (supra) had considered identical argument and held as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idiaries. The ld. Counsel for the assessee further relied upon the Apex Court decision in the case of M/s S.A. Builders Ltd. v. CIT(Appeals) and others 288 ITR 1 (SC). 9.1 The ld. DR for the revenue on the other hand relied upon the orders of the ld. CIT(A), he claimed that the ld. CIT(A)'s order was a speaking order and it has rebutted all the arguments of the assessee. 10. We have carefully considered the submissions and perused the records. The primary contention before us, as submitted by the ld. Counsel of the assessee is that it was commercially expedient for assessee to advance interest free loans to the AEs and that since no interest has actually been charged, there is no real income exigible to tax. As observed by the ld. CIT(A) the agreements show that these are loan amount given by the assessee to Associated Enterprises (AEs). This in fact is an admitted position. There is no case that any special feature in the contract make the transaction as capital in nature. It is also an admitted proposition that the assessee has extended the loan to its AE's who are 100% subsidiaries. The Assessee's case is that it has actually n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulations. 8.4 Having treated the transaction as international transaction, the only question remains to be considered and adjudicated is Arm's Length rate of interest. 8.5 So far as the question of most appropriate method for determining the ALP is concerned, the same is also settled by the various decisions as relied upon by the assessee wherein it has been held that in case of benchmarking of interest on the loans to the AEs, CUP is the most appropriate method for determining the ALP. Even, the assessee has not challenged the method adopted by the authorities below for determination of the ALP in the case of the assessee. 8.6 Now, the question arises whether LIBOR rate or prevailing market rate in India could be considered for determining the Arm's Length interest rate in respect of the loans advanced by the assessee to the AEs. The TPO had adopted LIBOR plus 3% as ALP for the rate of interest on the loan transaction in this case; whereas the DRP took the bond rate prevailing in Indian market and treated the AE as below BBB rating bond and accordingly, determined the rate at 14% as ALP in para 3.8 to 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t rate or the yield. Further, it is seen that the yield on unrated bonds can be taken as 20% more than the lowest graded bond BBB. 3.10 It is not considered fit that the AE of the taxpayer can be rated even as BBB (investment grade). Thus, as the risk is very high, a rate of interest of 14% p.a could be considered reasonable and representative of the market after considering the corporate bond market and the financial health of the AE. 3.11 So keeping all the above issues in consideration, it is considered view of the Panel that a reasonable interest rate of 14% appears appropriate in the facts and circumstances of the taxpayer. Hence, the interest on the loans facility extended by the taxpayers to its AE should be computed at the rate of 14% p a on the monthly closing balance for the period from 1.4.2006 to 31.3.2007. The Assessing Officer is directed to re-compute the arm's length interest, TP adjustment and addition on account of TP adjustment in view of the above direction, which may result in enhancement of TP adjustment and addition of Rs. 30,80,035/- as made by the TP/TPO." 8.7 Under the Transfer P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction with an unrelated parties. 8.11 Even under Rule 10B of the IT Rules, the factors prescribed for inclusion or exclusion of comparables to determine the ALP are also based on the comparison of the assessee with the chosen entities and the AE has no rule in the exercise of selecting the comparables. Thus, in our view, the interest that would have been earned by the assessee by advancing or placing the said amount with unrelated parties would be the Arm's Length interest in relation to the interest free loans/advances to the AE. The safest comparables, which can be taken as Arm's Length interest rate in such a case would be the interest on FD with the bank for a term equivalent to the term for which the loans given to the AEs. 8.12 It is pertinent to note that in case of FD with the Bank, the investment is safe as it is free from risk of credit and interest. On the other hand, if the loan/advance is given to the unrelated party, then always there is some risk of credit and interest involved in such transaction. There is one more reason for taking the FD as an appropriate and good comparable because the lending rate by financia ..... X X X X Extracts X X X X X X X X Extracts X X X X
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