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TMI Blog2017 (8) TMI 413X X X X Extracts X X X X X X X X Extracts X X X X ..... e has also not given any reason as to why the calculation submitted by the assessee was not acceptable. Therefore,reversing his order,we decide the first effective ground of appeal in favour of the assessee. TP adjustment on account of interest received from the AE - Held that:- We find that the assessee had advanced loan to its AE in US Dollar,that it had charged interest @ 6%-7.5% per annum,that the LIBOR rate as on last date of 2008 was 2.49%, that the AE of the assessee had taken loan from a third party namely ANB and Amro Bank Ltd.,that the bank had charged LIBOR +200 bps,that the assessee had benchmarked the transaction accordingly,that in the subsequent AY.(AY 2012-13),the AO himself had made no adjustment on account of interest rate transaction even though the facts and circumstances were identical to the facts to the year under appeal. We also find that in the cases,relied upon by the assessee,the Tribunal has taken a consistent view that LIBOR+ 200bps or 300bps interest rate has to be considered arm’s length rate of interest.In the case under consideration after adding 300 bps the rate would come to 5.49 %,whereas the assessee has charged 6%/7.5% interest from its AE t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that same was claimed as exempt,that it had not apportioned any expenditure eligible to the exempt income.Accordingly,he directed the assessee to furnish the basis of expenditure disallowed for exempt income. After considering the same,he made disallowance under section 14A read with rule 8D of the Income Tax Rules, 1962 (Rules) of ₹ 75.32 lakhs.Considering the fact that the assessee had voluntarily disallowed ₹ 16.58 lakhs,he made an addition of ₹ 58.72 lakhs to the income of the assessee. 2.1. Aggrieved by the order of the AO,the assessee preferred an appeal before the First appella te authority (FAA),who confirmed the order of the AO. 2.2. Before us,it was argued that the assessee had, on its own, identified the expenses incurred for earning exempt income,that it had disallowed interest expenditure of ₹ 2.28 lakhs, that other administrative expenses of ₹ 14.30 lakhs-comprising of salary cost and other miscellaneous expenses-were also disallowed,that the AO had, without any justification, changed the disallow - ance under the head miscellaneous expenses, that the assessee had considered the salary and expenses of two employees for calculatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per annum.He directed it to furnish details of interest received and its benchmarking process.It was submitted that the loan was dollar dominat -ed,that same had been given out of export earnings, that the interest rates were benchmarked with LIBOR rates. After considering the submission of the assessee, the TPO held that interest charged from the AE was not at arm s length,that the arm s length interest would be the interest that would have been earned if such loans were advanced to unrelated third parties with the same financial health as that of AE,that the assessee had referred to two decision of the tribunal i.e. Tech Mahindra and Siva Industries and Holding Ltd.for the argument that LIBOR rate should be applied to the international transactions,that the assessee had not been able to establish the facts and economical circumstances to justify the argument advanced by it, that interest rate depended on numerous factors,that the charging of interest from borrower was purely a question of fact and would vary on the creditworthiness,financial soundness and credit of the borrower.He further observed that the assessee had advanced loan to its AE in US dollar that would be open to f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 012);Cotton Naturals (I) Pvt.Ltd. (ITA 5855/ Del/ 2012);.M/s.Ekta appliances (ITA/4878/Del/2009);M/s. Four Soft Ltd. (ITA /1495/ Hyd./ 2010) ; Hinduja Global Solutions Ltd.(ITA/254/Mum/2013);Indian Hotels Co,and Mascon Global Ltd. (ITA/2205/Mds/2010).The DR supported the order of AO/TPO. 3.4. We have heard the rival submissions and perused the material before us. We find that the assessee had advanced loan to its AE in US Dollar,that it had charged interest @ 6%-7.5% per annum,that the LIBOR rate as on last date of 2008 was 2.49%, that the AE of the assessee had taken loan from a third party namely ANB and Amro Bank Ltd.,that the bank had charged LIBOR +200 bps,that the assessee had benchmarked the transaction accordingly,that in the subsequent AY.(AY 2012-13),the AO himself had made no adjustment on account of interest rate transaction even though the facts and circumstances were identical to the facts to the year under appeal.We also find that in the cases,relied upon by the assessee,the Tribunal has taken a consistent view that LIBOR+ 200bps or 300bps interest rate has to be considered arm s length rate of interest.In the case under consideration after adding 300 bps the rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. Technimont ICB Pvt.Ltd. (ITA/6394/Mum/ 2012-AY 08-09 dt.28/8/13),he held that the AO had rightly charged the guarantee commission @3%. 4.2. Before us,the AR stated that the assessee had charged guarantee commission in respect of bank loan (from FLS US and FLS-UK) and performance guarantee (from PIPAL-US and FSL UK),that it had obtained quotations from ICICI Bank for charging guarantee commission, that the FAA,while adjudicating appeal for AY.2010-11 had made no adjustment on performance guarantee transactions, that he had upheld financial guarantee @1.5% for that year, that the TPO for the AY.2012-13,had adopted rate of 1.5% to bench mark the guarantee fee,(finance guaran - tee),that for performance guarantee no adjustment was made.The AR relied upon more than a dozen cases,adjudicated upon by the Tribunal,wherein the identical issue was decided against the department.The DR left the issue to the discretion of the Bench. 4.3. We have heard the rival submissions and perused the material before us.We find that the assessee had given guarantee in respect of bank loans in case of two of its AE.s, that it had also given guarantee in respect of performance guarantee for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... becomes higher by virtue of the amount of guarantee and the company becomes more leveraged including by virtue of its debit equity ratio which would ultimately effect the cost of borrowing. The Dubai subsidiary was newly formed was unknown had a low credit rating and as such the Transfer Pricing Officer concluded that if the guarantee had not been provided, ICICI Bank would not have lent and advanced monies to the associated enterprise. Relying upon the principles of computing guarantee fees in a case of General Electric Capital Canada Inc. v. Her Majesty, The Queen [2009] TCC 563, the difference between the bank rate and the prime lending rate it showed a return for bearing risk followed by other banks during the relevant year was 6 per cent., while the average prime lending rate was 11.35 per cent. This shows that the return for bearing the risk was around 5.35 per cent. It was also found in another case taken up for comparison that a public company with limited liability in which 51 per cent. stake was held by Dutch State, FMO (Nederlands Financierings Maatschappij Voor Ontwikkelingslanden N. V.) had charged 2.5 per cent. for furnishing guarantee in the case of Rabo India Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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