Are transfer pricing regulations applicable when no income has been derived from the loan transactions?

IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI “K” BENCH, MUMBAI
[Coram: Justice P P Bhatt (President)
and Pramod Kumar (Vice President)]
ITA Nos: 7523/Mum/2014, 5827/Mum/2015, and 484/Mum/2017
Assessment years: 2010-11, 2011-12 and 2012-13

Bennett Coleman & Co Ltd
(As successor to Times Infotainment Media Limited)
The Times of India Building, Dr D N Road,
Mumbai 400 001 [PAN: AACB4373Q]

Appellant

vs

Deputy Commissioner of Income Tax
Circle 1(3), Mumbai

Respondent

Appearances by
J D Mistry, Sr Advocate along-with
Hiten Chande and Pratima D’Souza for the appellant
Anand Mohan, Commissioner (DR), for the respondent
Date of concluding the hearing : August 11 and 18, 2021
Date of pronouncement of the order : August 30, 2021
ORDER

These three appeals pertain to the same assessee, involve some common issues and were heard together. As a matter of convenience, therefore, both of these appeals are being disposed of by way of this consolidated order.

2. While ground nos. 1, 2 and 28 are general in nature, and ground nos. 27 is with respect to additional claim for consideration- which we will deal with separately , all the remaining grounds of appeal are essentially challenging the ALP adjustment in respect of interest-free debt funding of the SPV of the assessee.

3.The core issue requiring our adjudication, in this case, is whether an interest-free debt funding of an overseas company in the nature of a special purpose vehicle (SPV), with a corresponding obligation to use it for the purpose of acquisition of a target company abroad, can be compared with a loan simpliciter, and be, subjected to an arm’s length price adjustment, on the basis of Comparable Uncontrolled Price (CUP) method accordingly,. The issue in dispute is an ALP adjustment of Rs 44.26 crores on account of notional interest on a loan stated to be of this nature by the assessee company to its fully owned foreign subsidiary, which is used as an SPV for overseas acquisitions.

4.This brings us further to the issue of quantification of the adjustment on this account. The assessee has contended before the TPO and now again before the DRP that LIBOR rates should be considered for benchmarking outbound loans from India. During the course of hearing the assessee was required to submit the working of the L1BOR rate along with an appropriate spread. It was stated that TIML India funded its AE TIML Global with GBP 55,999,316 on 27/6/2008. Average rate of six months of GBP LIBOR for the period June, 2008 to March, 2009 was 4.515%. As regards the premium over LIBOR, the assessee relied on ECB search. The arithmetic mean of the spread worked out to 102 basis point. Accordingly, it was claimed that LIBOR plus for this tranche worked out to 5.535%.

5. On a conceptual note, the determination of arm’s length price is essentially an effort to neutralize the impact of intra- AE relationship in a transaction between two associated enterprises as also the impact of controlled conditions in such a transaction. In other words, the entire ALP ascertainment exercise is to determine if a hypothetical or real but same or materially similar transaction was to take place between two independent enterprises in uncontrolled conditions, whether such a hypothetical transaction would have been any different vis-à-vis the subject transaction entered into two associated enterprises, and, if so, to quantify the impact of such variations.

6. Learned representatives fairly agree that the issue in covered in favour of the assessee inasmuch as the Tribunal undisputedly has the powers to admit any new issue, whether or not the same is raised before the authorities below. We, therefore, admit the claim with respect to loss of Rs 5 written off by the assessee, and remit the issue to the file of the Assessing Officer for adjudication on merits. That is precisely what the assessee is praying for.

7. In the result, all the three appeal are allowed in the terms indicated above. Pronounced in the open court today on the 30th day of August 2021.

Please find attached the enclosed file for the full judgement