Delhi ITAT Deletes ALP Adjustment Qua Interest On Loan To AEs, Considering Tenure & Commercial Prudence

The Bench comprising Saktijit Dey (Vice President) and Dr. B.R.R. Kumar (Accountant Member) observed that “With regard to the guarantee in the agreement between Citibank, Singapore and JPSPL, it was submitted that JPSPL has obtained loan from Citibank, Singapore of around USD 2,90,00,000/-. No bank would provide such a huge amount of loan without taking any security in return, the security being any asset or any guarantee. In such circumstances, JPSPL has obtained loan backed by assessee's guarantee. The TPO has not brought on record any facts or material which depicts that the interest rate charged by bank is impacted by the securities offered by the borrower of the loan”. (Para 11)

As per the brief facts of the case, the assessee advanced loan to Singapore AE and charged interest @ 1 months LIBOR plus 300 basis points i.e. 3.23% per annum. The assessee benchmarked the transaction using CUP method, considering loan taken by AE from Citibank NA (@ 6 months LIBOR + 225 basis points i.e. 2.937% p.a.) as internal comparable. The TPO however adopted rate of 6 month Libor + 500 basis points i.e., 5.687% p.a., benchmarking interest on basis of Master circular on ECB and trade credits issued by RBI. On appeal, the CIT(A) directed rate of LIBOR +350 points to be considered.

The Bench considered assessee's submission that loan granted to AE is in essence a short-term loan (being repayable on demand and for meeting temporary fund requirement), and loan granted by Citibank is also a short term loan (for a period of 3 months), they are thus aptly comparable.

The Bench also considered assessee's submission that TPO has not brought anything on record to show that interest rate charged by bank is impacted by securities offered by the borrower of the loan, and that assessee holds 30% shareholding of AE and guarantee has been advanced by assessee as a matter of commercial prudence primarily to protect the group's business interest by fulfilling shareholder's obligation.

With respect to the fact that both loan agreements pertain to different FYs, the Bench considered that both transactions pertain to the same period in which LIBOR rates are applied i.e. in 2012.

Therefore, the ITAT concluded that it is comprehensible that interest has been earned by assessee at arm's length rate and accordingly, no adjustment on account of arm's length rate is required to be carried out.

Counsel for Appellant/ Taxpayer: Supriya Mehta

Counsel for Respondent/ Revenue: Manu Chaurasia

Case Title: Maharashtra Seamless Ltd vs DCIT

Case Number: ITA No 7065/Del/2019

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