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TMI Blog2015 (7) TMI 211X X X X Extracts X X X X X X X X Extracts X X X X ..... hes of the Tribunal. In such circumstances, we are of the view that the stand taken by the AO for rejecting the plea of the assessee referred to above is unsustainable. In view of the above conclusions, we are of the view that the interest charged in the loan transaction in question has to be held to be as at arm’s length - Decided in favour of assessee. - IT(TP)A No.1504/Bang/2012 - - - Dated:- 29-6-2015 - Shri N.V. Vasudevan and Shri Abraham P. George, JJ. For the Petitioner : Shri Vishnu Bagri, CA For the Respondent : Shri T.S.N. Murthy, CIT-III(DR) ORDER Per N.V. Vasudevan, Judicial Member This is an appeal by the assessee against the order dated 14.9.2012 of the ACIT, Circle 11(4), Bangalore passed u/s. 143(3) r.w.s. 144C of the Income-tax Act, 1961 [ the Act ]. 2. The assessee is a company engaged in rendering pharma services. In this appeal, we are concerned with only one issue viz., determination of arm s length price (ALP) u/s. 92 of the Act in respect of an international transaction entered into by the assessee with its AE. 3. During the financial year 2007-08, the assessee charged interest to the tune of ₹ 6,716,992 for the loans g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvert these funds to preference stock as per conditions to be specified in Shareholders Agreement as mutually decided at any time in future. The rate of interest is 10% per annum. Initial tenor for the repayment will be three years and further expansion by mutual decision thereafter. Indegene Australia shall promptly pay all present or future tax fees, charge or duties assessed or imposed by the Government of India or agency thereof with respect to the loans. Any withholding tax due to be paid shall be withheld by the said entity and paid to the appropriate authorities. 5. Accordingly, Indegene Australia had availed a loan of AUD 4,000/- in FY 2006-07 and AUD 210,000/- in FY 2007-08. Indegene Australia has repaid a portion of the said loan during the FY 2007-08. 6. Since the loan transaction between the Assessee and the aforesaid entities was an international transaction between two associated enterprises, the rate of interest charged for the loan has to pass the arm s length test as laid down in Sec.92 of the Act. The TPO to whom the question of determination of Arm s Length Price (ALP) was referred to considered corporate bonds issued by the companies in Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional market, is to be LIBOR based which is internationally recognized and adopted. It was argued that the TPO failed to appreciate the geographic differences between the associated enterprises and the comparables selected viz., the geographic and economic dissimilarity between the loans provided in India and outside India and also no suitable adjustment were made. It was also submitted that assuming though not admitting that in case the interest as charged by Indegene India shall be considered with corporate bonds in view of the risks as stated by the TPO, the interest rate of comparison should be with the corporate bonds rate prevailing in the countries in which the loan is given. In this regard attention of the DRP was invited to the following interest rates during the year 2007 2008 in the respective geographies as under:- Geography Bonds Type Interest Rate 2007 Interest Rate 2008 USA AAA 5.56% 5.63% BAA 6.48% 7.44% PLR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mstances and so on. 7. The issue to be decided now is to determine as to where the case of the taxpayer falls in the grading range of BB to D, which as mentioned above, is for the cases where, either there is no safety or the safety is inadequate. Although, tile taxpayer s risk is very high, however, to be reasonable and fair to the assessee as well as its AE, it is proposed to apply the yield rates for BB to the case of the taxpayer. As per the calculations made above on the basis of information supplied by CRISIL, the annnua1 average yield for BB rated bond for 5 year or more term is calculated at 17.26%. 12. The ALP was determined by applying the aforesaid rate on the monthly closing balance. A chart in this regard is given at page 7.4 of the TPO s order. The TPO finally determined the ALP as follows:- Arm s Length Interest Rate 17.26% p.a. ALP @ 17.26% p.a. on the monthly outstanding balances Rs.1,15,01,312 Price received vis- -vis the Arm s Length Price The price charged by the tax payer at ₹ 67,16,992/- in the form of interest to its Associated Enterprise is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Siva Industries Holdings Ltd. (supra), identical issue was considered by the Tribunal. In fact, the ITAT Bangalore Bench in the case of TTK Prestige Ltd. v. ACIT, ITA No.1257/Bang/2011 for A.Y. 2005-06, has also dealt with an identical issue and following the decision of the Mumbai Bench of the Tribunal in Tata Autocomp Systems Pvt. Ltd. v .ACIT, ITA No.7354/Mum/2011, dated 30.4.2012, held that in the matter of determination of ALP in respect of a loan transaction, LIBOR rate of interest should be the interest rate applied for determining the ALP. Following are the relevant observations of the Tribunal:- 37. On the quantum of interest percentage that has to be added, we find the Mumbai Bench of the ITAT in the case of Tata Autocomp Systems Ltd. (supra) held as follows: 18. On the issue as to what is quantum of addition that has to be made, we will proceed to examine the issue on the basis that CUP is the most appropriate method for determining ALP in the present case. It has been the argument on behalf of the Assessee that the TPO has adopted the interest rate charged by a domestic bank as comparable rate ignoring the fact that the Assessee is not in the business of g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions 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 had 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 comparable under the Comparable Uncontrolled Price (CUP) method, the transaction needs to occur between the taxpayer and an independent party. Even assuming that the adjustment for extended credit was necessary, USD LIBOR is more appropriate basis than the rate of interest on Euro denominated loan considering the fact that the AE is based in USA and commercial principles and practices related to USD denominated extended credit. The Tribunal has also made a crucial point that the arm s length interest rate should be taken from the country of the borrower/debtor, i.e. the rate of inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market. The interest rates do provide the basis for the price and interest rates of all kinds of financial products like interest rate swaps, interest rate futures, saving account and mortgages. We find that the RBI in respect of export credit to exporters at internationally competitive rates under the scheme of pre-shipment credit in foreign currency (PCFC) and Rediscounting of Export Bills abroad (EBR), has permitted banks to fix the rates of interest with reference to ruling LIBOR, 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. Gr.No.1 to 4 are thus partly allowed. 38. Following the aforesaid decision of the Mumbai ITAT we direct the AO to work out the TP adjustment as directed in the Tribunal s order refe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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