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TMI Blog2020 (2) TMI 257X X X X Extracts X X X X X X X X Extracts X X X X ..... ction in two different ways in the hands of two associated enterprises such that there would be arm s length price adjustment at least in the hands of one of the associated enterprises. Hence, the approach adopted by the DRP/TPO is not acceptable. We note that the assessee granted loan and advance to AT S India in foreign currency (Euro) and AT S India repaid principal / paid interest on loan and advance in foreign currency (Euro). Hence, in the instant case, Euro-LIBOR would be the appropriate benchmark that conforms to the arm s length standard under the CUP Method. The assessee applied the Euro-LIBOR rates prevailing during the relevant period for computation of interest payable by AT S India to the assessee and further added credit spread of 350 basis points (net of tax) for loan and 100 basis points for advance. Hence, the interest received by the assessee from AT S India is at arm s length under the CUP Method. In the assessee`s case, the DRP did not mention in his order the comparability analysis prescribed under clause (a) of sub-rule (1) of rule 10B of the Income-tax Rules, 1962. The DRP did not bring on record any comparable uncontrolled transaction under the CUP Metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ORDER PER DR. A. L. SAINI, AM: The captioned appeal filed by the assessee, pertaining to Assessment Year 2013-14 is directed against the fair assessment order passed by Assessing Officer u/s 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as the Act ), which incorporates the directions of the Dispute Resolution Panel u/s 144(5) of the Income Tax Act, dated 19.09.2017. 2. The facts of the case which can be stated quite shortly are as follows: AT S Austria Technologie Systemtechnik Aktiengesellschaft (hereinafter referred to as AT S Austria / assessee) is incorporated in Austria and is a tax resident of Austria. The AT S Austria does not have a permanent establishment in India. The AT S Austria has set up a wholly-owned subsidiary in India namely AT S India Pvt. Ltd. (hereinafter referred to as AT S India ) which is a tax resident of India. The AT S Austria and AT S India are associated enterprises within the meaning of section 92A of the Income-tax Act, 1961. The AT S Austria is regularly filing income tax return in India. The Transfer Pricing Officer (hereinafter referred to as the TPO ) vide order dated 19/12/2016 under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,13,68,273/- made by the AO in respect of receipt of interest on loans and advance granted to AT S India. 5. The brief qua the issue are the AT S India ( borrower ) raised loans / external commercial borrowing (hereinafter referred to as ECB ) from AT S Austria ( lender ). In this connection, AT S Austria entered into loan agreements dated 31st May, 2008 and 1st December, 2008, with AT S India for advancing the aforesaid ECBs to the latter amounting to Euro 20.8 million and Euro 16.4 million respectively. The aforesaid ECBs were approved by the Reserve Bank of India (hereinafter referred to as the RBI ) under the automatic route as per the guidelines issued by the RBI on ECBs. The borrower obtained Loan Registration Number (LRN) for the said loans as per the guidelines issued by the RBI. The borrower agreed that the rates of interest applicable for the said loans (ECBs) would be LIBOR+350 bps and LIBOR+ 100 bps respectively and the aforesaid interest rates were fixed by complying with the all-in-cost ceilings fixed by the RBI vide circular issued at that material point of time. The said loans had an average maturity period of more than five years. The loan proceeds w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of export advance was computed at INR 2,40,65,389/-. Thus, the ALP adjustments in respect of ECB and advance aggregated to INR 3,13,68,273/-. 6. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld DRP/TPO and other materials brought on record. Before us, Rituparna Sinha, ld Counsel for the assessee, begins by pointing out that as disclosed in Form No. 3CEB of AT S India for the AY 2013-14, the international transactions involving payment of interests on ECB and export advance by AT S India to AT S Austria were at arm s length under the CUP Method. The TPO accepted that the aforesaid international transactions were at arm s length under the CUP Method in the hands of AT S India and did not recommend any ALP adjustment in respect thereof in the order issued under section 92CA(3) of the Act to AT S India. Therefore, where the transaction has been accepted at arms -length in the case of borrower (AT S India) and no ALP adjustment was made, the same should be treated at arms -length in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer pricing could not be pressed into service in this case. The Special Bench rejected the above holistic view taken by the assessee and held that provision of sub-section (3) of section 92 of the Act did not contemplate taking of a holistic view i.e. considering lowering of the overall profit or increasing overall loss for the group companies taken together. The provision of sub-section (3) of section 92 of the Act would be applied to the non-resident assessee independent of the taxability of its Indian associated enterprise. Hence, the computation of arm s length interest income in the hands of the non-resident assessee would not trigger the provision of sub-section (3) of section 92 of the Act. The ld DR pointed out that in the instant case, AT S India paid interests to the non-resident assessee on loan which were benchmarked by AT S India by applying the CUP Method and the TPO had duly accepted the arm s length nature of the interest payments under the CUP Method in the hands of AT S India, but this does not mean that adjustment should not be made in the hands of AT S Austria (Assessee). Therefore, the arms length price (ALP) adjustment is necessary in the hands o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lying the CUP Method and the TPO had duly accepted the arm s length nature of the interest payments under the CUP Method in the hands of AT S India. In view of this, the aforesaid decision of the Special Bench is not applicable on the facts of the non-resident assessee s case (AT S Austria) under consideration. 9. We note that the assessee granted loan and advance to AT S India in foreign currency (Euro) and AT S India repaid principal / paid interest on loan in foreign currency (Euro). The assessee company adopted Euro-LIBOR as appropriate benchmark that conforms to the arm s length standard under the CUP Method. The assessee (AT S Austria ) applied the Euro-LIBOR rates prevailing during the relevant period for computation of interest payable by AT S India to the assessee and further added credit spread of 350 basis points (net of tax) for loan and 100 basis points for advance and claimed that the interest received by the assessee (AT S Austria) from AT S India is at arm s length under the CUP Method. We note that in the case of foreign currency loan advanced by one associated enterprise to the other, LIBOR is the appropriate benchmark interest rate which conforms to the arm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble High Court has held that the Chapter X of the Income-tax Act, 1961 and Transfer Pricing rules contained in the Income-tax Rules, 1962, do not permit the Revenue authorities to restructure actual business transactions that are legitimate in nature (i.e. to re-write the character and nature of a legitimate transaction). The Hon ble High Court has rejected the reasoning given by the TPO that the transfer pricing adjustment could restructure the transaction to reflect maximum return that a party could have earned and that would be the yardstick or the benchmark for determining the interest payable by the subsidiary AE. The Hon ble High Court has held that the above is not what Chapter X of the Act and Rules mandate and stipulate. The aforesaid provisions permit transfer pricing adjustment so as to bring to tax what would have been paid for the transaction in the same or similar comparable circumstances by an independent third party. Finally, the Hon ble High Court has held that the substantial question of law mentioned in the decision is answered against the Revenue. 10. We note that lending money is not one of the main businesses of the assessee (AT S Austria) and AT S India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conformed to the arm s length standard under the CUP Method. We note that LIBOR is the appropriate benchmark interest rate for intra-group loans denominated in foreign currency and hence, the arm s length interest rate determined by the DRP at LIBOR plus 450 basis points, based on restructuring of the international transaction under consideration, has no legal basis in the light of the decision rendered by the Hon ble High Court in the matter of CIT vs. Cotton Natural (supra). Therefore, the arms length price adjustment made by DRP/TPO needs to be deleted. 11. We note that another judgment on the identical facts was delivered by the Hon ble High Court of Rajasthan in the matter of CIT vs. Vaibhav Gems Ltd dated 13th October, 2017 reported in [2017] 88 taxmann.com 12 (Raj). In this case the assessee advanced loan to associated enterprise in foreign currency on which no interest was charged. The TPO proposed ALP adjustment at the rate of LIBOR plus 2% credit spread in respect of the aforesaid loan. The Tribunal confirmed the adjustment prevailing at the rate of LIBOR plus 2% on account of interest free loans provided by Vaibhav Gems Ltd to its associated enterprise for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be accepted. The Hon ble High Court, having considered that the Tribunal adopted EURIBOR rate as benchmark interest rate, confirmed the action of the Tribunal and dismissed the revenue s appeal. It is pertinent to note that the Hon ble Rajasthan High Court, while rendering the aforesaid decision in the matter of Vaibhav Gems Ltd (supra), had taken into consideration the decision dated 15th February, 2015, of the Hon ble High Court of Bombay in the matter of CIT v. Tata Autocomp Systems Ltd (supra). The Hon ble Rajasthan High Court rejected the principle enunciated by the Hon ble High Court of Bombay in the matter of Tata Autocomp Systems Ltd (supra) and strongly relied upon the decision of the Hon ble High Court of Delhi in the matter of Cotton Naturals (supra). We note that the decision of the Hon ble Delhi High Court in the case of CIT v. Cotton Naturals (I) (P) Ltd (supra) and the decision of the Hon ble Rajasthan High Court in the case of CIT vs. Vaibhav Gems Ltd (supra) go in favour of the assessee. However, the Hon ble Bombay High Court in the case of CIT v. Tata Autocomp Systems Ltd held that the arm s length interest rate would be determined based on the benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P has noted that the TPO relies upon a booklet Corporate Rating Criteria issued by Standard Poor s in the year 2006 for arriving at the credit rating of CC+ or C of the AE. The booklet prescribes credit rating based on various ratios like EBIT interest coverage, return on capital etc. and also credit ratings based on size of the corporate. However, the Income-tax Act, 1961, read with the Transfer Pricing Rules prescribing for computation of arm s length price has not authorised the AO to assign credit rating to corporate AEs. Therefore, the Ld. DRP has held that the action of the TPO is arbitrary and not as per law. The Ld. DRP, however, applies the CBDT s safe harbour rules in the case of lending between AEs wherein the CBDT has opined that addition of additional 3% (amount of loan exceeding ₹ 50 Crore) on account of credit rating and risk of borrower AE would be added to the base rate of interest charged on loans. The Jurisdictional Tribunal has held that instead of the base rate of 8% (which is based on lending rates of banks within India for commercial borrowing), it would be appropriate to apply LIBOR rate (i.e. not the domestic lending rate). Regarding c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s than those which would have been made by persons entering into similar transactions with unrelated parties in comparable circumstances. It signified that the aforesaid transactions did not cause erosion of tax base of India and hence, were at arm s length. That is, once it was admitted by the TPO that the payments of interest on ECB and advance were at arm s length in the hands of AT S India for the assessment year 2013-14 (i.e. the said transactions did not result in shifting of profit out of Indian tax jurisdiction in the hands of AT S India), it was unsustainable for the TPO to hold that the same international transactions as aforesaid resulted in shifting of profit out of Indian tax jurisdiction in the hands of the assessee for the same assessment year as mentioned herein above and to make arm s length price adjustment in the hands of the assessee (AT S Austria) in respect of the said interests. The DRP therefore erred in directing ALP adjustment in respect of the aforesaid interest on loan and advance in the hands of the assessee. 14. The Indian Transfer Pricing Laws contained in Chapter X of the Act has not contemplated determination of arm s length price of an inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Method. In the assessee`s case, the DRP did not mention in his order the comparability analysis prescribed under clause (a) of sub-rule (1) of rule 10B of the Income-tax Rules, 1962. The DRP did not bring on record any comparable uncontrolled transaction under the CUP Method for substantiating that the interest rate of LIBOR plus 450 basis points conformed to the arm s length standard under the CUP Method. Therefore, taking into account these facts and circumstances as narrated above we delete the upward adjustment of INR 3,13,68,273/- to the income of the assessee. 15. Ground No. 4 to 9 are directed against the arm s length price adjustment of INR 9,48,760/- made by the AO in respect of recovery of information technology ( IT ) service cost from AT S India. 16. Facts of the case which can be stated quite shortly are as follows. The assessee entered into the IT Cost Pooling Agreement with its group companies including AT S India under which all the parties to the aforesaid agreement combined together for financing the object of arranging IT products and related services primarily from unrelated IT companies. It is pertinent to note that the assessee, in order to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee provided requisite services on cost to cost basis. The ld Counsel relied on the decision of the Hon ble Kolkata Tribunal in AT S India vis- -vis AT S Austria s own case for the assessment years 2002-03 and 2003-04. The ld Counsel pointed out that the AO, on the same facts and circumstances of the case as stated herein above for the assessment year under consideration, alleged that the services provided were in the nature of fees for technical services under section 9(1)(vii) of the Act. The AO rejected the assessee s contention that the payment constituted reimbursement of expenditure to AT S Austria. Since the assessee did not deduct tax at source, the AO disallowed the entire payment under section 40(a)(i) of the Act. On appeal, the CIT(A) sustained the order of the AO. On further appeal by assessee the Tribunal noted that AT S Austria entered into agreements with several companies (IBM, Microsoft, SAP) for utilizing their products. In turn, it permitted the group companies to utilize those products and the total payments made to the service providers were allocated to the group companies which actually utilised the services. Placing reliance inter alia on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e share of cost to the assessee which did not include any profit element. The payment made by AT S India to the assessee is in the nature of reimbursement of cost whereby AT S India paid its due share of the expenses incurred by the assessee on the IT system maintained under the IT Cost Pooling Agreement. Hence, the recovery of cost in the hands of the assessee could not be income chargeable to tax in India. 21. We note that assessee entered into IT Cost Pooling Agreement with its group companies including AT S India under which all the parties to the aforesaid agreement combined together for financing the object of arranging IT products and related services primarily from unrelated IT companies (IBM, Microsoft, SAP etc.).The cost incurred by the assessee for arranging IT products and related services was allocated on actual basis to all the parties to the agreement using appropriate allocation keys as mentioned in the aforesaid agreement. No profit element was added to the actual cost for the purpose of allocation of the same to the parties to the aforesaid agreement. No third party was given access to the IT products and related services arranged by the assessee under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d against the arm s length price adjustment of INR 9,72,959/- made by the TPO/DRP in respect of receipt of corporate guarantee fee from AT S India. 24. When this appeal was called out for hearing, learned counsel for the assessee invited our attention to the order passed by the Division Bench of this Tribunal in the case of M/s Emami Limited, in ITA No.1958/Kol /2017, Assessment Year: 2013-14 whereby the issue Corporate guarantee has been discussed and adjudicated in favour of assessee. Learned counsel for the assessee submitted that the present issue is squarely covered by the aforesaid order of the Tribunal, a copy of which was also placed before the Bench. 25. Learned Departmental Representative relied upon the orders of the TPO/AO. 26. We see no reasons to take any other view of the matter than the view so taken by the Division Bench of this Tribunal in the case of M/s Emami Limited, in ITA No.1958/Kol/2017, Assessment Year : 2013-14. In this order, the Tribunal has inter alia observed as follows: 9. After giving our thoughtful consideration to the submission of the parties and perusing the judicial decisions relied upon by the Ld. AR, we find that the iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of the assessee company to earn the interest income by furnishing the corporate guarantee to the associated enterprises. We note that in the judgment of the Co-ordinate Bench of ITAT Ahmadabad, in the case of Micro Link Limited vs. ACIT [TS-568-ITAT-2015] (Ahd) wherein the Co-ordinate Bench has held that corporate guarantee does not constitute international transaction as per section 92B of the Act as amended by the Finance Act, 2012. The relevant extracts of the judgment is reproduced as under: On a conceptual note, thus, there is a valid school of thought that the corporate guarantees can indeed be a mode of ownership contribution, particularly when as is often the case, where such a guarantee is given, it compensates for the inadequacy in the financial position of the borrower; specifically the fact that the subsidiary does not have enough shareholders funds. There can be number of reasons, including regulatory issues and market conditions in the related jurisdictions, in which such a contribution, by way of a guarantee, would justify to be a more appropriate and preferred mode of contribution vis-a-vis equity contribution ... ... In other words, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tends an assistance to the associated enterprise, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under section 92B (1) of the Act .... 11. We rely on the judgment of the Co-ordinate Bench of ITAT, Delhi in the case of Bharti Airtel Ltd. vs. ACIT in I.T.A. No. 5816/Kol/2012, wherein the definition of international transaction in view of the amendments, vide Finance Act, 2012, had been discussed and it was held that the provision of corporate guarantee is not an international transaction. The relevant extract of the judgment is reproduced as under: Para 23 .... The issue whether giving a corporate guarantee amounts to an international transaction' has not been raised or discussed in the cases where ALP adjustments have been upheld and therefore those decisions cannot be put against the taxpayer ..... Para 27.... The Explanation inserted vide Fina ..... X X X X Extracts X X X X X X X X Extracts X X X X
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