Wednesday, December 18, 2013

Financial analysis of borrowers won’t be deemed as facilitation of loan agreement as per India-France treaty

Where role of assessee in facilitating foreign currency loan to its client is providing financial analysis of borrowers, general market conditions and regulatory environment, such nature of services will not fall under Para 4 of protocol between India and France.


a) The assessee had facilitated foreign currency loan to its clients from head office outside India but did not show any income on the said transactions contending that services provided by assessee was limited to providing financial analysis of borrowers, general market conditions and regulatory environment and it has no role to play in decision of granting of loan;

b) The TPO did not accept the contention of the assessee and computed the arm's length charges being 25 per cent of the total amount comprising interest and fee received by the offshore branches of the bank and made an adjustment. On appeal, the CIT(A) reduced the adjustment from 25 per cent to 20 per cent.

The Tribunal held as under:

1) As per Para 4 of the India-France protocol if the role of the PE is only to facilitate the conclusion of foreign trade or loan agreement or mere signing thereof, then no profit shall be attributable to PE in terms of article 7(2) of the Indo-France DTAA;

2) The assessee provided the services regarding credibility analysis of clients, their capacity to repay the loan and risk involved in the loan transaction;

3) Therefore, the role of the assessee in providing such services were inevitable for taking the decision of providing loan and as such couldn’t be said to be a mere facilitation of conclusion of the loan agreement or signing thereof; Thus, Para 4 of the Protocol does not apply in the instant case;

4) Since the assessee has provided certain services for that arms length charges could be determined as per the provisions of transfer pricing regulation. The interest couldn’t be taken into account for attribution of income towards service charges/fees and, therefore, only the fee charged by the foreign branches could be taken into consideration for making adjustment under transfer pricing provisions;

5) As none of the parties have come out with the suitable comparables, the estimation made by the CIT (A) at the rate of 20 per cent was justified, however, the same would be only in respect of the fee and charges other than interest received by the foreign branches - Credit Lyonnais v. ADIT (International Taxation) [2013] 40 87 (Mumbai - Trib.)

Quotation price isn’t analogous to actual price paid; former can’t be used for benchmarking under CUP method

Under CUP method, a quotation which hasn't fructified into a transaction can’t be used for benchmarking

The Tribunal held as under:

1) When the statute read with rules specifically provides that the ALP under the CUP method should be determined by considering 'the price charged or paid' in a comparable uncontrolled 'transaction', one fails to comprehend as to how any 'quotation' which has not fructified into a 'transaction' can be substituted with the actual price charged or paid in a transaction;

As the law provides for considering the price charged or paid in a comparable uncontrolled transaction, there can be no scope for considering a quotation price in isolation which is not preceded with or succeeded by any actual transaction - Sinosteel India (P.) Ltd. Dy. CIT [2013] 40 240 (Delhi - Trib.)