DCIT, New Delhi v. M/s. Delhi Call Centers Pvt. Ltd., New Delhi

ITA 6132/DEL/2014 | 2009-2010
Pronouncement Date: 30-11-2017 | Result: Partly Allowed

Appeal Details

RSA Number 613220114 RSA 2014
Assessee PAN AABCD9233C
Bench Delhi
Appeal Number ITA 6132/DEL/2014
Duration Of Justice 3 year(s) 20 day(s)
Appellant DCIT, New Delhi
Respondent M/s. Delhi Call Centers Pvt. Ltd., New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 30-11-2017
Appeal Filed By Department
Tags No record found
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 30-11-2017
Assessment Year 2009-2010
Appeal Filed On 10-11-2014
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : I - 2 NEW DELHI BEFORE SH. AMIT SHUKLA JUDICIAL M EMBER AND SH. O.P. KANT ACCOUNTANT MEMBER ITA NO. 6132 /DE L/ 2014 ASSESSMENT YEAR: 2009 - 10 DCIT CIRCLE - 10(1) NEW DELHI VS. M/S. DELHI CALL CENTERS PVT. LTD. I - 10 LAJPAT NAGAR II NEW DELHI PAN : AABCD9233C ( APPELLANT ) (RESPONDENT) DEPARTMENT BY SH. SANJAY KUMAR YADAV SR.DR ASSESSEE BY SH. TARUN ROHATAGI CA DATE OF HEARING 14.11.2017 DATE OF PRONOUNCEMENT 30.11.2017 ORDER PER O.P. KANT A. M. : THIS A PPEAL BY THE R EVENUE IS DIRECTED AGAINST ORDER DATED 15/08/2014 OF THE LD. COMMISSIONER OF INCOME - TAX ( APPEALS) - XX NEW DELHI FOR ASSESSMENT YEAR 2009 - 10 RAISING FOLLOWING GROUNDS: 1. ON THE FACTS IN THE CIRCUMSTANCES & THE CASE HAS ERRED IN DIRECTING TO CHARGE THE LIBOR RATE OF INTEREST INSTEAD OF INTEREST RATE OF 16% ON RECEIVABLE FOR DETERMINING THE ADJUSTMENT IN RESPECT OF DELAYED RECEIPTS FROM AES. 2. THE APPELLANT CRAVES TO LEAVE TO ADD ALTER OR AMEND ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF HEARING. 3. THE ORDER OF THE LEARNED CIT(A) BEING CONTRARY TO THE FACTS ON RECORD AND THE SETTLED POSITION OF LAW BE SET ASIDE AND THAT OF THE ASS ESSING OFFICER BE RESTORED. 2 ITA NO. 6132/DEL/2014 2. THE FACTS IN BRIEF OF THE CASE ARE THAT THE ASSESSEE COMPANY WAS ENGAGED IN PROVIDING CALL CENTRE SERVICES TO COMPANIES OUTSIDE INDIA. FOR THE YEAR UNDER CONSIDERATION THE ASSESSEE FILED RETURN OF INCOME ON 26/09/2009 DECL ARING TOTAL INCOME OF RS. 3 36 510/ - . THE CASE WAS SELECTED FOR SCRUTINY AND NOTI CE UNDER SECTION 143(2) OF THE INCOME - TAX ACT 1961 (IN SHORT THE ACT ) WAS ISSUED AND COMPLIED WITH. THE LD. ASSESSING OFFICER NOTICED INTERNATIONAL TRANSACTIONS OF PROVIDING CALL C ENTRE OUTBOUND SERVICES BY THE ASSESSEE TO THE ASSOCIATED ENTERPRISES (AES) AND MADE A REFERENCE TO THE LD. TRANSFER PRICING OFFICER (TPO) FOR DE TERMINATION OF ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. THE LEARNED TPO ACCEPTED THE ARM S LENGTH PRICE OF THE SAID TRANSACTION OF CALL CENTRE SERVICES DETERMINED BY THE ASSESSEE HOWEVER HE TREATED THE PENDING RECEIVABLES OF THE ASSESSEE FROM ITS AES AS ANOTHER INTERNATIONAL TRANSACTION AND BENCHMARKED IT ON COMPARABLE UNCONTROLLED PRICE (CUP) METHOD. THE LEARNED TPO ALLOWED CREDIT PERIOD OF SIX MONTHS AND DECIDED THAT ANY RECEIVABLE S P ENDING BEYOND SIX - MONTH S PERIOD SHOULD BE TREATED AS LOAN TO THE AE AND HE APPLIED AN INTEREST RATE OF 16% IN VIEW OF THE PRIME LENDING RATE OF STATE BANK OF INDIA ( SBI ) + 300 BASIS POINT ( TO TAKE INTO ACCOUNT VARIOUS FACTORS/RISK ETC) AND PROPOSED AN ADJUSTMENT OF RS. 50 22 173/ - . THE LD. AO INCLUDED THE SAID ADJ USTMENT IN THE DRAFT ASSESSMENT ORDER PASSED UNDER SECTION 144C READ WITH SECTION 143(3) OF THE ACT. THE ASSESSEE FILED APPEAL AGAINST THE FINAL ORDER OF THE ASSESSING OFFICER BEFORE THE LD. THE CIT(A) . BEFORE THE LD. CIT(A) THE ASSESSEE ARGUED THAT LON DON INTER - BANK OFFERED RATE ( LIBOR ) OF INTEREST SHOULD BE APPLIED FOR COMPUTING THE ADJUSTMENT ON DELAYED RECEIPT. THE ASSESSEE FURTHER ARGUED THAT CREDIT PERIOD OF 270 DAYS SHOULD BE ALLOWED HOWEVER THE LD. CIT(A) FOUND THE CREDIT OF SIX MONTHS AL LOWED B Y THE ASSESSING OFFICER A S REASONABLE AND SUFFICIENT IN 3 ITA NO. 6132/DEL/2014 THE PRESENT CASE. THE LD. CIT(A) FOLLOWING THE DECISION OF THE TRIBUNAL DELHI BENCH IN THE CASE OF KOHINOOR FOODS L IMITED VS. ACIT IN ITA NO S. 3867 68 69 90 91/2012 DIRECTED THE AO/TPO TO CHARGE LIBOR RATE OF INTEREST ON THE RECEIVABLE S DETERMINING THAT ADJUSTMENT IN RESPECT OF THE DELAYED RECEIPT FROM THE AES. 2.1 AGGRIEVED THE R EVENUE IS IN APPEAL BEFORE THE TRIBUNAL RAISING THE GROUNDS AS REPRODUCED ABOVE. 3. THE ONLY EFFECTIVE GROUND RAISED IS IN RESPECT OF THE RATE OF INTEREST WHICH WOULD BE APPLICABLE ON DELAYED RECEIPT FROM THE AES. 4. THE LEARNED SR. DR RELYING ON THE ORDER OF THE LEARNED AO/TPO SUBMITTED THAT LOAN HAS BEEN DEEMED TO BE GRANTED BY THE I NDIAN ENTITY AND THEREFORE THE RATE OF INTEREST ON LOANS APPLICABLE IN INDIAN MARKET HAS RIGHTLY BEEN APPLIED BY THE LEARNED TPO FOR DETERMINING ARM S LENGTH PRICE OF THE TRANSACTION. 5. THE LD. COUNSEL OF THE ASSESSEE ON THE OTHER HAND RELIED ON THE FIN DING OF THE LEARNED CIT - A AND SUBMITTED THAT LIBOR RATE HAS BEEN ACCEPTED AS ARM S LENGTH PRICE IN CASE OF INTEREST ON OVERSEAS RECEIVABLES PENDING FOR A PERIOD MORE THAN THE PERIOD AGREED. IN SUPPORT OF HIS CONTENTION HE RELIED ON THE DECISION OF THE MUMB AI TRIBUNAL IN TH E CASE OF DY. CIT VS. TECH MAHINDRA LTD. (2011) 12 TAXMANN.COM 13 (MUM.) AN D DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. COTTON NATURALS (I) (P) LTD (2015) 55 TAXMANN.COM 523 (DELHI). 6. WE HAVE HEARD THE RIVAL SUBMIS SION AND PERUSED THE RELEVANT MATERIAL ON RECORD. IN THIS CASE THE ONLY DISPUTE RAISED BEFORE US IS IN RESPECT OF THE RATE OF INTEREST FOR THE PURPOSE OF COMPUTATION OF ARM S LENGTH PRICE. THERE IS NO DISPUTE ON THE ISSUE WHETHER THE RECEIVABLES MORE THAN THE PERIOD AGREED IS AN INTERNATIONAL TRANSACTION ARE NOT. 4 ITA NO. 6132/DEL/2014 7. THE TRIBUNAL IN THE CASE OF KOHINOOR FOODS LTD. (TS - 224 - ITAT - 2014(DEL) - TP) HAS UPHELD THAT LIBOR RATE SHOULD BE APPLIED ON AN INTERNATIONAL LOAN FOR COMPUTING INTEREST. THE RELEVANT FINDIN G OF THE TRIBUNAL IS REPRODUCED AS UNDER: 8.1 THE ADVANCING OF LOAN IN COMMERCIAL CIRCLES TO ADVANCE TO AES OWN BUSINESS IN FOREIGN COUNTRIES AND INTER SE AE S TRANSACTIONS CHARTERED ACCOUNTANT CAN NOT BE AKIN TO FINANCIAL INSTITUTIONS. THEREFORE IN OUR CONSIDERED VIEW TPO HAS ERRED IN SUMMARILY APPLYING THE COMPARABLE OF FINANCIAL INSTITUTIONS AS UNCONTROLLED COMPARABLE TRANSACTION. WE HAVE NO ISSUE OF THE TPO APPLYING THE CUP METHOD . BUT THE PROBLEM ARISES WHEN IN THE NAME OF APPLYING CUP METHOD; A WHOLLY INAPPLICABLE COMPARABLE MODEL APPLIED WHICH LEADS TO DISTORTED RESULTS. IN OUR CONSIDERED VIEW A SIGNIFICANT SECTOR OF MULTI - NATIONAL CORPORATE SET UP INVOLVES CREATION OF SUBSIDIARIES AND ASSOCIATE ENTERPRISES FOR ADVANCEMENT OF THEIR OVERSEAS BUSINESS. THEY HELP THEM IN TERMS OF FINANCE BY OFFERING SOFT LOANS AND SUBSIDIARY LOANS; THEY ARE PRIMARY FOCUSED TO SPREAD THE B USINESS OF THE PRINCIPAL UNIT. IT WOULD HAVE BEEN VERY REASONABLE JUDICIOUS AND APPROPRIATE ON THE PART OF THE TPO TO HAVE LOOKED INTO SUCH TYPE OF TRANSACTIONS AND APPLYING IT AS UNCONTROLLED TRANSACTIONS. IN OUR VIEW R E - COURSING STRAIGHTAWAY TO CRISIL WHICH DEALS IN HARDCORE INSTITUTIONAL FINANCE TRANSACTIONS THAT TOO WITH CLEAR COMMERCIAL OBJECT OF EARNING OUT OF LOANS BEREFT ON OTHER CONSIDERATIONS IS WHOLLY INAPPLICABLE. THERE IS NO DISPUTE ON THE ISSUE THAT THE REAL INCOME THEORY HAS NO APPLICATION TO A FICTIONAL WORKING AS PROVIDED BY SECTION 92 BUT THIS BEING PART OF THE INCOME - TAX ACT THE VALID CONSIDERATION FOR PROPERLY ASSESSING A TRANSACTION CANNOT BE GIVEN A GO BY. EVERY FICTION HAS LIMITS TO ITS APPLICATION. IN VIEW THEREOF WE HOLD THAT THE RATE OF 13.49% APPLIED SOLELY RELYING UPON A THIRD PARTY OPINION BY APPLYING ON UNCONTROLLED SET OF TRANSACTION IS FACTUALLY NOT CORRECT AND CANNOT BE ACCEPTED. 68.2 IN CONSIDERATION OF THE CONTENTIONS CASE LAWS AND FOREGOING OBSERVATIONS WE ARE OF THE VIEW THAT THE CORRECT COMPARABLE WHICH CAN BE APPLIED IN THESE FACTS AND CIRCUMSTANCES IS OF LIBRO RATE WHICH IS INTERNATIONALLY RECOGNIZED. IT IS THE MOST APPROPRIATE COMPARABLE FOR THE RELEVANT PERIODS AND BEING REASONABLE AND SCIENTIFIC UNCONTROLLED COMPARABLE TO BE APPLIED TO THE ASSESSEE S LOAN TRANSACTIONS. WE DIRECT THE AO/TPO TO WORK OUT THE TP ADJUSTMENT ACCORDI NGLY DEPENDING ON THE LIBOR RATE APPLICABLE TO YEAR FROM YEAR. IN VIEW THEREOF THE GROUNDS RAISED BY THE ASSESSEE ON THIS ISSUE ARE PARTLY ALLOWED. 8. SIMILAR FINDING HAS BEEN GIVEN BY THE TRIBUNAL IN FOLLOWING DECISIONS: 5 ITA NO. 6132/DEL/2014 1 . SIVA INDUSTRIES & HOLDINGS LTD (ITA NO. 2148/MDS/2010) 2 . FOUR SOFT LTD. (ITA NO. 1495/HYD/2010) 3 . VARROC ENGINEERING PVT. LTD. (I.T.A NO. 2482/PN/2012) 4 . TRICORN INDIA LTD. ( TS - 266 - ITAT - 2014(MUM) - TP) 9. W HEN WE ADVERT TO THE FACT OF THE INSTANT CASE WE FIND FROM T HE ORDER OF THE LD. TPO THAT THE ASSESSEE HAS RAISED INVOICES IN AUSTRALIAN DOLLAR AS WELL AS IN US DOLLAR AND THUS THE MONEY WHICH WAS DUE FROM THE ASSOCIATED ENTERPRISES WAS IN CURRENCY OF AUSTRALIAN DOLLAR AND USA D OLLAR. IN THE CASE OF TECH MAHINDRA ( SUPRA) IT HAS BEEN HELD BY THE TRIBUNAL THAT ARM S LENGTH INTEREST RATE SHOULD BE TAKEN FROM THE COUNTRY OF THE BORROWER/DEBTOR. 10. FURTHER WE NOTE THAT T HE HON BLE DELHI HIGH COURT IN THE CASE OF COTTON N ATURALS (I)(P) LTD. (SUPRA) HAS HELD THAT INTEREST RATES SHOULD BE THE MARKET DETERMINE INTEREST - RATE APPLICABLE TO THE CURRENCY CONCERNED IN WHICH THE LOAN HAS TO BE REPAID AND INTEREST RATE SHOULD NOT BE COMPUTED ON THE BASIS OF THE INTEREST PAYABLE ON THE CURRENCY OR LEGAL TENDER OF THE PLACE O R COUNTRY OF THE RESIDENCE OF EITHER PARTY . THE RELEVANT FINDING OF THE HON BLE HIGH COURT IS REPRODUCED AS UNDER: 39. THE QUESTION WHETHER THE INTEREST RATE PREVAILING IN INDIA SHOULD BE APPLIED FOR THE LENDER WAS AN INDIAN COMPANY/ASSESSEE OR THE LENDING RATE PREVALENT IN THE UNITED STATES SHOULD BE APPLIED FOR THE BORROWER WAS A RESIDENT AND AN ASSESSEE OF THE SA ID COUNTRY IN OUR CONSIDERED OPINION MUST BE ANSWERED BY ADOPTING AND APPLYING A COMMONSENSICAL AND PRAGMATIC REASONING. WE HAVE NO HESITATION IN HOLDING THAT THE INTEREST RATE SHOULD BE THE MARKET DETERMINED INTEREST RATE APPLICABLE TO THE CURRENCY CONC ERNED IN WHICH THE LOAN HAS TO BE REPAID. INTEREST RATES SHOULD NOT BE COMPUTED ON THE BASIS OF INTEREST PAYABLE ON THE CURRENCY OR LEGAL TENDER OF THE PLACE OR THE COUNTRY OF RESIDENCE OF EITHER PARTY. INTEREST RATES APPLICABLE TO LOANS AND DEPOSITS IN TH E NATIONAL CURRENCY OF THE BORROWER OR THE LENDER WOULD VARY AND ARE DEPENDENT UPON THE FISCAL POLICY OF THE CENTRAL BANK MANDATE OF THE GOVERNMENT AND SEVERAL OTHER PARAMETERS. 6 ITA NO. 6132/DEL/2014 INTEREST RATES PAYABLE ON CURRENCY SPECIFIC LOANS/ DEPOSITS ARE SIGNIFICANTLY UNIVERSAL AND GLOBALLY APPLICABLE. THE CURRENCY IN WHICH THE LOAN IS TO BE RE - PAID NORMALLY DETERMINES THE RATE OF RETURN ON THE MONEY LENT I.E. THE RATE OF INTEREST. KLAUS VOGEL ON DOUBLE TAXATION CONVENTIONS (THIRD EDITION) UNDER ARTICLE 11 I N PARAGRAPH 115 STATES AS UNDER: - THE EXISTING DIFFERENCES IN THE LEVELS OF INTEREST RATES DO NOT DEPEND ON ANY PLACE BUT RATHER ON THE CURRENCY CONCERNED. THE RATE OF INTEREST ON A US $ LOAN IS THE SAME IN NEW YO RK AS IN FRANKFURT - AT LEAST WITHIN THE FRAMEWORK OF FREE CAPITAL MARKETS (SUBJECT TO THE ARBITRAGE). IN REGARD TO THE QUESTION AS TO WHETHER THE LEVEL OF INTEREST RATES IN THE LENDER'S STATE OR THAT IN THE BORROWER'S IS DECISIVE THEREFORE PRIMARILY DEPEN DS ON THE CURRENCY AGREED UPON (BFH BST.B1. II 725 (1994) RE. 1 ASTG). A DIFFERENTIATION BETWEEN DEBT - CLAIMS OR DEBTS IN NATIONAL CURRENCY AND THOSE IN FOREIGN CURRENCY IS NORMALLY NO USE BECAUSE FOR INSTANCE A US $ LOAN ADVANCED BY A US LENDER IS TO HIM A DEBT - CLAIM IN NATIONAL CURRENCY WHEREAS TO A GERMAN BORROWER IT IS A FOREIGN CURRENCY DEBT (THE SITUATION BEING DIFFERENT HOWEVER WHEN AN AGREEMENT IN A THIRD CURRENCY IS INVOLVED). MOREOVER A DIFFERENCE IN INTEREST LEVELS FREQUENTLY REFLECTS NO MORE THAN DIFFERENT EXPECTATIONS IN REGARD TO RATES OF EXCHANGE RATES OF INFLATION AND OTHER ASPECTS. HENCE THE CHOICE OF ONE PARTICULAR CURRENCY CAN BE JUST AS REASONABLE AS THAT OF ANOTHER DESPITE DIFFERENT LEVELS OF INTEREST RATES. AN ECONOMIC CRITER ION FOR ONE PARTY MAY BE THAT IT WANTS IF POSSIBLE TO AVOID EXCHANGE RISKS (FOR EXAMPLE BY MATCHING THE CURRENCY OF THE LOAN WITH THAT OF THE FUNDS ANTICIPATED TO BE AVAILABLE FOR DEBT SERVICE) SUCH AS TAKING OUT A US $ LOAN IF THE PROCEEDS IN US $ ARE EXPECTED TO BECOME AVAILABLE (SAY FROM EXPORTS). IF AN EXCHANGE RISK WERE TO PROVE INCAPABLE OF BEING AVOIDED (SAY BY FORWARD RATE FIXING) THE APPROPRIATE COURSE WOULD BE TO ATTRIBUTE IT TO THE ECONOMICALLY MORE POWERFUL PARTY. BUT EXACTLY WHERE THERE IS NO SPECIAL RELATIONSHIP' THIS WILL FREQUENTLY NOT BE POSSIBLE IN DEALINGS WITH SUCH PARTY. CONSEQUENTLY IT WILL NORMALLY NOT BE POSSIBLE TO REVIEW AND ADJUST THE INTEREST RATE TO THE EXTENT THAT SUCH RATE DEPENDS ON THE CURRENCY INVOLVED. MOREOVER I T IS QUESTIONABLE WHETHER SUCH AN ADJUSTMENT COULD BE BASED ON ART. 11 (6). FOR ART. 11(6 ) AT LEAST ITS WORDING ALLOWS THE AUTHORITIES TO ELIMINATE HYPOTHETICALLY' THE SPECIAL RELATIONSHIPS ONLY IN REGARD TO THE LEVEL OF INTEREST RATES AND NOT IN REGARD TO OTHER CIRCUMSTANCES SUCH AS THE CHOICE OF CURRENCY. IF SUCH OTHER CIRCUMSTANCES WERE T O BE INCLUDED IN THE REVIEW THERE WOULD BE DOUBTS AS TO WHERE THE LINE SHOULD BE DRAWN I.E. WHETHER AN EXAMINATION SHOULD BE ALLOWED OF THE QUESTION OF WHETHER IN THE ABSENCE OF A SPECIAL RELATIONSHIP (I.E. FINANCIAL POWER STRONG POSITION IN THE MARKE T ETC. OF THE FOREIGN CORPORATE GROUP MEMBER) THE BORROWING COMPANY MIGHT NOT HAVE COMPLETELY REFRAINED FROM MAKING INVESTMENT FOR WHICH IT BORROWED THE MONEY. 40. THE AFORESAID METHODOLOGY RECOMMENDED BY KLAUS VOGEL APPEALS TO US AND APPEARS TO BE THE REASONABLE AND PROPER PARAMETER TO DECIDE UPON THE QUESTION OF APPLICABILITY OF INTEREST RATE. THE LOAN IN QUESTION WAS GIVEN IN FOREIGN CURRENCY I.E. US $ 7 ITA NO. 6132/DEL/2014 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 WHI CH 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 INTERES T RATES VARY AND ARE THUS DEPENDENT ON THE FOREIGN CURRENCY IN WHICH THE REPAYMENT IS TO BE MADE. THE SAME PRINCIPLE SHOULD APPLY. 41. COUNSEL FOR THE REVENUE HAD MADE REFERENCE TO CHAPTER 10 OF THE U.N. TRANSFER PRICING MANUAL RELEVANT PORTION OF WHICH R EADS: - 10.4.10. FINANCIAL TRANSACTIONS 10.4.10.1. INTERCOMPANY LOANS AND GUARANTEES ARE BECOMING COMMON INTERNATIONAL TRANSACTIONS BETWEEN RELATED PARTIES DUE TO THE MANAGEMENT OF CROSS - BORDER FUNDING WITHIN GROUP ENTITIES OF AN MNE GROUP. TRANSFER PRICING OF INTER - COMPANY LOANS AND GUARANTEES ARE INCREASINGLY BEING CONSIDERED SOME OF THE MOST COMPLEX TRANSFER PRICING ISSUES IN INDIA. THE INDIAN TRANSFER PRICING ADMINISTRATION HAS FOLLOWED A QUITE SOPHISTICATED METHODOLOGY FOR PRICING INTER - COMPANY L OANS WHICH REVOLVES AROUND: SS EXAMINATION OF THE LOAN AGREEMENT; SS A COMPARISON OF TERMS AND CONDITIONS OF LOAN AGREEMENTS; SS THE DETERMINATION OF CREDIT RATINGS OF LENDER AND BORROWER; SS THE IDENTIFICATION OF COMPARABLE THIRD PARTY LOAN AGREEMENTS: AND SS SUITAB LE ADJUSTMENTS TO ENHANCE COMPARABILITY. 10.4.10.2. THE INDIAN TRANSFER PRICING ADMINISTRATION HAS COME ACROSS CASES OF OUTBOUND LOAN TRANSACTIONS WHERE THE INDIAN PARENT HAS ADVANCED TO ITS ASSOCIATED ENTITIES (AE) IN A FOREIGN JURISDICTION EITHER INTEREST FREE LOANS OR LOANS AT LIBOR (LONDON INTERBANK OFFERED RATE) OR EURIBOR (EURO INTERBANK OFFERED RATE). THE MAIN ISSUE BEFORE THE TRANSFER PRICING ADMINISTRATION IS BENCHMARKING OF THESE LOAN TRANSACTIONS TO ARRIVE AT THE ALP OF THE RATES OF INTERE ST APPLICABLE ON THESE LOANS. THE INDIAN TRANSFER PRICING ADMINISTRATION HAS DETERMINED THAT SINCE THE LOANS ARE ADVANCED FROM INDIA AND INDIAN CURRENCY HAS BEEN SUBSEQUENTLY CONVERTED INTO THE CURRENCY OF THE GEOGRAPHIC LOCATION OF THE AE THE PRIME LENDI NG RATE (PLR) OF THE INDIAN BANKS SHOULD BE APPLIED AS THE EXTERNAL CUP AND NOT THE LIBOR OR EURIBOR RATE. 10.4.10.3. A FURTHER ISSUE IN FINANCIAL TRANSACTIONS IS CREDIT GUARANTEE FEES. WITH THE INCREASE IN OUTBOUND INVESTMENTS THE INDIAN TRANSFER PRICIN G ADMINISTRATION HAS COME ACROSS CASES OF CORPORATE GUARANTEES EXTENDED BY 8 ITA NO. 6132/DEL/2014 INDIAN PARENTS TO ITS ASSOCIATED ENTITIES ABROAD WHERE THE INDIAN PARENT AS GUARANTOR AGREES TO PAY THE ENTIRE AMOUNT DUE ON A LOAN INSTRUMENT ON DEFAULT BY THE BORROWER. THE GUARA NTEE HELPS AN ASSOCIATED ENTITY OF THE INDIAN PARENT TO SECURE A LOAN FROM THE BANK. THE INDIAN TRANSFER PRICING ADMINISTRATION GENERALLY DETERMINES THE ALP OF SUCH GUARANTEE UNDER THE COMPARABLE UNCONTROLLED PRICE METHOD. IN MOST CASES INTEREST RATES QUO TES AND GUARANTEE RATE QUOTES AVAILABLE FROM BANKING COMPANIES ARE TAKEN AS THE BENCHMARK RATE TO ARRIVE AT THE ALP. THE INDIAN TAX ADMINISTRATION ALSO USES THE INTEREST RATE PREVALENT IN THE RUPEE BOND MARKETS IN INDIA FOR BONDS OF DIFFERENT CREDIT RATING S. THE DIFFERENCE IN THE CREDIT RATINGS BETWEEN THE PARENT IN INDIA AND THE FOREIGN SUBSIDIARY IS TAKEN INTO ACCOUNT AND THE RATE OF INTEREST SPECIFIC TO A CREDIT RATING OF INDIAN BONDS IS ALSO CONSIDERED FOR DETERMINATION OF THE ARM'S LENGTH PRICE OF SUCH GUARANTEES. 10.4.10.4. HOWEVER THE INDIAN TRANSFER PRICING ADMINISTRATION IS FACING A CHALLENGE DUE TO NON - AVAILABILITY OF SPECIALIZED DATABASES AND OF COMPARABLE TRANSFER PRICES FOR CASES OF COMPLEX INTER - COMPANY LOANS AS WELL AS MERGERS AND ACQUISITI ONS THAT INVOLVE COMPLEX INTER - COMPANY LOAN INSTRUMENTS AS WELL AS AN IMPLICIT ELEMENT OF GUARANTEE FROM THE PARENT COMPANY IN SECURING DEBT. 42. THE FIRST PARAGRAPH QUOTED ABOVE RIGHTLY STIPULATES THAT INTER - COMPANY LOANS WOULD REQUIRE EXAMINATION OF THE LOAN AGREEMENT COMPARISON OF THE TERMS AND CONDITIONS OF LOAN AGREEMENTS THE DETERMINATION OF CREDIT RATING OF THE LENDER AND THE BORROWER IDENTIFICATION OF COMPARABLE THIRD PARTY LOAN AGREEMENTS AND SUITABLE ADJUSTMENTS SHOULD BE MADE. IN ADDITION TO THE AFORESAID FACTORS THE COMPARABILITY ANALYSIS SHOULD ALSO TAKE INTO ACCOUNT THE BUSINESS RELATIONSHIP AND THE FUNCTIONS PERFORMED BY THE SUBSIDIARY AE FOR THE PARENT COMPANY. IN THE PRESENT CASE WE ARE NOT CONCERNED WITH PARAGRAPH 10.4.10.3 OF THE UNITED NATIONS TRANSFER PRICING MANUAL. HOWEVER WE ARE UNABLE TO AGREE WITH THE POSITION SET OUT AND ASSERTED IN PARAGRAPH 10.4.10.2 OF THE MANUAL. THE REASONING GIVEN THEREIN IS CONTRARY TO THE ACCEPTED INTERNATIONAL TAX JURISPRUDENCE AND THE RULES ADOPT ED AND APPLIED. THERE IS NO JUSTIFICATION OR A COGENT REASON FOR APPLYING PLR FOR OUTBOUND LOAN TRANSACTIONS WHERE THE INDIAN PARENT HAS ADVANCED LOAN TO AN AE ABROAD. CHAPTER 10 OF THE UNITED NATIONS PRACTICAL MANUAL ON TRANSFER PRICING RELATES TO COUNTRY PRACTICES. THE SAID CHAPTER SETS OUT AN INDIVIDUAL COUNTRY'S VIEW POINT AND ITS EXPERIENCES FOR THE INFORMATION OF THE READERS. THE SAID CHAPTER DOES NOT REFLECT THE VIEW OF THE MANUAL. PARAGRAPH 10.1 OF THE UNITED NATIONS PRACTICAL MANUAL ON TRANSFER PRI CING FOR DEVELOPING COUNTRIES READS: - 9 ITA NO. 6132/DEL/2014 10.1. PREAMBLE BY THE SUBCOMMITTEE ON TRANSFER PRICING: PRACTICAL ASPECTS 10.1.1. IN THE FIRST NINE CHAPTERS OF THIS MANUAL THE SUBCOMMITTEE HAS SOUGHT TO PROVIDE PRACTICAL GUIDANCE ON THE APPLICATION OF TRANSFER PRICING RULES BASED ON ARTICLE 9(1) OF THE UN MODEL TAX CONVENTION AND THE ARM'S LENGTH PRINCIPLE EMBODIED IN THAT ARTICLE. WITH REGARD TO CHAPTERS ONE THROUGH NINE THE SUBCOMMITTEE HAS DISCUSSED AND DEB ATED THE MERITS OF THE GUIDANCE THAT IS PROVIDED AND WHILE THERE MAY BE SOME DISAGREEMENT ON CERTAIN POINTS FOR THE MOST PART THE SUBCOMMITTEE IS IN AGREEMENT THAT THE GUIDANCE IN THOSE CHAPTERS REFLECTS THE APPLICATION OF THE ARM'S LENGTH PRINCIPLE AS E MBODIED IN THE UN MODEL TAX CONVENTION. 10.1.2. THE SUBCOMMITTEE RECOGNIZES THAT INDIVIDUAL COUNTRIES PARTICULARLY DEVELOPING AND EMERGING ECONOMIES STRUGGLE AT TIMES WITH THE DETAILS OF APPLYING THESE TREATY - BASED PRINCIPLES IN A WIDE VARIETY OF PRACTI CAL SITUATIONS. IT THEREFORE SEEMED APPROPRIATE TO ALLOW REPRESENTATIVES OF INDIVIDUAL COUNTRIES AN OPPORTUNITY TO SET OUT THEIR INDIVIDUAL COUNTRY VIEWPOINTS AND EXPERIENCES FOR THE INFORMATION OF READERS. THOSE INDIVIDUAL COUNTRY VIEWS ARE CONTAINED IN T HIS CHAPTER. IT SHOULD BE EMPHASIZED THAT IT DOES NOT REFLECT A CONSISTENT OR CONS ENSUS VIEW OF THE SUBCOMMITTEE. 43. NORMALLY THERE WOULD BE A DIFFERENCE BETWEEN THE LENDING RATE AND BORROWING RATE IN EACH COUNTRY. SOME AUTHORS AND WRITERS SUGGEST THAT THE AVERAGE OR MID - POINT BETWEEN THE TWO SHOULD BE TAKEN. HOWEVER OTHERS LIKE KLAUS VOGEL HAVE SUGGESTED THAT ECONOMIC PURPOSE AND SUBSTANCE OF THE DEBT - CLAIM OR DEBT FOR WHICH GRANTING OF CREDIT CALLS FOR THE LENDING RATE WOULD BE DETERMINATIVE. THUS I N CASE OF A CAPITAL INVESTMENT THE BORROWING RATE WILL APPLY WHEREAS IN CASE OF CREDIT ALLOWED TO A CUSTOMER ON SALE OF GOODS THE LENDING RATE WOULD APPLY. WE DO NOT DEEM IT NECESSARY TO ENTER INTO THIS CONTROVERSY AND EXPRESS OUR VIEW AS REGARDS THE SA ME . 11. IN THE CASE IN HAND BEFORE US THE INVOICE S HAVE BEEN RAISED IN AUSTRALIAN D OLLARS AND US D OLLARS AND THESE AMOUNTS ARE RECEIVABLES TO THE ASSESSEE THEREFORE THE RECEIVABLES ARE PAYABLE TO THE ASSESSEE IN RESPECTIVE CURRENCIES. THUS FOLLOWING THE FINDING OF THE HON BLE D ELHI HIGH COURT IN THE CASE OF COTTON NATURALS (I) (P ) LTD . (SUPRA) WE DIRECT 10 ITA NO. 6132/DEL/2014 THE AO/TPO TO COMPUTE THE INTEREST RATE APPLYING THE LIBOR RATE PREVALENT DURING THE RELEVAN T PERIOD IN CASE OF AUSTRALIAN D OLLAR/ US D OLLA R PLUS SUITABLE BASIS POINT KEEPING IN VIEW THE CREDIT SCORE OF THE AES. ACCORDINGLY WE RESTORE THE ISSUE OF COMPUTATION OF ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF THE RECE IVA BLES IN THE CASE OF THE ASSESSEE IN VIEW OF THE ABOVE DIRECTION S . THE ASSESSEE SHALL BE AFFORDED ADEQUATE OPPORTUNITY OF BEING HEARD. THE GROUND OF THE APPEAL IS ACCORDINGLY ALLOWED PARTLY FOR STATISTICAL PURPOSES. 12. IN THE RESULT APPEAL OF THE R EVENUE IS ALLOWED PARTLY FOR STATISTICAL PURPOSES. THE DECISION IS PRONOUN CED IN THE OPEN COURT ON 3 0 T H NOV . 201 7 . S D / - S D / - ( AMIT SHUKLA ) ( O.P. KANT ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 3 0 T H NOVEMBER 201 7 . RK / - (D.T.D) COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT 4 . CIT(A) 5 . DR ASST. REGISTRAR ITAT NEW DELHI