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TMI Blog2014 (12) TMI 349X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign currency cash loan @ 12% was lower than the Prime Lending Rate (PLR) of interest charged by the State Bank of India at the relevant point of time, i.e. 12.25% - 13.25% - the TPO is justified in saying that the transactions involve loan liabilities in foreign currency and it is not a domestic borrowing so as to compare the transaction of payment of interest with the domestic Prime Lending Rate of the Indian banks. Whether it is relevant to consider the stated rate of interest of 12% or the effective rate of interest for the purpose of benchmarking the transaction with comparable cases – Held that:- The terms and conditions of the agreement approved by the RBI in relation to technical knowhow and foreign currency cash loans, which have been succinctly noted by us in the earlier part of this order, clearly establish that in the initial period of nine years there was a moratorium on interest payment and that assessee was not required to incur any interest costs - It is only subsequent to the moratorium period, assessee was to incur interest cost and that too, during the period of repayment of loans - it would be appropriate to compute effective rate of interest in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the associated enterprise is at an arm's length price - the addition on account of interest paid on ECB loan is directed to be deleted. Depreciation on assets forming part of block assets but not used during the period disallowed – Held that:- As decided in assessee’s own case decided in Asstt. Commissioner of Income Tax Versus South Asia Tyres Ltd., Good Year South Asia Tyres Pvt. Ltd. [2014 (10) TMI 288 - ITAT PUNE]- the claim of the assessee for depreciation was allowed by the Tribunal – the order of the Tribunal continues to hold the field and therefore following the precedent the assessee has to succeed on this aspect also – the AO is directed to allow appropriate relief to the assessee – Decided in favour of assessee. Addition towards impost of capital goods – Held that:- CIT(A) rightly was of the view that having a Global Transfer Pricing Policy does not mean that the markup stated in the Policy is automatically justified - the reasonableness of the markup has to be established. 10% markup over and above the cost of capital goods to AE cannot be said to be on lower side under any parameter of comparison - the evidences or certificate certifying the actual cost of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer/Transfer Pricing Officer ( AO/TPO ) erred on facts and in law in making addition to the income of the appellant to the extent of ₹ 66,04,445/- on account of the alleged difference in the arm's length price of the international transactions undertaken by the appellant. 2.1 That the AO/TPO erred on facts and in law in disregarding the methodology applied by the appellant for benchmarking the international transaction of payment of interest on Technical Know How Fees loan and proposing an adjustment of ₹ 19,02,919/- to the income of the appellant. 2.2 That the learned AO/TPO erred on facts and in law in comparing the interest rate charged by the associated enterprise for Technical Know How Fees loan with the interest rate prescribed by Reserve Bank of India ( RBI ) for External Commercial Borrowing ( ECB ) for the assessment year 2006-07. 2.3 That the learned AO/TPO erred on facts and in law in not appreciating that the Technical Know How Fees Loan was strictly to support the business of the appellant in the initial period of its set-up the payment was deferred for a period of 9 years (initially for 7 years and subsequently for 7 years) without inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts are that assessee is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of manufacture and sale of automotive tyres, tubes, flaps, etc. at its factory located at Aurangabad. For the assessment year 2006-07, it filed a return of income declaring Nil income. The said return was subject to a scrutiny assessment u/s 143(3) r.w.s. 144C(13) of the Act by the Assessing Officer dated 14.10.2010 wherein the total income has been determined at Nil . However, two additions have been made firstly, a sum of ₹ 66,04,445/- on account of a transfer pricing adjustment; and secondly, a sum of ₹ 7,59,723/- on account of disallowance of depreciation, thus, totaling to ₹ 73,64,368/-. The income so determined was set-off against the brought forward business loss for assessment year 1998-99 and ultimately the total income was determined at Nil . However, both the additions made by the Assessing Officer have been challenged by the assessee in the appeal before us. 5. Although, assessee has raised multiple Grounds of Appeal but the essentially the grievance is on account of the aforesaid two additions made by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) was raised from the associated enterprise in the past years, for financing its working capital needs, which carried rate of interest of LIBOR plus 3%. The TPO compared the international transaction of the payment of interest on the aforesaid loans with the ceiling prescribed by the Reserve Bank of India (RBI) for payment of interest on ECB loans for the previous year under consideration, which stood at LIBOR plus 2% i.e. 5.46. By comparing the aforesaid RBI mandated interest rate on ECB loans i.e. 5.46% with the rate of interest incurred by the assessee, an adjustment of ₹ 66,04,445/- was made so as to determine the arm's length price on account of the payment of interest which is detailed as under :- Loan Rate of interest paid by the Appellant Interest paid by appellant (Rs.) Interest computed by TPO (LIBOR+200bps) Difference (Adjustment) Technical knowhow loan 12% p.a. 34,91,594 15,88,675 19,02,919 Foreign currency cash loan 12% p.a. 55,03,780 21,96,926 33,06,854 ECB Loan LIBOR plus 3% 2,06,30,308 1,92,35,636 13,94,672 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent case cannot be considered de-hors the factum of the Central Government having approved the terms and the rate of payment of interest. In this context, he has relied on the parity of reasoning upheld by the Tribunal in the following decisions : (i) Abhishek Auto Industries Ltd. Vs. DCIT (ITA No.1433/Del/2009 dated 12.11.2010); (ii) DCIT vs. Sona Okegawa Precision Forgings Ltd. (ITA No.5386/Del/2010 dated 16.12.2011); (iii) M/s Cadbury India Ltd. vs. Addl.CIT (ITA No.7408/Mum/2010 dated 13.11.2013); (iv) Lumax Industries Ltd. vs. ACIT (ITA No.4456/Del/2012 dated 31.05.2012); (v) M/s Here Motocorp Ltd. vs. Addl.CIT (ITA No.5130/Del/2010 dated 23.11.2012); and, (vi) M/s ThyssenKrupp Industries India Pvt. Ltd. vs. Addl.CIT (ITA No.6460/Mum/2012 dated 27.02.2013). 11. Apart therefrom, it has also been submitted that the adjustment made by the TPO by comparing the specific rate of interest approved by the RBI for technical knowhow loan and foreign currency cash loan available by the assessee with a general rate prescribed by the RBI in respect of ECB loans is wrong because it is fallacious to apply the general rates approved by RBI in preference to the specific rate approved by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O. In this context, the assessee company has calculated the effective rate of interest on a standalone basis by considering the loan outstanding during the year and the period for which it has been availed by the assessee, i.e. including the period of moratorium when no interest was payable. It is submitted that the effective rate of interest works out to be lesser than arm's length rate determined by the TPO. The details in this regard are as under :- Technical knowhow loan FCC loan Particulars Year ending March, 05 Year ending March, 06 Year ending March, 06 Interest paid 8066927 3491595 5503760 Amount of loan outstanding 223691325 210246455 243824000 Effective rate of interest 3.60% 1.66% 2.26% 14. It was therefore contended that even on this count adjustment proposed by the TPO is uncalled for. 15. On the other hand, the Ld. Departmental Representative appearing for the Revenue has contended that the income-tax authorities made no mistake in determining the arm's l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also modified by an agreement dated 02.10.2003 whereby the principal amount of loan was reduced from USD one crore to USD 67,50,000/-. The loan agreement dated 11.07.1996 was approved by the Reserve Bank of India vide letter dated 17.04.1996, which was subsequently amended vide RBI letter dated 10.06.2003 reducing the principal amount of loan from USD one crore to USD 67,50,000/-. Copies of such approvals have been placed in the Paper Book at pages 469 473. In terms of the RBI approvals, it transpires that the technical knowhow loan was interest free for initial period of seven years from the date on which technical knowhow fee was payable and at the end of the seven years the loan was repayable in five equal installments together with interest @ 12% per annum. Notably, such interest was payable for the period after the moratorium period of seven years. The RBI approval also permits that during the seven years moratorium period, the loan amount was to be increased by 5% of the principal amount to account for the foreign exchange risk coverage. The aforesaid increase on account of foreign exchange risk coverage was not applicable after the close of seven year s moratorium period. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the aforesaid payment of interest was at an arm's length price. The stand of the assessee was that interest charged on technical knowhow loan and foreign currency cash loan @ 12% was lower than the Prime Lending Rate (PLR) of interest charged by the State Bank of India at the relevant point of time, i.e. 12.25% - 13.25%. Assessee also justified the rate of interest on the ground that technical knowhow and foreign currency loans were specifically approved by the RBI wherein the rate of interest payable was also prescribed. Even with regard to the ECB loan availed, it was contended that the same was in accordance with guidelines and the interest rate ceiling prescribed by the RBI at the time of obtaining such loan. The aforesaid submissions of the assessee have not found favour with the TPO. One of the points raised by the TPO is that the technical knowhow loan has been obtained by conversion of technical knowhow fee payable to Goodyear Tyre and Rubber Co.. As per the TPO, what is indeed payable by the assessee is a charge/fee for obtaining technical knowhow and that it is not a pure cash loan taken by the assessee. According to the TPO, such a transaction cannot be compared wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of loan the effective rate of interest for the assessment year 2006-07 works out to 2.51% only. Similarly, with respect to the foreign currency cash loan on spreading the actual interest cost of 1,39,69,848/- over the period of loan and also taking into account the increased borrowings on account of exchange rate fluctuation, the effective rate of interest for assessment year 2006-07 comes to 2.67%. It is sought to be pointed out that the aforesaid effective rates of interest is less than the arm's length rate of interest considered by the TPO in respect of technical knowhow and foreign currency cash loans. Therefore, there was no necessity of making any adjustment in the transaction of payment of interest on account of technical knowhow and foreign currency cash loans in order to bring it to the level of arm's length price. The aforesaid workings are tabulated as under :- (i) Regarding technical knowhow loan :- Year Loan outstanding (A) Interest spread (B) Exchange fluctuation (C) Interest +exchange fluctuation cost D=B+C Interest rate % D/A 1995 49,795,823 963210 - 963,210 1.93 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to whether it is relevant to consider the stated rate of interest of 12% or the effective rate of interest for the purpose of benchmarking the transaction with comparable cases. The terms and conditions of the agreement approved by the RBI in relation to technical knowhow and foreign currency cash loans, which have been succinctly noted by us in the earlier part of this order, clearly establish that in the initial period of nine years there was a moratorium on interest payment and that assessee was not required to incur any interest costs. It is only subsequent to the moratorium period, assessee was to incur interest cost and that too, during the period of repayment of loans. Ofcourse, during the moratorium period the liability towards principal amount of loan was liable to be increased by 5% on account of exchange rate fluctuation. Considering the entirety of terms and conditions, therefore, the cost of borrowings to the assessee (i.e. on technical knowhow and foreign currency cash loans) are to be computed after factoring the initial period of moratorium. Therefore, it would be inappropriate to merely compare the stated rate of interest of 12% with the prevailing rates without t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. vide ITA No.182/Ahd/2011 Others dated 12.08.2012 wherein the royalty paid by the assessee at 3.75% to the associated enterprise was sought to be benchmarked. The Revenue determined the arm's length rate of payment of royalty @ 3%, while assessee was charged 3.75% by the associated enterprise. The assessee had put up a defence on the ground that the effective rate of royalty payable was @ 2.30% on sales. It was contended that the royalty of 3.75% was payable after reducing various expenses from the sale value of the products but the effective rate worked out to 2.30%, which was comparable to arm's length rate being considered by the Revenue. On the basis of the assertion of the assessee to the effect that the effective rate of royalty was lower than the comparable transaction, the addition made by the TPO was deleted by the Tribunal. The Ld. Representative for the assessee submitted that the concept of the effective rate of royalty as against the stated rate of royalty was approved by the Tribunal for the purpose of benchmarking the international transaction of the assessee. In the present case also, in our view the ratio of the decision of the Ahmedabad Bench of Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unication dated 19.02.2009 furnished an agreement for foreign currency cash loan availed by the associated enterprise from M/s J.P. Morgan Chase Bank, wherein the associated enterprise had paid interest @ LIBOR plus 4% i.e. 7.46% (3.46% + 4%) or alternate base rate +3%. In comparison, assessee had paid lower interest on ECB loan which was LIBOR plus 3% i.e. 6.46% (3.46% + 3%) by considering the ceiling prescribed by the RBI at the relevant point of time. In this context, it is sought to be submitted that assessee paid interest rate to the associated enterprise which was even lower than the cost of borrowing of the associated enterprise. In this context, a reference has been made to page 257 to 260 of the Paper Book wherein it was pointed out to the TPO that the rate of interest payable by the associated enterprise on its borrowing to provide ECB to the assessee was LIBOR plus 4% or alternate basis rate +3%. But keeping in mind, the RBI restrictions associated enterprise charged only LIBOR plus 3% from the assessee company. Ld. Representative submitted that this internal benchmark available with the assessee has been disregarded by the TPO. 25. In our considered opinion, the afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction. The word 'comparable' may encompass internal comparable or external comparable. There is cue in the rule itself as to preference to be given to internal comparable uncontrolled transactions vis-a-vis externally comparable uncontrolled transactions. It is because the delegated legislature has firstly referred to the net profit margin realized by the enterprise (internal) from a comparable uncontrolled transaction and, thereafter, it points towards net profit margin realized by an unrelated enterprise (external) from a comparable uncontrolled transaction. Thus where potential comparable is available in the shape of an uncontrolled transaction of the same assesses, it is likely to have higher degree of comparability vis-a-vis comparables identified amongst the uncontrolled transactions of third parties. The underlying object behind computing ALP of an international transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment year 2005-06 in the appeal of the assessee vide ITA No.1868/PN/2012, the first issue is with regard to the transfer pricing adjustment made with respect to the transaction of interest paid to the associated enterprise on technical knowhow and foreign currency cash loans. It was a common point between the parties that the facts and circumstances on this aspect are pari-materia to those considered by us in the appeal of the assessee for assessment year 2006-07 in the earlier paras. Therefore, our decision in relation to the aforesaid issue in the appeal for assessment year 2006-07 would apply mutatis mutandis in this year also. Following the same, assessee succeeds in assessment year 2005-06 also. 31. In assessment year 2005-06, another issue is with regard to an addition of ₹ 5,48,472/- made by the Assessing Officer towards the import of capital goods. The relevant discussion in this regard made by the CIT(A) is as under :- 12.3 In respect of the adjustment of ₹ 5,48,472/- to the price paid by the appellant towards the import of capital goods, it has been observed that having a Global Transfer Pricing Policy does not mean that the markup stated in the Po ..... X X X X Extracts X X X X X X X X Extracts X X X X
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