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Case law aithent 1
Case law aithent 1
Case law aithent 1
Case law aithent 1
Case law aithent 1
Case law aithent 1
Case law aithent 1
Case law aithent 1
Case law aithent 1
Case law aithent 1
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Case law aithent 1

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Comparable Uncontrolled Price Method (“CUP”) has been considered as Most appropriate method for determining Arm’s length Price (“ALP”) of an international transaction of grant of interest free loan to …

Comparable Uncontrolled Price Method (“CUP”) has been considered as Most appropriate method for determining Arm’s length Price (“ALP”) of an international transaction of grant of interest free loan to foreign subsidiary company.

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  • 1. Aithent Technologies Pvt Ltd. Vs. ITO (ITAT Delhi)IT APPEAL NO. 3647 (DELHI) OF 2007Comparable Uncontrolled Price Method (“CUP”) has been considered asMost appropriate method for determining Arm’s length Price (“ALP”) of aninternational transaction of grant of interest free loan to foreign subsidiarycompany.
  • 2. Aithent Technologies (P.) Ltd. (“the assessee or the company “), during theyear, has given periodic interest free loans to its AE, totaling to USD1,51,5,000, corresponding to Rs. 73,916,850, and applied Transactional NetMargin Method (“TNMM”) as Most appropriate method (“MAM”) todetermine the ALP of this loan. The Assessee has further argued that this loanwould have fetched an interest of 10% as per the lending rate authorized bythe Reserve Bank of India. The assessee has used overall TNMM as MAM, andthis notional interest has been factored in the software development income.The notional amount of interest of Rs. 31.51 lacs has been deducted from theSoftware development income. The net operating margin ratio, afterdeduction of the notional interest element, was higher than the average netmargins of the comparable, hence concluding that the interest free loan givento its subsidiary was at arms length.
  • 3. The arguments put forth by the assessee, for not charging any interest can besummarized as:-Ø The loan has been granted to promote its own business interests, as theassessee is getting all its business revenue from the transactions entered intowith the Associated Enterprise.Ø The amount of interest is already included into the cost of softwaredevelopment costs charged to the AE.Ø No data is available in the public domain, which could be comparable to thetransactions between these entities.Ø Assessees US based business and revenues have been generated fromAithent Inc., a wholly owned subsidiary of the assessee.Ø Being a 100% holding company, it was the onus of the assessee to investmoney in the subsidiary, either in the form of capital contribution or give it asa loan, as per RBI approval.Ø The loan to the AE had been funded from an amount received from aSingapore based venture capital fund, as investment in the assesseecompany, and does not bear any cost to the assessee.
  • 4. Under the arms length condition, no person would undertake such a bigrisk without expecting any return. No person will give loan without chargingany interest.Ø The amount received from the Singapore based venture capital fund hasbeen received in the F.Y. 2000-01 as share application money. A major partof this share application money amounting to Rs. 32.61 crore remainedinvested in the form of FDRs as in the beginning of the financial year. Theassessee had exclusive rights on this money and it cannot be comparedwith interest free borrowing from a third party. At the end of the year, amajor part of the FDR stood withdrawn, which apparently was used to fundthe interest free loan to the subsidiary. Hence, the claim, that the moneywas advanced out of interest free funds, is not acceptable.Ø As per the Transfer Pricing guidelines, every transaction has to beanalyzed separately, and the arms length price has to be benchmarked.Therefore the method adopted by the assessee in factoring the notionalinterest with the software development function under the TNMManalysis, is not acceptable.
  • 5. With these observations, the TPO rejected the assessee’s argumentfor not charging the interest from the AE.· Being aggrieved by the order of TPO/AO, the assessee filed appealto the CIT.·CIT (A) upheld the findings of TPO/AO.·Being aggrieved by the order of CIT (A), the assessee filed appeal tothe ITAT.
  • 6. Assessee and Department’s contention before ITATØ CIT (A) was not justified in upholding the addition, as the amount wasadvanced to a wholly owned subsidiary in USA and the transaction wasexceptional in nature. Though the cost of funds so advanced, was factoredin determining the ALP of transactions of sales made to the AE, noseparate addition should be made, in view of certain exceptionalcircumstances, since the subsidiary was facing a financial crunch.Ø Reliance was placed on the decision of the Chennai Bench of the ITAT, inthe case of Shiva Industries & Holdings Ltd., and it was pointed out that inthe said decision, LIBOR rates were considered as a bench mark whiledetermining the ALP of the transaction, in respect of the loan given inforeign currency.
  • 7. Ø Reliance has been placed on the decision - Perot Systems TSI (India) Ltd. v. Dy.CIT [2010] 37 SOT 358 (Delhi), where in the assessee granted interest-free loansto two of its wholly owned subsidiaries in Canada and Dubai. The Tribunalobserved, that the cost incurred by the assessee was not a relevant considerationunder the CUP method, and held that it was irrelevant whether the loans wereadvanced out of their own funds, or out of borrowed funds, and whether theinterest free loan were commercially viable for the assessee or not.
  • 8. Neither the assessee, nor the TPO/AO and the CIT (A), have examined theapplicability of CUP method as the most appropriate method, in order todetermine ALP of the international transaction of interest free foreign currencyloan, to its subsidiary by the assessee, In this regard, reliance has been placed onthe decision of Perot Systems TSI (India) Ltd. v. Dy. CIT [2010] 37 SOT 358 (Delhi).Ø It is considered fair and appropriate, to vacate the findings of the CIT (A) andrestore the matter to the file of the AO for fresh adjudication, with the directionsto recompute the ALP of the aforesaid international transaction, following the CUPmethod, keeping in view the various judicial pronouncements after allowingsufficient opportunity to the assessee.Ø Since the onus is on the assessee to establish ALP of the internationaltransaction, the assessee shall also provide all necessary relevant inputs, forestablishing ALP of the transaction in accordance with the CUP method.
  • 9. The current decision is in line with earlier decisions given by variousother jurisdictions on the issue.
  • 10. Bangalore Office 616, Oxford Towers, Bangalore Tel: +91-80-25705494 Telefax: +91-80- 32908917 Email: spnblr@spnagrath.co m www.spnagrath.comDelhi OfficeA-380, Defence Colony, New Delhi – Made By- Rashi24 Pilaniwala, Nandita Naruka &Tel: +91-11-4980 0000 Meenakshi GuptaTelefax: 91-11-4980 0029Email: spn@spnagrath.com

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