Transfer Pricing: For outbound loans LIBOR rate should be adopted but not PLR of Indian Banks

3F Industries Limited Vs ACIT (ITAT Visakhapatnam)

The ALP is to be determined on an international transaction ie., on the international loan and not for the domestic loan. Therefore, the comparable in respect of foreign currency loan in international market is LIBOR based and which is internationally recognized and adopted. In the assessee’s own case for the AYs 2008-09 and 2009-10 by the Hon’ble Visakhapatnam Bench, the dispute is with respect to 2% mark-up on the interest on loans granted to the AE which is on back to back basis from EXIM Bank. The Hon’ble Tribunal held that LIBOR should be the basis for benchmarking the interest payments for the purpose of determining the ALP. Therefore, the interest paid to EXIM Bank @ 12.5% on back to back basis was not considered by the Hon’ble Tribunal. In the instant case, the Ld. DRP and Ld. TPO have relied on the non-availability of back to back loan from EXIM Bank during the impugned assessment year. Further, the Ld. DRP has also observed that the long term borrowings and short term borrowings of the assessee have increased and therefore the Ld. DRP has adopted the PLR rates of SBI which stood at 13.85% for the FY 2011-12. In the instant case, we find from the written submissions of the Ld. AR that the average cost of borrowings works out to 10.58% as follows:

The Ld. TPO in para 4.3 of his order detailed the risks borne by the assessee in comparison with the risks borne by the AEs. We find that since the risk borne by the assessee is comparatively higher than the risks borne by the AEs and also the loans advanced to the subsidiary companies is with an intention to procure raw materials through its AEs and not with an intention to earn interest. We find that these loans were given solely for the business expediency and business convenience but not with the aim of earning interest from the subsidiary companies. Various Hon’ble Courts have held that the foreign currency loans to foreign subsidiary companies, the ALP should be computed based on the market determined interest applicable to the currency in which the loan has to be repaid ie., on LIBOR and not on PLR. The Hon’ble Delhi High Court in the case of CIT vs. Cotton Naturals India (P) Ltd reported in 55 Taxmann.com 523 held that for outbound loans the LIBOR rate should adopted but not PLR of Indian Banks. It was also established by the assessee that the loans were given for the purpose of carrying on the business and not with an intention of earning interest. Therefore, we are of the considered view that in the instant case, the prevailing LIBOR rate should be adopted for the interest received on outbound loans.

FULL TEXT OF THE ORDER OF ITAT VISAKHAPATNAM

This appeal is directed against the final order of the Ld. Assessing Officer [AO] passed U/s. 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 [the Act] for the AY 2012-13.

2. Brief facts of the case are that the assessee is engaged in the business of manufacturing of edible oils and its by-products, bakery shortenings and margarine, specialty facts etc filed its return of income for the AY 2012-13 on 29/11/2012 declaring a total income of Rs. 21,76,95,690/-. Subsequently, the assessee revised the return on 16/3/2013 revising the total income toRs. 21,52,87,470/-. Another revised return on 20/11/2013 was filed by the assessee revising the total income of Rs. 24,21,46,720/-. The revised return of income filed on 20/11/2013 was summarily processed. Subsequently, the case was selected for scrutiny under CASS and statutory notices U/s. 143(2) & 142(1) were issued and served on the assessee. During the course of assessment proceedings the Ld. AO noticed that the assessee has entered into various international transactions and hence the matter was referred to the Ld. TPO. The Ld. TPO determined the ALP U/s. 92CA of the Act and made an upward adjustment of Rs. 1,29,82,692/- while determining the Arm’s Length Price [ALP] for interest on working capital loan advanced to Associated Enterprises [AEs] of the assessee. Aggrieved by the draft  assessment order of the Ld. AO, the assessee filed an appeal before the Ld. DRP-1, Bangalore. The assessee made various submissions before the Ld. DRP regarding the interest received from AEs and on the foreign currency loans given to overseas subsidiaries. The Ld. AR contended before the Ld. DRP, the Ld. AO has benchmarked the interest received on outbound foreign currency loans by benchmarking the same to the PLR rates adopted by banking companies in India. The Ld. AR pleaded that in the assessee’s own case for the earlier AYs it has been held by the Hon’ble Tribunal and the Ld. DRP that the prevailing rates of LIBOR should be adopted for the purpose of benchmarking the interest received from subsidiaries. Considering the objections raised by the assessee, the Ld. DRP concluded that facts during the impugned assessment year are distinguishable as back to back loan from EXIM Bank is not available to the assessee which was also not rebutted by the assessee before the Ld. Revenue Authorities or before the Ld. DRP, directed the Ld. TPO to adopt the average PLR for the period relevant to the FY 2011-12 @ 13.85% based on the information available in the corporate website of SBI as against the rate adopted by the Ld. TPO @ 14.75% . Considering the directions of the Ld. DRP, the Ld. AO passed the final assessment order as directed by the Ld. DRP and made upward adjustment of Rs. 1,01,41,718/-. Aggrieved by the final assessment order of the Ld. AO, the assessee filed the present appeal before us.

3. The assessee has raised the following grounds in its grounds of appeal:

“Based on the facts and circumstances of the case and in law, the Ld. AO / Ld. TPO and the Hon’ble Dispute Resolution Panel erred in:

Transfer Pricing Matter:

1. (a) Grounds with respect to adjustment on interest on foreign currency working capital loan, term loan and other loan provided to its subsidiaries of INR. 1,01,41,718/-.

(b) Not appreciating that foreign currency denominated loans should be benchmarked using LIBOR, and not appreciating that the foreign currency loans cannot be benchmarked with domestic rates;

(c) Determining the rate of interest @ 13.85%;

(d) Ignoring the judicial proceedings while determining the arm’s length price.

Other Grounds:

2. Incorrect computation of interest U/s. 234D of the Act of Rs,. 1,06,799/-.

3. Incorrect computation of interest U/s. 244A of the Act of Rs. 65,081/-.

4. Initiating penalty proceedings U/s. 271(1)(c) of the Act.”

4. Ground No. 1 is with respect to adjustment of interest on foreign currency loan provided to its subsidiaries. The Ld. AR argued that the basic raw material for the manufacturing of the products by the assessee company is Shea Nuts, which is to be imported from Africa. The Ld. AR further submitted that the basic raw material viz., Shea Nuts is a spontaneous crop available in the forest of Africa. The Ld. AR further submitted that the local laws in Ghana does not allow foreign companies to procure the same. The Ld. AR further submitted that the in order to source this material the assessee company incorporated its wholly owned subsidiary companies in Ghana, Nigeria and Benin Sari. The Ld. AR further submitted that to leverage on the location savings and to procure the raw material for the purpose of exporting to 3F India (Assessee), the assessee has granted advances in the form of working capital and term loans to its subsidiary companies located outside India. The Ld. AR further submitted that 3F India is bearing all the business risks whereas the AEs are bearing market risks only to the limited extent. The Ld. AR submitted that as per Rule 10B, comparables for the foreign currency loans provided by the assessee to its overseas subsidiaries would have to be loans provided in comparable conditions prevailing in the markets in which the respective parties to the transaction operates. The Ld. AR further submitted that since the loans given to AE are in the foreign currency, LIBOR rate should be adopted. The Ld. AR relied on the following case laws.

1. Judgment of Hon’ble Supreme Court in the case of CIT, Jaipur vs. M/s. Vaibhav Gems Ltd (SLP (CIVIL) Diary No(s). 30849/2018).

2. Decision of the Hon’ble Delhi High Court in the case of CIT vs. Cotton Naturals (I) Pvt Ltd (ITA No. 233/2014 (Delhi HC).

3. Decision of Bombay High Court in the case of CIT vs. M/s. Tata Autocomp Systems Ltd.

4. Decision of the ITAT, Visakhapatnam in the case of CCL Products (India) Limited vs. ACIT

5. The Ld. AR further submitted that in the assessee’s own case for the AY 2007-08, 2008-09, 2009-10, 2010-11, 2013-14, 2014-15, 2016-17 and 2017-18, the Hon’ble Tribunal, Ld. DRP and the Ld. TPO has adopted the prevailing LIBOR rate. The Ld. AR submitted that the principle of consistency as laid down in the case of Radhasoami Satsang vs Commissioner Of Income Tax reported in 1992 AIR 377 (SC) should be adopted. The Ld. AR therefore pleaded that prevailing LIBOR rate shall be benchmarked as ALP for interest received from AEs.

Per contra, the Ld. DR submitted that the loans originated from India to its subsidiaries outside India and hence LIBOR cannot be adopted for rupee loans. The Ld. DR further submitted that LIBOR applies to external commission borrowings or loans taken from outside India. The Ld. DR further submitted that in the previous years in the assessee’s own case there was a back to back arrangement with EXIM Bank which is not available for the current Financial Year. The Ld. DR also invited our attention to the order of the Ld. DRP wherein the Ld. DRP has observed that there is a substantial increase in the borrowings of the assessee and therefore the Ld. DR pleaded that the order of the Ld. DRP shall be upheld.

6. Countering the argument of the Ld. DR, the Ld. AR submitted that the loan rates are higher in Ghana when compared to the loans given by assessee to its subsidiary companies. The Ld. AR further submitted that the average cost of borrowings for the year is 10.58% only.

7. We have heard both the sides and perused the material available on record. Admittedly, the assessee is charging interest on the loans granted to its AEs as follows:

8. The ALP is to be determined on an international transaction ie., on the international loan and not for the domestic loan. Therefore, the comparable in respect of foreign currency loan in international market is LIBOR based and which is internationally recognized and adopted. In the assessee’s own case for the AYs 2008-09 and 2009-10 by the Hon’ble Visakhapatnam Bench, the dispute is with respect to 2% mark-up on the interest on loans granted to the AE which is on back to back basis from EXIM Bank. The Hon’ble Tribunal held that LIBOR should be the basis for benchmarking the interest payments for the purpose of determining the ALP. Therefore, the interest paid to EXIM Bank @ 12.5% on back to back basis was not considered by the Hon’ble Tribunal. In the instant case, the Ld. DRP and Ld. TPO have relied on the non-availability of back to back loan from EXIM Bank during the impugned assessment year. Further, the Ld. DRP has also observed that the long term borrowings and short term borrowings of the assessee have increased and therefore the Ld. DRP has adopted the PLR rates of SBI which stood at 13.85% for the FY 2011-12. In the instant case, we find from the written submissions of the Ld. AR that the average cost of borrowings works out to 10.58% as follows:

9. The Ld. TPO in para 4.3 of his order detailed the risks borne by the assessee in comparison with the risks borne by the AEs. We find that since the risk borne by the assessee is comparatively higher than the risks borne by the AEs and also the loans advanced to the subsidiary companies is with an intention to procure raw materials through its AEs and not with an intention to earn interest. We find that these loans were given solely for the business expediency and business convenience but not with the aim of earning interest from the subsidiary companies. Various Hon’ble Courts have held that the foreign currency loans to foreign subsidiary companies, the ALP should be computed based on the market determined interest applicable to the currency in which the loan has to be repaid ie., on LIBOR and not on PLR. The Hon’ble Delhi High Court in the case of CIT vs. Cotton Naturals India (P) Ltd reported in 55 Taxmann.com 523 held that for outbound loans the LIBOR rate should adopted but not PLR of Indian Banks. It was also established by the assessee that the loans were given for the purpose of carrying on the business and not with an intention of earning interest. Therefore, we are of the considered view that in the instant case, the prevailing LIBOR rate should be adopted for the interest received on outbound loans. We therefore direct the Ld. TPO to calculate the interest as per the prevailing LIBOR rates. Thus, this ground raised by the assessee is allowed.

10. Grounds No. 2, 3 & 4 are with respect to computation of interest and penalty proceedings which are consequential in nature and accordingly they need no adjudication.

11. In the result, appeal filed by the assessee is allowed.

Pronounced in the open Court on the 03^rd February, 2023.