CLR Editorial Note: The assessee, an Indian company, had given loans of Rs. 15.65 crores to its Associated Enterprises s in USA, Singapore and Bahrain. In its assessment report, it claimed that the said loans were working capital advances given for commercial consideration to secure the business and that no interest was recoverable on it.
The Transfer Pricing Officer (TPO) applied the CUP method and determined the Arms Length Pricing (ALP) of the advances at LIBOR, plus 3% mark up. The DRP held that only inbound loans i.e. External Commercial Borrowings, taken by the Indian entities from outside India could be benchmarked with LIBOR and that outbound loans had to be benchmarked on the interest rate prevailing in India on corporate bonds. It hence treated the advance as an unrated bond having very high risk and enhanced the assessment by directing the TPO to adopt 14% as the ALP rate.
On appeal by the assessee, the Tribunal reversed the order by the DRP and held:
“The assessee™s argument that the non-charging of interest on the working capital advances to AEs from whom the assessee was getting good business was justified by commercial considerations and that no transfer pricing adjustment is warranted is not acceptable because the existence or non-existence of commercial consideration between the assessee and the AEs is not a required condition for applicability of the TP regulations Further, the advance was not the credit period extended to the AEs in respect of business transactions but was a transaction of advancing loans to the AEs which falls under the ambit of international transaction u/s 92B. In principle, the DRP is justified in its view that the ALP should be determined on the basis of the interest rate that would have been earned by the assessee by advancing loans to an unrelated third party (in India) such as a Fixed Deposit with the Bank. However, since LIBOR has been accepted by the Tribunal in other cases, the ALP should be determined on the basis of LIBOR + 2% (Siva Industries 59 DTR 182 (Che), Tech Mahindra 46 SOT 141 (Mum) & Tata Autocomp Systems 73 DTR 220 (Mum) referred).”
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