Cotton Naturals (I) (P.) Ltd. v. Dy. CIT

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The Tax Publishers2013 TaxPub(DT) 0797 (Del-Trib) : (2014) 146 ITD 0662 : (2015) 169 TTJ 0685 : (2013) 022 ITR (Trib) 0438 INCOME TAX ACT, 1961 --Transfer pricing--Computation of ALP Bench marking of interest rate of loan in foreign currency--Assessee was a leading manufacture of rider apparel as per transfer pricing document, comparable was controlled price method had been choosen to bench mark sale of apparel as well as interest received on loan. Assessee had contended that since sale of apparel to uncontrolled enterprises were at a lower rate, same were at arm's length. In case of interest, assessee has mentioned that it had received interest at a rate of 4 per cent which was comparable with the export packing credit rate obtained from independent banks in India. Assessee had obtained loan in foreign currency on less than 4 per cent rate of interest however, it had charged interest rate 4 per cent from its AEs. Assessing officer might observed that it had been held that while deciding interest that might be charged on receivables from associated enterprises, Libor rate for calculating interest was not proper, as for calculating cost factor of assessee in India, potential loss suffered by him was to be considered., Instead of US rate, Indian rate was to be adopted. thus, TPO made adjustment on account of interest rate on loan given and received from AEs. Moreover, assessee's profit was deductible under section 10B. *Held:* As assessees profit was exempt/deduction under section 10B there would be no occasion to shift profit outside India in case interest rate at libor was charged being 4 per cent from AEs. As per the transfer pricing document, comparable uncontrolled price method has been chosen to benchmark the sale of apparel as well as interest received on loan. The Transfer Pricing Officer accepted the assessee's submission qua sale of apparel that the same was at arm's length. As regards interest the assessee mentioned that it has received interest at a rate of 4 per cent, which was comparable with the export packing credit rate obtained from independent banks in India. The Transfer Pricing Officer was not in agreement with the above' contention of the assessee. He observed that it is to be seen what the assessee would have earned by giving loans in the Indian market. He noted that lending or borrowing is not one of the main business of the taxpayer. He opined that what is to be considered is the prevalent interest that could have been earned by advancing a loan to an. unrelated party in India with the same financial health as that of the taxpayer's subsidiary. The Transfer Pricing Officer further observed that the taxpayer has not submitted the financial position of the subsidiary, hence the financial health of the subsidiary cannot be judged. The Transfer Pricing Officer further noted that while deciding the interest rate that may be charged on receivables from associated enterprises, Libor rate for calculating interest is not proper. He opined that instead of the US rate, Indian rate is to be adopted. He observed that an independent person in India would expect the maximum return on its investment, and if the lending rate is higher in Indian currency then he would not lend in foreign currency where the lending rate is not so attractive. The Transfer Pricing Officer further noted that it should not be forgotten that, had the associated enterprise of the assessee-company got loan from any bank or financial institution in the place of residency at Libor rate, then why it did not avail of loan at such a rate. The assessing officer observed that, no company in India would like to invest in the form of loan outside India and that also without security as the interest returns in India would be higher than those prevailing in developed markets. Finally, the assessing officer held that interest rate at 17.26 per cent, would be fair and reasonable. [Para 19] We note that comparable uncontrolled price method is the most appropriate method in order to ascertain the arm's length price of the international transaction as that of the assessee. Tribunal agree with the assessee's contention that where the transaction was of lending money in foreign currency to its foreign subsidiaries the comparable transactions, therefore, was of foreign currency lended by unrelated parties. The financial position and credit rating of the subsidiaries will be broadly the same as the holding company. In such a situation, domestic prime lending rate would have no applicability and the international rate fixed being Libor should be taken as the benchmark rate for international transactions. [Para 21] Assessee had given the loan to the associate enterprise in U.S. dollars, and in such a situation when the transaction was in foreign currency, and the transaction was an international transactions, the transaction would have to be looked upon by applying the commercial principles in regard to international transactions. In such a situation domestic prime lending would have no applicability and the international rate fixed being Libor rate would have to be adopted. [Para 22] the assessee has arrangement, for loan with Citi Bank, for less than 4 per cent. However, for loan provided to its associated enterprises it has charged 4 per cent, per annum interest. Hence, adjustment suggested by the Transfer Pricing Officer is not warranted. [Para 24] In this case the loan agreement was for fixed rate of interest. The Libor has been accepted in the decision referred to above as the most suitable benchmark for judging the arm's length price in the case for foreign currency loan. Hence, adjustment as made by the Transfer Pricing Officer is not warranted. [Para 26] In the background of the aforesaid discussions and precedents, we hold that the rate of interest charged by the assessee for the loan transactions with the associated enterprise was the arm's length price. Hence, no transfer pricing adjustment is called for. [Para 27] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 0797 (Del-Trib) : (2014) 146 ITD 0662 : (2015) 169 TTJ 0685 : (2013) 022 ITR (Trib) 0438

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALP Bench marking of interest rate of loan in foreign currency--Assessee was a leading manufacture of rider apparel as per transfer pricing document, comparable was controlled price method had been choosen to bench mark sale of apparel as well as interest received on loan. Assessee had contended that since sale of apparel to uncontrolled enterprises were at a lower rate, same were at arm's length. In case of interest, assessee has mentioned that it had received interest at a rate of 4 per cent which was comparable with the export packing credit rate obtained from independent banks in India. Assessee had obtained loan in foreign currency on less than 4 per cent rate of interest however, it had charged interest rate 4 per cent from its AEs. Assessing officer might observed that it had been held that while deciding interest that might be charged on receivables from associated enterprises, Libor rate for calculating interest was not proper, as for calculating cost factor of assessee in India, potential loss suffered by him was to be considered., Instead of US rate, Indian rate was to be adopted. thus, TPO made adjustment on account of interest rate on loan given and received from AEs. Moreover, assessee's profit was deductible under section 10B. Held: As assessees profit was exempt/deduction under section 10B there would be no occasion to shift profit outside India in case interest rate at libor was charged being 4 per cent from AEs.

As per the transfer pricing document, comparable uncontrolled price method has been chosen to benchmark the sale of apparel as well as interest received on loan. The Transfer Pricing Officer accepted the assessee's submission qua sale of apparel that the same was at arm's length. As regards interest the assessee mentioned that it has received interest at a rate of 4 per cent, which was comparable with the export packing credit rate obtained from independent banks in India. The Transfer Pricing Officer was not in agreement with the above' contention of the assessee. He observed that it is to be seen what the assessee would have earned by giving loans in the Indian market. He noted that lending or borrowing is not one of the main business of the taxpayer. He opined that what is to be considered is the prevalent interest that could have been earned by advancing a loan to an. unrelated party in India with the same financial health as that of the taxpayer's subsidiary. The Transfer Pricing Officer further observed that the taxpayer has not submitted the financial position of the subsidiary, hence the financial health of the subsidiary cannot be judged. The Transfer Pricing Officer further noted that while deciding the interest rate that may be charged on receivables from associated enterprises, Libor rate for calculating interest is not proper. He opined that instead of the US rate, Indian rate is to be adopted. He observed that an independent person in India would expect the maximum return on its investment, and if the lending rate is higher in Indian currency then he would not lend in foreign currency where the lending rate is not so attractive. The Transfer Pricing Officer further noted that it should not be forgotten that, had the associated enterprise of the assessee-company got loan from any bank or financial institution in the place of residency at Libor rate, then why it did not avail of loan at such a rate. The assessing officer observed that, no company in India would like to invest in the form of loan outside India and that also without security as the interest returns in India would be higher than those prevailing in developed markets. Finally, the assessing officer held that interest rate at 17.26 per cent, would be fair and reasonable. [Para 19] We note that comparable uncontrolled price method is the most appropriate method in order to ascertain the arm's length price of the international transaction as that of the assessee. Tribunal agree with the assessee's contention that where the transaction was of lending money in foreign currency to its foreign subsidiaries the comparable transactions, therefore, was of foreign currency lended by unrelated parties. The financial position and credit rating of the subsidiaries will be broadly the same as the holding company. In such a situation, domestic prime lending rate would have no applicability and the international rate fixed being Libor should be taken as the benchmark rate for international transactions. [Para 21] Assessee had given the loan to the associate enterprise in U.S. dollars, and in such a situation when the transaction was in foreign currency, and the transaction was an international transactions, the transaction would have to be looked upon by applying the commercial principles in regard to international transactions. In such a situation domestic prime lending would have no applicability and the international rate fixed being Libor rate would have to be adopted. [Para 22] the assessee has arrangement, for loan with Citi Bank, for less than 4 per cent. However, for loan provided to its associated enterprises it has charged 4 per cent, per annum interest. Hence, adjustment suggested by the Transfer Pricing Officer is not warranted. [Para 24] In this case the loan agreement was for fixed rate of interest. The Libor has been accepted in the decision referred to above as the most suitable benchmark for judging the arm's length price in the case for foreign currency loan. Hence, adjustment as made by the Transfer Pricing Officer is not warranted. [Para 26] In the background of the aforesaid discussions and precedents, we hold that the rate of interest charged by the assessee for the loan transactions with the associated enterprise was the arm's length price. Hence, no transfer pricing adjustment is called for. [Para 27]