CIT vs. Aurionpro Solutions Ltd (Bombay High Court)

The High Court had to consider the following question of law from the order pf the Tribunal in Aurionpro Solutions Ltd vs. ACIT (ITAT Mumbai):

“Whether on the facts and in the circumstances of the case and in law, the Hon’ble Tribunal was justified in directing the Assessing Officer to determine the Arm’s Length interest by considering the LIBOR (London Inter Bank Operative Rate) plus 2% on the monthly closing balance of the advances?”

HELD by the High Court dismissing the appeal:

(i) In Commissioner of Income Tax Vs. Tata Autocomp [2015] 56 taxmann.com 206, this Court had made following observations:

“7. We find that the impugned order of the Tribunal inter alia has followed the decisions of the Bombay Bench of the Tribunal in cases of VVF Ltd. Vs. DCIT” (supra) and “DCIT Vs. Tech Mahindra Ltd.” (supra) to reach the conclusion that ALP in the case of loans advanced to Associate Enterprises would be determined on the basis of rate of interest being charged in the country where the loan is received/consumed. Mr. Suresh Kumar, the learned counsel for the revenue informed us that the Revenue has not preferred any appeal against the decision of the Tribunal in “VVF Ltd. Vs. DCIT” (supra) and “DCIT Vs. Tech Mahindra Ltd.” (supra) on the above issue. No reason has been shown to us as to why the Revenue seeks to take a different view in respect of the impugned order from that taken in “VVF Ltd. Vs. DCIT” (supra) and “DCIT Vs. Tech Mahindra Ltd.” (supra). The Revenue not having filed any appeal, has in fact accepted the decision of the Tribunal in “VVF Ltd. Vs. DCIT” (supra) and “DCIT Vs. Tech Mahindra Ltd.” (supra).”

(ii) We have also perused the order of the Tribunal in case of Deputy Commissioner of Income Tax, Circle 2(3), Mumbai vs. Tech Mahindra Ltd., reported in [2011] 12 taxmann.com 132 (Mum). The Tribunal has made following observations:

“The view taken by us also finds support from these observations of the coordinate Bench. When there is a choice between the interest rate of a currency other than the currency in which transaction has taken place and the interest rate in respect of the currency in which transaction has taken place, in our considered view, the latter should be adopted. In Siva Industries & Holdings Ltd.’s case (supra), coordinate Bench was making a choice between the PLR (Prima Lending Rate in India) and the LIBOR (London Inter Bank Offered Rate). The coordinate Bench held that “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 transactions”, and accordingly proceeded to take into account interest rate in terms of LIBOR basis. We have adopted the same approach by taking into account the commercial principles and practices with regard to a US Dollar denominated extended credit for arriving at the benchmark rate, and take LIBOR as the base. Accordingly, the LIBOR (US Dollar) has to be as benchmark for US Dollar transactions – rather than the rate of interest on domestic borrowings, even which is lower than the interest rate of 10 per cent taken as ALP by the TPO, or, for that purpose, rate of interest on any other currency loans. Having said that, we may also reiterate that as we hold so, we are not giving any decision on whether the ALP adjustment can be made, on the basis of LIBOR plus mark up, in respect of extended credit because we are dealing with a very limited issue in this appeal which does not require adjudication on the broader question as to whether an extended credit period can anyway be compared with a loan, much less a loan in some other currency which will have distinct lending rates depending on the peculiarities relating that currency, since it does not involve the lending period commitment as loan necessarily involves. Be that as it may, the CIT (A) cannot thus be said to be in error in adopting the US Dollars LIBOR rate, with markup which is not in dispute for its being too low, as a basis for ALP adjustmentas long as he can be said to be justified in upholding the ALP adjustment. There is thus no justification in grievance raised by the Assessing Officer against the relief granted by the CIT (A). As we uphold the relief given by the CIT (A), we refrain from making any observations on whether or not such an ALP adjustment could have been made in the first place. The mere fact that the relief granted by the CIT (A) is upheld, it does not imply that the CIT (A)’s action of confirming the ALP adjustment on the facts of this case, in principle, is upheld too. That remains an open question and need not be adjudicated in this appeal. With these observations, and to the extent the grievance of the revenue is concerned, we confirm the order of CIT(A) and decline to interfere in the matter at the instance of the revenue authorities, Ground No. 2 is dismissed.”.

(iii) This Court in a case of Commissioner of Income Tax Vs. Tata Autocomp [2015] 56 taxmann.com 206 has approved the said reasoning given by the Tribunal in Dy Commissioner of IncomeTax, vs. Tech Mahindra (supra), the observations, which are reproduced above.

(iv) In the present case also, it is not disputed that advances were made to the company situated abroad. The LIBOR rate naturally will be considered to determine the Arms Length interest, the same would be reasonable and proper in applying the commercial principle. The Tribunal has directed the appropriate rate would be LIBOR plus 2% instead of LIBOR plus 3% applied by the TPO.