Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI INTURI RAMA RAO
Date of hearing : 10.04.2018 Date of Pronouncement : 13.04.2018 O R D E R
Per Sunil Kumar Yadav, Judicial Member
This appeal is preferred by the assessee against the order of the AO passed consequent to the directions of the DRP inter alia on the following grounds:-
“1. The learned TPO / AO and the Hon'ble DRP grievously erred by determining and sustaining the transfer pricing adjustment of Rs. 6,94,98,484/- and not following the judgement of the Hon'ble Tribunal, Bangalore Bench in your appellant's own case for AY 2010-11 and AY 2011-12 and also not appreciating
IT(TP)A No.2788/Bang/2017 Page 2 of 9 that the Hon'ble DRP in your appellant's own case for AY 2010- 11, AY 2011-12 and AY 2012-13 has adjudicated the matter in favour of your appellant.
2. The learned TPO / AO erred in holding and the Hon'ble DRP grievously erred by upholding that your appellant must mandatorily apply Reserve Bank of India's reference exchange rates while selling foreign currency, although it is itself an average rate of the previous days transactions made by major forex dealers and announced on a daily basis during the day and not available when the business commences in the morning; 3. The learned TPO / AO and the Hon'ble DRP grievously erred by not granting the benefit of plus or minus three percent for adjustments to ALP in accordance with the second proviso to section 92C(2); 4. For these and other grounds that may be adduced at the time of hearing, the order of the learned Deputy Commissioner of Income Tax, Circle 7(1)(1), Bangalore, may be set aside to the extent appealed against and this appeal be allowed.”
During the course of hearing, the ld. Counsel for the assessee has contended that the issue involved in this appeal is squarely covered by the order of the Tribunal in the assessee’s own case for the AY 2010-11 in which it was held that RBI rates of foreign exchange were also based on averaging. Therefore, the assessee’s prices were within +/- 5% range of the RBI rates and therefore there was no necessity for TP adjustment. Copy of the order of the Tribunal is placed on record.
The ld. DR, however, placed reliance upon the order of the AO and the DRP.
IT(TP)A No.2788/Bang/2017 Page 3 of 9
Having carefully examined the orders of the authorities below in the light of rival submissions, we find that the assessee is engaged in foreign inward money transfers, buying and selling of foreign currencies and travelers cheques, air ticketing, corporate agency for insurance and provision of other exchange house services. The assessee filed its return of income declaring total income of Rs.14,99,10,050 and claimed a refund of Rs.46,34,430. The AO made a reference to the TPO and the TPO vide order dated 21.10.2016 directed that an addition of Rs.6,94,98,484 be made on account of TP adjustment. The adjustment was proposed consequent to the TPO holding that the CUP method using internal comparables cannot be applied as assessee does not export foreign currency to its AE exactly at the reference rate announced by the RBI and that benefit of permissible range of +/- 3% prescribed under proviso to section 92C(2) is not available to the assessee. Consequently, the AO passed draft assessment order proposing to determine the total income at Rs.21,94,08,530 by making the TP adjustment of Rs.6,94,98,484 as against returned income of Rs.14,99,10,050. The assessee filed objections before the DRP and the DRP confirmed the additions primarily on the contention that revenue has filed appeal before the Hon’ble Karnataka High Court against the order of the Tribunal for the earlier years.
The Tribunal in the earlier years have examined the issue in detail and having relied upon the order of the Mumbai Bench, accepted the IT(TP)A No.2788/Bang/2017 Page 4 of 9 contention of the assessee and has held that assessee was justified in claiming the benefit available to it under proviso to section 92C(3) of the Act. The relevant observations of the Tribunal is extracted hereunder for the sake of reference:-
“05. We have perused the orders and heard the rival contentions. Question before us is whether second proviso to Section 92C(2) which allows +/- 5% range to an assessee could be applied even in a case where the transactions involved were on account of trading in foreign exchange, where RBI rates were considered to be a bench-mark for the arms length study. In the case of Development Bank of Singapore v. DDIT (supra) the Mumbai Tribunal considered the question whether the +/- 5% range would be available when libor rate was considered for bench marking the arms length pricing with respect to interest charges on loans. At para 11 to 13 of its order, the coordinate bench held as under:- “11. At this juncture, we consider it expedient to note that the above quoted proviso to section 92C(2) has been substituted by the Finance (No.2) Act, 2009 w.e.f. 1.10.2009 with two provisos. The first proviso states that : ` Provided that where more than one price is determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices’. As per the second proviso if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed the specified percentage of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. Main sub-section (2) provides that the most appropriate method as per subsection (1) shall be applied for the determination of ALP. As per the first proviso where more than one price is determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices. Per contra, if there is only one price which is determined by the most appropriate method, then as per the main sub-section (2) without the aid of proviso, that price shall constitute the ALP. The second proviso comes into play to deem the actual transacted price as the ALP. It
IT(TP)A No.2788/Bang/2017 Page 5 of 9 provides that where the variation between the ALP `so determined’ does not exceed the specified percentage, the price at which the international transaction has actually been undertaken `shall be deemed to be the arm’s length price’. The words `so determined’ as employed in the second proviso assume significance. As these have been used in the second proviso distinct from the subject matter of the first proviso, naturally these will apply to the ALP determined under sub-section (2) consisting of the main provision and also the first proviso. Resultantly, the option of `deemed’ ALP shall extend not only to a situation where more than one price is determined as ALP by the most appropriate method but also where only one price is determined as ALP. The net result is that the option to the assessee shall be available in both the situations, covered under main sub-section (2) and also the first proviso.
We revert to the position of law governed by the single proviso before substitution by the Finance (No.2) Act, 2009 which has been accepted by the assessee as laying down that if there is only one price determined by the most appropriate method, then this option of plus minus 5% is not available for determination of ALP. Now the moot point for our determination is as to whether the LIBOR rate should be considered as a single interest rate or the arithmetical mean of more than one interest rate. In order to find answer to this question, it is sine qua non to understand the connotation and import of LIBOR. In this regard, both the sides have placed on record some literature throwing light on LIBOR. Wikipedia, the free encyclopedia define the London Inter bank Offered Rate (LIBOR) as `the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks.’ It has further been explained that LIBOR “is a benchmark giving an indication of the average rate at which a LIBOR contributor bank can obtain unsecured funding in the London interbank market for a given period. …Individual bbalibor rates are the end-product of a calculation based upon submissions from LIBOR contributor banks, which are then averaged under a `trimmed mean’ methodology”. Libor rates are calculated for ten currencies and 15 borrowing periods ranging from overnight to one year and are published daily at 11.30 a.m. (London time) by Thomson Reuters. Currently 18 banks contribute to the fixing of the US $
IT(TP)A No.2788/Bang/2017 Page 6 of 9 Libor. Modus operandi for calculation of LIBOR is extracted as under :- “Libor is calculated and published by Thomson Reuters on behalf of the British bankers’ Association (BBA). It is an index that measures the cost of funds to large global banks operating in London financial markets or with London-based counterparties. Each day, the BBA surveys a panel of banks (18 major global banks for the USD Libor), asking the question, “At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?” The BBA throws out the highest 4 and lowest 4 responses, and averages the remaining middle 10, yielding a 23% trimmed mean. The average is reported at 11:30 a.m.”
It can be seen that each LIBOR contributor panel bank formulates its own rate for a day which is put into the application which links directly to a rate setting team at Thomson Reuters. Then trimming is done of such rates submitted by different contributor banks. After excluding four highest and lowest rates, an average is worked out, which becomes LIBOR rate. Thus it is evident that LIBOR is not a rate in itself which is charged or paid for the user of inter bank deposits. It is only an `average’ of the rates submitted by various panel banks, after exclusion of four each of highest and lowest responses, which is daily reported at 11:30 a.m. Albeit, technically speaking it is only one rate, but in reality, it is an average of rates at which various banks borrow or lend inter bank deposits. Returning to our context of rule 10B(1)(a) read with section 92C(2) proviso, it can be easily deduced that the LIBOR is nothing but arithmetical mean of rates of interest charged or paid on inter bank deposits by a number of panel banks representing different comparable uncontrolled transactions. Considering the LIBOR as one comparable uncontrolled interest rate, in our considered opinion is a restricted and narrow approach incapable of acceptance. Further, since the LIBOR is not a rate in itself at which some bank is willing to borrow or lend, but an average of rates at which various panel banks offer to borrow or lend inter bank offers, the same cannot be characterized as one price determined under the comparable uncontrolled price method. It is required to be considered as arithmetical mean of such prices, thereby making available the IT(TP)A No.2788/Bang/2017 Page 7 of 9 option of plus minus 5% variation to the assessee. As the present addition of & CO 248/M/2009. The Development Bank of Singapore. 14 `50,476 made by the AO was the outcome of not allowing plus minus 5% cushion, which in our considered opinion is richly due to the assessee, we hold that the learned CIT(A) was justified in deleting this addition.”
6. Mumbai Bench had held that libor rates were also an averaging of rate of interest charged or paid on inter-bank deposits by a number of panel banks. Of course, here for the ALP analysis what has been considered was the RBI exchange rates. However, we find that RBI in its press release dt. 06.08.2008 has mentioned as under:- “August 6, 2008. Computation and Dissemination of RBI Reference Rate The Reserve Bank of India complies on a daily basis and publishes reference rates for Spot USD/INR and Spot EUR/INR. The rates are arrived at by averaging the mean of the bid/offer rates polled from a few select banks among 12 noon every week day (excluding Saturdays). The contributing banks are selected on the basis of their standing, market share in the domestic foreign exchange market and representative character. The Reserve Bank periodically reviews the procedure for selecting the banks and the methodology of polling so as to ensure that the reference rate is a true reflection of the market activity. G. Rahguraj Deputy General Manager Press Release: 2008 – 2009/163” It is clear from the above that the RBI rates of foreign exchange were also based on averaging. Therefore in our opinion, the principle evolving out of the decision of coordinate bench of Mumbai in Development Bank of Singapore (supra) will apply here as well. Assessee was therefore well justified in claiming the benefit available to it under proviso to Section 92C(3) of the Act. DRP, in our opinion, was justified in holding that assessee’s prices were within +/- 5% range of the RBI rates and therefore there was no necessity for transfer pricing adjustment.”
IT(TP)A No.2788/Bang/2017 Page 8 of 9
The order of the Tribunal has not been reversed so far, therefore it holds the field. So long as the Tribunal’s order holds the field, the subordinate authorities are required to follow the same in its letter and spirit. The DRP cannot ignore the order of the Tribunal under the garb that revenue has preferred an appeal before the Hon’ble High Court against the order of the Tribunal. The action of the DRP is quite contemptuous by not following the order of the Tribunal while adjudicating an issue. We accordingly have no hesitation in setting aside the order of the AO passed consequent to the direction of the DRP. Accordingly we hold that assessee is entitled for the benefit available to it under proviso to section 92C(3) of the Act. Accordingly the additions made by the AO are hereby deleted.
In the result, the appeal of the assessee stands allowed.
Pronounced in the open court on this 13th day of April, 2018.