Cotton Naturals (I) Pvt. Ltd. v. D CIT (2013) 22 ITR 438(Delhi) (Trib.)

S.92C: Avoidance of tax-Transfer Pricing- ALP of loan transaction has to be determined as per CUP & LIBOR.

The assessee, an Indian company, gave a loan of $ 10,50,000 to its USA based Associated Enterprise (AE) at 4% rate of interest. The TPO adopted the Indian company as the tested party and held that the comparable rates for benchmarking the interest had to be selected from the Indian domain and the rate that the assessee would have earned by giving loans in the Indian market had to be taken as the ALP. It was also held that an addition to the interest rate had to be made for the risk factor. The interest rate was determined at 17.25%. On objection by the assessee, the DRP held that the ALP had to be taken at the PLR of RBI being 13.25%. On appeal by the assessee to the Tribunal, HELD reversing the TPO & DRP:

(i) CUP is the most appropriate method for ascertaining the arm’s length price of an international transaction of lending money. Where the transaction is of lending money in foreign currency to its foreign subsidiaries, the comparable transactions have to be of foreign currency lent 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. On facts, the assessee had an arrangement for loan with CitiBank for less than 4% and on the loan provided to its AE’s it had charged 4% interest. Hence, the adjustment made by the TPO was not warranted (Siva Industries & Holding Ltd. (2011) 59 DTR 182 (Che), Four Soft Ltd. v. Dy. CIT (2011) 62 DTR 308 (Hyd), Dy. CIT v. Tech Mahindra Ltd. (2011) 46 SOT 141 (Mum) & Tata Autocomp Systems ltd. v. ACIT (2012) 73 DTR 220 (Mum) followed);

 (ii) Further, the assessee’s profits are exempt u/s 10B and so there was not a case where the assessee would benefit by shifting profits outside India (Philips Software Centre (P) Ltd. v. Asst. CIT (2008) 26 SOT 226 (Bang) & Ito v. Zydus Altana Health Care(P) Ltd. (2011) 44 SOT 132 (Mum) followed). (A. Y. 2008-09)