The assessee, GE India Technology Centre Pvt Ltd, is engaged in the business of R&D in the area of material sciences and process technology and providing related software development services.
During AY 206-07, the Assessee had obtained 2 External commercial borrowings (ECBs) from its AEs. The rate of interest on ECBs were fixed @ 7.5% and 8.49%. The TP adjustment was made considered ALP interest rate at 5.67%.
Before the Tribunal, the Assessee argued that the loan agreements were entered into in AY 2000-01 and the interest rates of these ECB’s has been consistently accepted by the Revenue in AY 2004-05, 2005-06 and AY 2008-09. The ITAT accepted the contention and held that interest rate cannot be disputed in AY 2006-07.
Aggrieved, Revenue filed an appeal before the HC. The Revenue contended that Tribunal’s order was without application of mind and was contrary to the manner of ALP determination provided under Rule 10B. Revenue submitted that the issue of determination of interest of ECBs to related party was never an issue in previous AYs and thus Tribunal’s finding was perverse. The Revenue submitted that even assuming that the issue was adjudicated in earlier AYs, Tribunal ought to have appreciated that the principles of res judicata were not applicable and that each AY is a different unit. The Revenue further contended that RBI, in order to regulate foreign exchange, prescribes minimum and maximum rate of interest payable on ECBs and that the RBI does not determine arm’s length nature of rate of interest applicable between unrelated parties.
Before HC, the Assessee demonstrated that it had submitted the details concerning acceptance of interest rates in earlier AYs. It was further contended that the interest rates had to be determined with reference to the date on which the transaction takes place. Assessee further submitted that RBI had given approval with regard to rate of interest, which was a relevant consideration to determine interest rate.
Decision of HC:
The HC observed assessee paid interest at the rate of 7.5% and 8.49% on ECB’s. The HC observed that RBI has given the approval in respect of rate of interest on the ECBs and therefore “approval given by the RBI with regard to rate of interest is a relevant factor while determination of rate of interest.” The HC further held that “It is equally well settled that rate of interest should be determined on the basis of rate of interest prevailing at the time of availing the loan.”
The HC observed that the Tribunal has noted that assessee had obtained loans for AY 2000-01 at the rate of 7.5% and 8.49% respectively and the Tribunal had considered the fact that the issue had been considered by TPO for AYs 2004-05, 2005-06 and 2008-09. The HC observed that the rate of interest was accepted by the AO for AYs 2002-03 to 2008-09 except for AY 2006-07 (year under consideration). The HC concluded that the “Tribunal has rightly held that the revenue cannot be allowed to take a departure in case of rate of interest for Assessment Year 2006-07.” On principle of consistency, the HC relied on the SC decision in the case of Radhasoami Satsang v CIT (1992) 60 Taxman 248 (SC).