9911796707
TMI Blog2022 (9) TMI 1593X X X X Extracts X X X X X X X X Extracts X X X X ..... before carrying out the exercise of benchmarking such international transactions vis- -vis the arm's length price/interest of the comparable uncontrolled transactions. In assessee s case, though the coupon rate agreed is at 15% and 14.25%, there is a moratorium clause whereby assessee is having a moratorium period of 60 months for Tranche-I, 58 months 11 days for Tranche-II and 24 months for Tranche-III. The assessee in the TP study has also given a detailed working for arriving at effective rate of interest (Annexure 3.1 to 3.3 of TP study) after considering the said moratorium period. Lower authorities have not considered the said working and have rejected the same on the ground that assessee has debited the Profit Loss account with interest accrued at 15% / 14.25% and also on the ground that there is a pre-payment of interest clause in the agreement. This, in our considered view, is not the correct approach since the time value of money needs to be considered and debit to the Profit Loss account is not the relevant factor for determination of ALP. Assessee has not paid any amount towards interest to the AE till date and as per the submissions of the ld AR, the assessee is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of real estate development. The assessee has issued NCDs in three tranches to its AE. During the year under consideration, the assessee has accrued on these NCDs @ 15% p.a. for first two tranches and @ 14.25% p.a. for the third tranche as per details given below:- International Transactions Amount (INR) Interest accrued on NCDs issued in Tranche I 10,02,00,000 Interest accrued on NCDs issued in Tranche II 6,67,50,000 Interest accrued on NCDs issued in Tranche III 6,34,12,501 Total 23,03,62,501 4. The assessee benchmarked the said transactions using CUP method. In the TP study, the assessee used Comparable Uncontrolled Price (CUP) method as the most appropriate method for determining the arm s length price (ALP) of the interest rate on NCDs issued to the AE. As per the comparables chosen by the assessee, the median rate of interest was worked out at 11.45%. As per the terms agreed with the AE the assessee is having a moratorium period of 60 months for Tranche-I, 58 months 11 days for Tranche-II and 24 months for Tranche-III. The assessee in the TP study computed the effective rate of interest taking into account the moratorium period worked out at 11.5% for Tranche-I, 11.61% for Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprises has been incurred by the assessee. Pertinently, the loans in question, namely, Technical knowhow loan, Foreign currency cash loan and ECB loan have been availed by the assessee from Goodyear Tyre and Rubber Co. an associated enterprise based in USA. Assessee has made a payment of interest of Rs.2,96,25,682/- in respect of the aforesaid three loans. Regarding the technical knowhow loan, the details are that the assessee company entered into a technical assistance and license agreement with its associated enterprise on 21.06.1994 for provision of technical assistance in manufacturing of Earthmover tyres, Radial tyres, Radial passenger tyres, etc.. In terms of the said agreement, assessee was required to pay a lump sum technical knowhow fee of USD one crore. The said agreement was subsequently amended vide a supplementary agreement dated 01.10.2003, whereby the agreed amount of technical knowhow fee payable to Goodyear USA was reduced to USD 67,50,000/-. On 11th July, 1996 assessee entered into an agreement with the associated enterprise in terms of which the technical knowhow fee payable was converted into a loan which was initially interest-free for the first seven years per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the seven years it shall be repaid in five equal installments together with interest @ 12%. A perusal of the RBI approval reveals that other terms and conditions in respect of above foreign currency cash loan are similar to those prescribed for technical knowhow loan, which we have succinctly enumerated in the earlier paras. 18. Thirdly, the ECB loan raised by the assessee from its associated enterprise, namely, Goodyear Tyre and Rubber Co., USA is of a sum of USD 90,00,000. The said loan has been raised vide an agreement dated 12.09.2003 and such financing is to meet the working capital requirements. In terms of the said agreement, a copy of which has been placed in the Paper Book at page 438, the borrowing is repayable in three installments by 15.03.2006, 31.12.2006 and 31.12.2007. The ECB loan was availed by the assessee at the interest rate of LIBOR plus 3% as notified by the RBI in its Circular No.36 dated 14.11.2003, which was prevailing when the assessee raised such ECB loan. 19. In the background of the aforesaid terms and conditions of the loans raised from the associated enterprise, assessee paid interest aggregating to Rs.2,96,25,683/- to its associated enterprises. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee before us to the effect that in order to benchmark the interest cost incurred by the assessee it would be appropriate to evaluate the effective rate of interest payable by the assessee on the technical knowhow loan and foreign currency cash loan raised from the associated enterprise. Notably, the said argument has been raised by the assessee not only before us but also before the TPO as is evident from para 5 of the order of the TPO wherein the arguments of the assessee have been reproduced. The plea of the assessee is that the rate of interest of 12% for the current year cannot be considered in isolation by ignoring the interest-free moratorium period of initial nine years. The Ld. Representative for the assessee submitted in the course of hearing that although the rate of interest payable during the five year repayment schedule is 12%, but if the initial interest-free period of nine years is considered, the effective rate of interest would be even lower than the rate of 5.46% considered by the TPO as an arm's length rate. In this context, our attention has been drawn to a working furnished in the course of the hearing. With respect to the technical knowhow loan, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into consideration the specific terms and conditions of the assessee s borrowings. Therefore, in-principle, we are agreement with the assessee for the proposition that it would be appropriate to compute effective rate of interest in respect of international transaction of loan entered into with the associated enterprise before carrying out the exercise of benchmarking such international transactions vis- -vis the arm's length price/interest of the comparable uncontrolled transactions. On this aspect, the Ld. Departmental Representative reiterated the stand of the TPO to the effect that the Transfer Pricing Regulation of India provide that for comparability of an uncontrolled transaction with an international transaction, data relating to the relevant financial year alone is to be used and that the data relating to other periods not being more than two years prior to such financial year can be considered only if such data revealed facts which have an influence on determination of the transfer pricing in relation to the transaction being compared. In other words, as per the Ld. Departmental Representative, the aforesaid approach of considering the data of other years would not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Hitachi Home Life Solutions (India) Ltd. (supra) applies. Therefore, in conclusion, without opining on the other arguments raised by the assessee, we deem it fit and proper to delete the addition with respect to the interest paid on Technical knowhow and foreign currency cash loans on the ground that the effective rate of interest incurred by the assessee is lower than the arm's length rate of interest considered by the TPO. Thus, on this aspect assessee succeeds. 8. The Hon ble Tribunal in the above decision has clearly laid out the ratio that it would be appropriate to compute effective rate of interest in respect of international transaction of loan entered into with the associated enterprise before carrying out the exercise of benchmarking such international transactions vis- -vis the arm's length price/interest of the comparable uncontrolled transactions. We notice that the assessee has brought to the notice of the lower authorities that decision of the Hon ble Tribunal which has not been taken into consideration. In assessee s case, though the coupon rate agreed is at 15% and 14.25%, there is a moratorium clause whereby assessee is having a moratorium period of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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