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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 ..... mine whether there is anomaly in the transaction which arise out of special relationship between the creditor and the debtor. Hence the contention of having actually not earned any income cannot come to the rescue of the assessee in this scenario – Decided against the Assessee. Rate of interest to be charged for computation of Arms Length Price of an International transaction – Held that:- Since the issue of LIBOR has been considered and decided by the Tribunal in various cases as relied upon by the assessee, therefore, to maintain the rule of consistency, followed the decision of the coordinate Benches of this Tribunal, and accept LIBOR for benchmarking interest on interest free loans to AEs. Since the LIBOR is a rate applicable in the transactions between the banks and further the loans advanced by the bank to clients are secure by security and guarantee; therefore, a loan which has been advanced without any security or guarantee as in the case of the assessee has to be benchmark by taking the Arm's Length interest rate as LIBOR plus - The appropriate rate would be LIBOR plus 2% - Directed to determine the Arm's Length interest by considering the LIBOR plus 2% on the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer noted that the assessee has given loans of Rs. 15.65 crores to its AEs in USA, Singapore and Bahrain. The assessee claimed the said loans as working capital advances to its 100% subsidiary outside India. Accordingly, the Assessing Officer made a reference u/s 92CA(1) of the I T Act to TPO for computation of Arm's Length Price (ALP) in relation to international transactions. 6.2 The assessee contended before the TPO that the advances were given towards working capital on cost plus zero margin as the AEs were giving the business to the assessee without any cost borne by the company and hence, assessee benchmarked the transactions at the cost plus zero mark-up claiming to use cost plus method. 6.3 The TPO found that as in a third party comparable situation, advances would bear interest and therefore, there is a need to charge a mark up as per CUP method. Accordingly, the TPO proposed to benchmark the loans at dollar denominated LIBO (London Inter Bank Operative) Rate plus mark up of 3%. 6.4 The assessee objected to the proposed benchmark of the loans and contended that no cost has been incurred by the assessee and hence no interest was charged by them. Further, it was clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um as reasonable and representative of the market. Accordingly, the DRP directed the TPO/Assessing Officer to compute the interest on loans to AE @ 14% per annum on monthly closing balances for the period from 1.4.2006 to 31.3.2007 and consequently, enhanced the transfer pricing adjustment. The Assessing Officer accordingly made the adjustment of Rs. 53,43,272/- on this account while passing the impugned assessment order as per the directions of the DRP. 7. Before us, the ld AR of the assessee has submitted that the advance was given to 100% subsidiary outside India as working capital loan. Since the assessee is getting business from the AEs; therefore, the transaction has to be seen on commercial consideration as no motive to evade tax by shifting the income to tax heaven. He has further contended that all the AEs are wholly subsidiaries of the assessee and there is no relationship as lender and borrower. One cannot earn the interest by borrowing to itself. He has further submitted that the objection of the transfer pricing provisions are intended to ensure that profits taxable in India are not understated by declaring lower receipts or higher outgoings in relation to the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imate of 3% considered by the TPO or the rate applied by the DRP. 7.4 On the other hand, the ld DR has referred the provisions of section 92B and submitted that the term 'international transaction' as per sec. 92B includes lending or borrowing of money to AEs. Thus, the ld DR has submitted that advancing loan to AEs is undoubtedly an international transaction. Even the Tribunal, in the decision relied upon by the ld AR has held that the advance to AEs is an international transaction. He has further contended that under the transfer pricing provisions and regulations, there is no requirement of shifting the income to tax heaven for treating a transaction as an international transaction. In the absence of any such condition, if the transaction falls within the meaning of international transaction, then ALP has to be determined as per the provisions provided under the statute. 8. We have considered the rival submissions as well as relevant material on record. The first contention of the ld AR of the assessee is that the advance was given to the AEs towards working capital and the assessee is getting good business from the AEs; therefore, having commercial consideration, no adjustm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thiagaraja Chetty Co. reported in 24 ITR 525 (SC) in the case of Morvi Industries Ltd. v. CIT reported in 82 ITR 835 (SC) for the proposition that liability to tax can arise only when there is income. No tax can be charged as notional income on accrual. Further reliance has been placed upon the ruling of Authority for Advance Rulings delivered in the case of Veneburg Group B.V. v. CIT 727 of 2006 for the proposition that in the absence of any income, Transfer Pricing provisions being machinery provision shall not apply. It has further been argued that Transfer Pricing document maintained by the assessee clearly mentioned that these loans/advances are in the nature of quasi-equity and hence the transaction of granting interest free loan is at arm's length. The loan agreements mentioned that these are interest free loans. Reliance in this regard is placed upon the decision of Delhi Tribunal in the case of Sony India Ltd. 114 ITD 448 Para 100 that "under fiscal loans actual transaction as entered between the parties is to be considered. Authorities have no right to re-write the transaction unless it is held that it sham or bogus or entered into by the parties to avoid and evade ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer pricing aims at determining the pricing in the situations of cross-border international transactions, where two enterprises which are subject to the same centre or direction or control (associated enterprise) maintain commercially or financially relation with other. In such a situation, the possibility exist that by way of intervention from the centre or otherwise, business conditions must be accepted by the acting units which differs from those which in the same circumstances would have agreed upon between unrelated parties. The aim is to examine whether there is anomaly in the transaction which arise out of special relationship between the creditor and the debtor. Hence the contention of having actually not earned any income cannot come to the rescue of the assessee in this scenario. The case laws from the Apex Court cited by the ld. Counsel of the assessee are in the context of the proposition that only the real income has to be taxed and interest free advances can be given by companies (domestic) to their subsidiaries on the ground of commercial expediency. But these decisions are not in the context of Chapter-X of the IT Act which relates to special provision relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Income Tax Act, the arm's length interest is to be determined by following CUP method wherein the interest rate is determined under the circumstances in which the taxpayer and its AE are operating i.e. what is the interest that would have been earned if such loans given from the funds of Indian entity to unrelated parties in similar situation as that of the AE. 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 weak financial health as that of the taxpayer's AE is to be considered. 3.9 Corporate bonds issued by companies in India also give an indication of interest that could be earned if, the amount is lent to the companies. Government bonds are subject only to interest rate risk. However, corporate bonds are subject to credit risk in addition to interest rate risk. Interest rate risk refers to the risk of a bond changing in value due to changes in the structure or level of interest rates. It is seen from the information available in the public domain that the yield rate on corporate debt papers (with AAA rating) for five year maturity ranged between 7.24 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transaction with the AEs. The underlining principle of determining the ALP is based on the transaction between the unrelated parties. The income of the assessee should not be effected as reduced and therefore, the same is compared with the income or expenditure as the case may be earned or incurred by the assessee, if it would have been between the assessee and the unrelated parties. Therefore, tested party for the purpose of determination of ALP is the assessee and not the AEs. 8.8 In the case in hand, the assessee has advanced loans to the AEs without charging any interest; therefore, the transaction has to be tested with a situation, had the assessee invested or advanced or deposited the said amount with an unrelated third party and thereby the income, which would have been earned by the assessee is expected to have been earned from the transaction of advancing loans to the AEs. 8.9 Thus, on principle, we do agree with the DRP on the point of the tested party for determining the Arm's Length interest rate that would have been earned by the assessee by advancing loans to the unrelated third party. 8.10 The Transfer Pricing Regulation are based on the deemi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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