The assessee, respondent, an Indian company having head quarter located in Delhi, was engaged in the business of manufacture and exports of rider apparels. It had incorporated its wholly owned subsidiary company named M/s JPC Equestrian for the purpose of marketing and promotion of their exports to USA. The respondent assessee has granted loan of USD 1050000 at interest rate of 4% which was derived using ‘Comparable Uncontrolled Price Method’, to its subsidiary company M/s JPC Equestrian (hereinafter termed as Associate Enterprise as per Income Tax Act). The Transfer Pricing Officer (TPO, for short) hold that the arm‘s length interest rate should be taken as 14% p.a. keeping in view the lending rates in India and also no security offered by the subsidiary to the assessee company. The respondent assessee filed objections before the Dispute Resolution Panel (DRP, for short) against adoption of 14% rate of interest as suggested by the TPO. DRP while substantially rejecting the contentions, granted partial relief in the form of reduction of rate of interest to 12.20%, recording that the loan was given on fixed rate of interest out of shareholder funds. Aggrieved assessee filed the appeal before ITAT and succeeded. The question raised in the present appeal by the Revenue under Section 260A of the Income Tax Act, 1961 was:-
“Whether the Income-Tax Appellate Tribunal was right in following their earlier order for the assessment year 2008-09, dated 8th February, 2013 in ITA No. 5855/Del./2012 and in holding that the interest @ 4% p.a. charged by the respondent assessee from its subsidiary i.e. the Associated Enterprise was arm‘s length rate of interest and the adjustment made in the Assessment Order determining the arms’ length rate of interest at 12.20% was unwarranted?”
Contention of Assessee
The respondent assessee had declared that the interest received at the rate of 4% was comparable with the export packing credit rate obtained from independent banks in India. The respondent assessee also submitted the order copy of Tribunal in favour of the assessee in the identical issue in A.Y. 2008-09.
Contention of Revenue
The revenue emphasized on the observation of TPO that LIBOR rate for calculating interest is not proper. Arms length Interest rate should be the prevalent interest that could have been earned by advancing a loan to an unrelated party in India with the same financial health as that of the tax payer’s subsidiary. He further observed that an independent person in India would expect the maximum return on its investment, and if the lending rate is higher in Indian currency then he would not lend in foreign currency where the lending rate is not so attractive. Assessing Officer also observed that, no company in India would like to invest in the form of loan outside India and that also without security as the interest returns in India would be higher than those prevailing in developed markets.
Held by the Court
The Hon’ble High Court relied on the reasoning of Tribunal in the identical issue decided in assessee’ own case of A.Y. 2008-09 wherein it was held by Tribunal as:-
“We note that CUP method is the most appropriate method in order to ascertain arms length price of the international transaction as that of the assessee. We agree with the assessee’s contention that where the transaction was of lending money in foreign currency to its foreign subsidiaries the comparable transactions, therefore, was of foreign currency Tended 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 Mixed being LIBOR should be taken as the benchmark rate for international transactions.”
The above view of Tribunal was duly supported in case of Siva Industries and Holding Ltd. vs. ACIT. It was held by ITAT that the assessee had given the loan to the associate enterprise in U.S.D. and in such a situation when the transaction was in foreign currency, and the transaction was an international transactions, then the transaction would have to be looked upon by applying the commercial principles in regard to international transactions. In such a situation domestic prime lending would have no applicability and the international rate fixed being LIBOR rate would have to be adopted.
The Court further pronounced that the transaction of lending of money by the respondent-assessee to the subsidiary should not be seen in isolation, but also for the purpose of maximizing returns, propelling growth and expanding market presence. Chapter X and Transfer Pricing rules do not permit the Revenue authorities to step into the shoes of the assessee and decide whether or not a transaction should have been entered. It is for the assessed to take commercial decisions and decide how to conduct and carry on its business. Actual business transactions that are legitimate cannot be restructured.
The ultimate purpose is to ascertain whether the transfer price is the same price which would have been agreed and paid for by unrelated enterprises transacting with each other, if the price is determined by market forces.
What an independent party would have paid under the same or identical circumstances, would be the arm‘s length price or rate of interest and not what the assessed would have earned in case he would have entered into or gone ahead with a different transaction, say with a party in India. The comparison, therefore, has to be with comparables and not with what options or choices which were available to the assessed for earning income or maximizing returns. Importantly, the TPO, DRP and the Assessing Officer have all accepted that the respondent assessee had adopted and applied CUP Method for computing arm‘s length interest payable by the subsidiary AE. To this extent, there is no lis or dispute. The loan in question was given in foreign currency i.e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made.
In the light of the aforesaid discussion, the substantial question of law mentioned above has to be answered against the appellant i.e. the Revenue and in favour of the respondent-assessee. The appeal is accordingly disposed of.