Aurionpro Solutions Ltd vs. ACIT (ITAT Mumbai)
Transfer Pricing: Even business advances have to be benchmarked on Libor ALP
The
assessee, an Indian company, gave loans of Rs. 15.65 crores to its AEs
in USA, Singapore and Bahrain. It claimed that the said loans were
"working capital advances" given for commercial consideration to secure
business and that no interest was recoverable on it. The TPO applied the
CUP method and
determined the ALP of the advances at LIBOR plus 3% mark
up. The DRP held that only inbound loans (ECBs) 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 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, HELD reversing
the DRP:
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).
See
also Cotton Naturals (ITAT Del) & contrast with Evonik Degussa,
Nimbus Communication 139 TTJ 214 (Mum) & Patni 141 TTJ 190 (Pune)