Arm’s length rate of interest is the rate prevalent in country of AEs where loan is received/consumed and not the country whose enterprise advances loans
ABCAUS Case Law Citation:
ABCAUS 3063 (2019) (07) ITAT
Important Case Laws Cited/relied upon by the parties:
CIT Vs. Tata Autocomp Systems Ltd. (2015) 374 ITR 516 ( Bom.)
CIT Vs. The Great Eastern Shipping Co. Ltd. (2018) 301 CTR 662 (Bom.)
The instant appeal by the assessee was directed against the final assessment order passed by the Assessing Officer (AO) u/s 143(3) read with section 144C(13) of the Income tax Act, 1961 (the Act) The only grievance of the assessee was taking interest rate of 17.50% as arm’s length interest rate for loans advanced by the assessee to its Associated Enterprises (AEs).
In the case of the assessee, certain international transactions had been reported in Form No. 3CEB. The Assessing Officer made reference to the Transfer Pricing Officer (TPO) for determining the arm‟s length price (ALP) of the international transactions.
The TPO observed that the assessee had availed External Commercial Borrowings (ECB) from ICICI Bank, Singapore for establishing three entities in foreign. The assessee had also availed Long Term Rupee Loans carrying rates of interest between 12% to 15.25%. The TPO also noted that though the assessee was paying interest, but it did not charge analogous interest from its AEs.
Accordingly, considering loans to its AEs as international transactions in terms of section 92B(1) of the Act, the TPO determined arm’s length rate of interest at 11.35% resulting in transfer pricing adjustment. The Assessing Officer made the transfer pricing addition in the draft assessment order.
The assessee took this matter to the DRP, which revised upwards the arm’s length rate of interest on the basis of 300 basis points above the prime lending rate in India.
Aggrieved by such an addition, the assessee approached the Tribunal on the question if interest on loans advanced by the assessee to its AEs was at ALP?
The Tribunal observed that the assessee had worked out the arm’s length interest on the basis of rates of interest prevalent in the countries in which the AEs availed loan from the assessee. The Tribunal noted that the rate of interest actually charged by the assessee was much more than the rate of interest prevalent in the countries in which the assessee’s subsidiaries are situated and this fact had also been accepted by the Settlement Commission and not controverted by the Revenue.
The Tribunal noted the ratio laid down by the Hon’ble jurisdictional High Court wherein it was held that the interest free loans extended by a company to its AEs coming within the ambit of `International Transaction” and arm’s length rate of interest, would be determined on the basis of rate of interest being charged in the country where the loan is received/consumed.
Similar view had been reiterated by the Hon’ble High Court holding that the arm’s length rate of interest in the case of loans advanced to the AEs would be determined on the basis of rate of interest charged in the countries where loan is received/consumed.
The Tribunal opined that in view of the judgments rendered by the Hon’ble jurisdictional High Court, the arm’s length rate of interest is the rate prevalent in the country where loan is received/consumed and not the country whose enterprise advances loans to its AEs
The Tribunal noted that the arm’s length rate of interest as per the rates prevalent in the countries of AEs was lower than the rate assessee actually charged. Therefore it was held that there was no rationale in making any transfer pricing adjustment. The addition was directed to be deleted accordingly.