whether for the benchmarking of the transaction of loan, the interest rate for 6 months LIBOR + 150 Basis Points for a period for more than 5 years is appropriate or not.
IN THE ITAT MUMBAI BENCH ‘K’
Deputy Commissioner of Income-tax, Range 8 (1), Mumbai
AND AMIT SHUKLA, JUDICIAL MEMBER
IT APPEAL NO. 1656 (MUM.) OF 2013
[ASSESSMENT YEAR 2003-04]
AUGUST 12, 2015
N. Padmanaban for the Appellant.
Amit Shukla, Judicial Member – The aforesaid appeal has been filed by the revenue against order dated 16.12.2001 passed by the CIT(A)-15 Mumbai for the quantum of assessment passed u/s 143(3) r.w.s. 144C(3)(a) for assessment year 2008-09 on the following grounds:
|“1.||On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in benchmarking the transaction of loan with RBI guidelines on external commercial borrowings by applying 6 months LIBOR + 150 Basis points for a period of 3 years and 6 months LIBOR + 250 Basis Points for a period of more than 5 years.|
|2.||On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in rejecting the method adopted by the TPO in benchmarking the loan transactions with domestic corporate bonds.|
|3.||On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in ignoring the fact that the cost of borrowing by the assessee is much more than the LIBOR rate and in application of CUP, it has to be seen whether the assessee company would give loan to 3rd party at the same rate at which it has given to the AE”.|
2. The sole issue raised in the revenue’s appeal is, whether for the benchmarking of the transaction of loan, the interest rate for 6 months LIBOR + 150 Basis Points for a period for more than 5 years is appropriate or not.
3. The brief facts are that, the assessee has undertaken transaction of giving unsecured interest free loan to its subsidiary for sum amounting to Rs. 284,887,000/-, that is, to Geodesic Technology Solutions Ltd. (Hong Kong) (GTSL), which is its AE. The TPO has applied interest rate @ 20.72% based on his consideration of credit rating of AE in the Category “B”. He also analyzed financial ratios like, earning per share, debt equity ratio and interest coverage ratio of the AE and based on such credit rating he held that interest rate of 20.72% is to be charged.
4. Before the CIT(A), the assessee submitted that the rate of interest on the international transaction should be taken at LIBOR based. In support of its contention, reliance on various decisions of the Tribunal was relied upon, which has been noted by the CIT(A) at page 12. The Ld. CIT(A) held that, firstly, the justification for manner in which a credit rating of “B” has been assigned to the AE is not a correct approach. There has to be specific information regarding the credit rating assigned by the professionals. Making assumption regarding such credit ratings could result serious distortion of the estimation of risk assumed, hence, the TPO’s basis for arriving and assigning the credit ratings is not correct; secondly, he held that in the international transactions LIBOR is the best basis for benchmarking the interest rate. Since there is no independent CUP rate available to benchmark the said international transaction, accordingly, he looked into RBI guidelines, which are in respect of ECB rates for the borrowing by the Indian corporates for the purposes of capital account transactions. Based on these RBI guidelines, he directed the Assessing Officer to adopt 6 moths Libor + 150 basis points and LIBOR + 250 basis points. The relevant observation and finding of the CIT(A) in this regard is as under:
“xxi. However it is the fact that normal lending does not take place at LIBOR as the same is interbank rate. In the facts of the case there is no independent CUP rate available to benchmark this international transaction. Accordingly it was considered fit to look into the RBI guidelines which are in respect of ECB. ECB rates are for borrowing by the Indian Corporates for the purposes of capital account transactions and accordingly are fully secured against the capital assets which would be acquired through such ECB. Accordingly, the delayed receivables which would in turn constitute loan which would be for the purposes of working capital, there would ordinarily be a further premium to the all in cost ceiling rates. However the all in cost ceiling rates would also be including the other costs relating to the loan transaction such as processing fee etc. In the case on hand there would be no such costs incurred. However, it is considered that the premium that would be warranted to bridge the gap between a secured and unsecured loan would be more than the processing costs etc. Accordingly it is considered suitable to benchmark the appellant’s international transaction with the ceiling prescribed by the RBI for ECB.
xxii. During the relevant period, Reserve Bank of India’s Master Circular No.02/2007-08 dated 2nd July, 2007 on External Commercial Borrowing (ECB) provided that all in cost ceiling for ECB with average maturity period of three years and up to five years is to be 6 months LIBOR plus 150 basis points and for period more than five years the rate Js 6 months LIBOR plus 250 basis points.
xxiii. Accordingly it is directed to work out the amount of adjustment. by applying above rates of interest depending upon the average period by which the money so advanced by the appellant remained with the without allotment of shares. The appellant gets consequential relief”.
5. After hearing both the parties, we find that so far as the basis adopted by the TPO, we agree with the observation and finding of the CIT(A) that manner in which credit rating has been assigned to the AE is not a correct approach, because there is ‘no specific information’ with regard to the AE and making assumption of various factors for giving the credit rating actually destroys the estimation of risk assumed. Since both lender and the borrower are overseas based, therefore, it would not be appropriate to use domestic interest rate to benchmarking interest charged on account of such loan transactions. In absence of any independent study carried on by the assessee or any independent CUP rate applied by the TPO based on comparables, the approach of the CIT(A) to follow the guidelines of the Reserve Bank of India appears to be correct approach for benchmarking the ALP. The aforesaid finding of CIT(A) is thus affirmed and we do not find any reason to deviate from such a conclusion. Accordingly, the order of the CIT(A) on this score is affirmed and the grounds raised by the revenue stands dismissed.
6. In the result, appeal of the revenue stands dismissed.