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92 B - Meaning of international transaction.—

(1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.

(2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise.

Explanation  —For the removal of doubts, it is hereby clarified that —


the expression "international transaction" shall include —


capital financing, including any type of long-term or short-term  borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;

1. Loan given to subsidiary company by Holding Indian Company on Interest – it is covered under sec 92 for the purpose of transfer pricing adjustment. Interest should be charged at LIBOR i.e. London Inter Bank Offer Rate based CUP Method is bench marking in respect of loan given to its subsidiary/AE as decided in Case Laws.

(a)  Aurionpro Solutions Ltd. Vs Addl. CIT (Mumbai ITAT)

(b) Hinduja Global Solutions Ltd. V Addl. CIT (Mumbai Tribunal) - .The case of the assessee was that LIBOR as on 31.03.2008 was 2.49% against which the assessee has charged interest @ 6% p.a. In other words, interest charged by the assessee is much higher than the corresponding arm's length LIBOR even from an Indian transfer pricing perspective. It is not in dispute that the loan has been denominated in US dollars

(c) Tata Autocomp System Ltd. V Asst CIT (Mumbai)

(d) Cotton Naturals (I) P Ltd. Vs Dy. CIT (Delhi HC) - The rate of interest should be  LIBR and Markup not the Interest Rate prevailing in India i.e. SBI Interest Rate.

(e) Siva Industries Ltd. & Holding Ltd. Vs Asst CIT (Chennai)- assessee had granted a loan of Rs. 50 crores to its subsidiary in Mauritius for the purpose of making investments and has charged interest @ 6 per cent per annum.

The Assessing Officer had taken a view that the US$ denominated LIBOR rate could not be considered as the loan was given from India and the prime lending rate in India was to be considered. It was the submission that consequently the Assessing Officer had determined the rate at 11.75 per cent

Once the transaction between the assessee and the Associated Enterprises is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, we are of the view that it LIBOR rate which has to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the Associated Enterprises.

(f) Shiva Venturs Ltd. Vs Asst CIT (Chennai Tribunal) - The assessee had advanced USD25 Million to its wholly owned subsidiary Avis Venture Ltd.,(AVL) Mauritius @ 6% p.a.

The TPO was of the view that interest charged @ 6% does not represent the ALP of the interest charged by the assessee on the loan amount of 25 Million US Dollars given to the subsidiary. The TPO vide order dated 28-10-2010 held that based on the opportunity cost, it is appropriate to treat interest @ 14% as the ALP of the transaction.

The case of the assessee is squarely covered by the order of the co-ordinate bench of the Tribunal wherein the London Inter-bank Offered Rate (LIBOR) has been accepted. Accordingly, this ground of appeal of the assessee is allowed.

(g) VIP Industries Ltd. Vs Add CIT (ITAT Mumbai) - During the year under consideration, the assessee advanced loan of US$ 33,50,000/- equivalent to INR 16,98,78,500 to its AE namely Carlton Travel Goods Ltd., U.K.. The assessee charged interest at the rate of 10% per annum on the said loan advanced to AE. The assessee adopted CUP as the most appropriate method for bench marking its interest charged to the AE and applied LIBOR of 2.93% as ALP. Thus the assessee claimed that the interest charged to AE is higher than the LIBOR and, therefore, the same is at arm's length.

The TPO was of the view that assessee is a tested party and, therefore, the LIBOR cannot be considered for bench marking of outbound loan from India. Accordingly, the TPO adopted the average cost of the funds of the assessee + 3% which was worked out at 13.97% per annum as arm's length interest rate. Consequently, the TPO made an adjustment on account of arm's length interest rate being difference between the interest charged by the assessee at the rate of 10% and arm's length interest rate of 13.97%

The assessee is charging the interest from AE at the rate of 10% which is more than the interest rate paid by the assessee on the foreign currency loan from SBI at LIBOR + 205 BPS. Therefore, even if the arm's length interest adopted as 5.71% which is LIBOR + 2.5%, the assessee's interest charged to the AE at the rate of 10% is more than the arm's length interest rate and accordingly no adjustment on account of arm's length of interest is warranted

2. Guarantee Commission – Normally HO gives guarantee to bank as well as financial institution for the subsidiary company finance requirement at their country. It is normal corporate practice. There can be two situations in that case for the purpose of Arms Length Price for the international transaction.

A. Holding Company does not bear any cost for the providing guarantee to subsidiary or AE – in that case, this transaction out of preview of International transaction for the purpose of ALP as decided by Delhi high court in Bharti Airtel Ltd. The court held that: Since corporate guarantee issued for benefit of AE does not involve any costs to assessee and it does not have any bearing on profits, income, losses or assets of enterprise, it has to be kept outside ambit of 'international transaction' to which ALP adjustment can be made.

B. Holding Company bear cost of providing guarantee to AE – in that case, these transaction is within International Transaction require ALP and Transfer Pricing adjustment has to be made equal to Charged paid to Bank by Holding Company for  the purpose of bank Guarantee.

(Everest Kanto Cylinder Ltd Vs ACIT – ITAT Mumbai)


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CA Ram Bajaj
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