Interest on sums lent to foreign AE is to be benchmarked at LIBOR and not at domestic prime lending rate

IT/ILT : While benchmarking international transactions where assessee had advanced money to its AE and charged interest, international rates fixed being LIBOR + rate would be applicable and not domestic prime lending rates

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[2015] 54 taxmann.com 384 (Pune - Trib.)

IN THE ITAT PUNE BENCH 'B'

Varroc Engineering (P.) Ltd.

v.

Assistant Commissioner of Income-tax, Circle-1, Aurangabad

Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm’s length price (Adjustments - Interest) - Assessment year 2008-09 - Whether while benchmarking international transactions what has to be seen is comparison between related transactions, i.e., where assessee has advanced money to its associated enterprises and charged interest, then said transaction is to be compared with a transaction as to what rate assessee would have charged, if it had extended loan to third party in foreign country and in that case, international rates fixed being LIBOR + rates would have an application and domestic prime lending rates would not be applicable - Held, yes - Whether where assessee had made borrowings on LIBOR + rates and advanced same at LIBOR + rates, then said transaction was at arm's length price - Held, yes [Para 15] [In favour of assessee]

FACTS

■		The assessee was engaged in the manufacture of polymer engineering and electrical goods and wind power generation.
■		It had raised the loan from Citi Bank on international rates for the purpose of investment in the share application money of its associated enterprises, which in turn was partly converted from capital into loan at interest at the rate of 4.75 per cent.
■		It had benchmarked its international transaction taking international interest rate of the disbursing bank, i.e., Citi Bank.
■		The TPO, however, applied the domestic loan rates, i.e., BPLR rates for benchmarking transaction of charging of interest on the loans advanced to the associated enterprises by the assessee and proposed certain adjustment as arm's length price of the transactions.
■		The DRP upheld the proposition of the TPO and, consequently, the Assessing Officer made an addition being the arm's length price adjustment of the international transactions.
■		On appeal:

HELD

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While benchmarking the international transactions what has to be seen is the comparison between related transactions, i.e., where the assessee has advanced money to its associated enterprises and charged interest, then the said transaction is to be compared with a transaction as to what rate the assessee would have charged, if it had extended the loan to the third party in foreign country. Once there is a transaction between the assessee and its associated enterprises in foreign currency, then the transaction would have to be looked upon by applying the commercial principles with regard to the international transactions. In that case, the international rates fixed being LIBOR+ rates would have an application and the domestic prime lending rates would not be applicable. The assessee has further explained that it had raised the loan from Citi Bank on international rates for the purpose of investment in the share application money of its associated enterprises, which in turn was partly converted from capital into loan. Where the assessee had a comparable of borrowing loan on international rates and advancing to its associated enterprises, then the said comparable was to be applied for benchmarking the transaction of advancing the loan on interest to its associated enterprises. The assessee had charged interest rate of 4.75 per cent on the loan advanced to the associated enterprises. The assessee, on the other hand, claims that it had borrowed the money on LIBOR+ rates, i.e., international rates, which were Japanese based LIBOR+ rates which were lower than the US based LIBOR+ rates. In the totality of the facts and circumstances where the assessee has the internal CUP of operating at international rates available and since the said loan raised by the assessee at international rates was advanced to its associated enterprises, there is no merit in the order of the TPO in applying the domestic loan rates, i.e., BPLR rates for benchmarking transaction of charging of interest on the loans advanced to the associated enterprises by the assessee. Where the assessee had made the borrowings on LIBOR+ rates and advanced the same at LIBOR+ rates, then the said transaction is at arm's length price and there is no merit in any adjustment to be made on this account.