Prolifics Corporation Ltd. v. Dy. CIT

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALPAdjustment for loans to AE--Semantic Space Technologies Limited, presently known as Prolifics Corporation Limited (referred herein as assessee or SSTL) was a global software solutions conglomerate with a track record of providing enterprise project services, quality assurance services and software products to Global 2000 companies. During the year, SSTL acquired JYACC Inc. New York, USA. For the purpose of facilitating the acquisition, SSTL set up a holding subsidiary in United States -- SST, North America Inc. USA ('SST, North America') as a Special Purpose Vehicle (“SPV”). The total purchase consideration to JYACC Inc. USA (now known as Prolifics) was agreed to be paid which was inter alia included loan by SSTL into SST, North America-INR 3,37,12,600. TPO noticed that assessee did not charge any interest on the loans and advances given to its subsidiary. Accordingly, he made adjustment considering loans given to Associated Enterprises. DRP even though took the objections on record, more or less, agreed with the findings of TPO and confirmed the amounts. Held: The commercial considerations advanced by assessee could not be considered while examining the ALP of the transactions. The transaction of providing loans to subsidiary, whether a direct loan or providing credit for initial expenditure, which was stated to be reimbursable, did call for adjustment. Therefore, in principle, the adjustment made on these transactions was approved. As far as the rate of interest was concerned, the AO/TPO had considered the subsequent collection of interest in assessment year 2012-2013 at LIBOR + 4.75 basis points as an internal CUP. This could not be accepted as rate of interest in each year is a dynamic figure which varies according to the period, demand and supply. Since A.E. borrowed funds from Bank, U.K. @ LIBOR + 2.75%, that rate should be considered as ALP of interest and AO was directed to work out the interest at that rate on the loan provided to SSTL, North America.

Income Tax Act, 1961, Section 92C

REFERRED :

FAVOUR : In assessee's favour (Partly).

A.Y. : 2009-2010

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALPAdjustment for corporate guarantee fee--SST, North America, subsidiary of assessee borrowed funds from Bank, UK based on the corporate guarantee provided by SSTL to ICICI Bank, U.K. SSTL also provided a corporate guarantee to the shareholders of JYACC towards the deferred purchase consideration. TPO noticed that assessee did not charge any interest on the loans and advances given to its subsidiary nor charged any guarantee commission on the guarantees provided. The issue of Corporate guarantee given by tax payer, the TPO discussed vide para 8 of the order and calculated the fee of Rs. 2 per cent on the guarantee amount and arrived at adjustment. DRP even though took the objections on reord, more or less, agreed with the findings of TPO and confirmed the amounts. Held: Although the OECD Transfer Pricing Guidelines, 2010 acknowledge the role of the use of money in transfer pricing matters, they do not yet provide specific guidelines regarding how such issues are to be addressed and resolved. Assessee relied on the views expressed by Australian Tax Officer which was issued in 2008. Law has changed subsequently and provisions of Income Tax also were amended so as to include providing guarantees as service to the A.E. However, guarantees involve express guarantee or implied guarantee which increases creditworthiness of AEs, if provided by main company. There is always an inherent risk in providing guarantees. That might be a reason that finance provider insisted on non charging any commission from AE as a commercial principle. This indicate that provision of guarantee always involve risk and there is a service provided to AE in increasing its creditworthiness in obtaining loans in market, be from Financial institutions or from others. There may not be immediate charge on P& L account but inherent risk cannot be ruled out in providing guarantees. Considering the above, there was service rendered to A.E. by providing guarantees and therefore, invoking provisions of T.P. did arise on the facts of the case.

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