The Income Tax Appellate Tribunal (ITAT), Mumbai Bench deleted Arm Length Price (ALP) adjustment as London Inter-Bank Offered Rate (LIBOR) cannot always be rate at which intra-bank transactions take place.
The Dispute Resolution Panel (DRP) erred in upholding the action of the learned Deputy Commissioner of Income-tax (Transfer Pricing)(‘TPO’) in computing the arm’s length price of interest paid on foreign currency borrowings by the Appellant,Shinhan Bankfrom its Associated Enterprise (AEs’) by applying LIBOR.
The grievances pertain to ALP adjustments in respect of lending and borrowing transactions that the Indian Permanent Establishment (PE) had with its associated enterprise, namely Shihan Bank Europe GmbH. The assessee had several short term transactions, loans extended for a period between 1 to 13 days, and loans taken for a period between 1 to 178 days.
While the PE has given loans at the rates of LIBOR+ mark up, there are certain borrowings with rates less than even the LIBOR. These rates were justified on the basis of market exigencies, the amounts being transacted for extremely low period transactions, and based on the transactions that the assessee had with the independent parties.
The TPO simply proceeded to apply LIBOR as the ALP, disregarding the assessee’s plea that even the assessee has taken the loans, from independent parties at rates higher than LIBOR, and that LIBOR itself is the average inter-bank lending rate. The assessee is aggrieved and is in appeal before the Tribunal.
A Bench comprising Pramod Kumar (Vice President), and Sandeep S Karhail (Judicial Member) observed that “We deem it fit and proper to delete the impugned ALP adjustments for the short reason that the LIBOR, even amongst the independent banks, cannot always be the rate at which the intra-bank transactions must take place.”
“It cannot be open to the TPO to reject the independent party transactions, which are valid input for application of Comparable Uncontrolled Price Method (CUP), simply because the transactions are entered at a rate higher than LIBOR. Such a simplistic approach cannot meet any judicial approval” the Tribunal added.
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