2018 (10) TMI 1851 - AT - Income Tax

TP adjustment relating to difference in the interest paid on loan - assessee has given a loan in foreign currency to its AE and has charged interest @ EURIBOR Plus 0.25% - such an interest rate was benchmarked by applying CUP method whereby the ALP interest rate was considered at EURIBOR Plus 0.12% - HELD THAT - Assessee has given loan to its AE in foreign currency only, therefore, to hold that such a foreign currency loan should be treated as loan given in India rupee, because it has gone from the accounts from India is not correct observation of the TPO. DRP, therefore, has rightly held that AO did not have any rational basis for treating the foreign currency loan to be given in INR. Now is a well settled law that a loan given or taken in foreign currency loan, then same has to be benchmarked with reference to the market determined interest rate applicable to the currency loan has to be repaid. See M/S COTTON NATURALS (I) PVT. LTD. 2015 (3) TMI 1031 - DELHI HIGH COURT - No transfer pricing adjustment can be made by the TPO by applying SBI base rate. Thus, the appeal of the revenue is dismissed.

Summary

Issues:
Challenge to deletion of TP adjustment on interest paid on loan.

Analysis:
The appeal was filed by the revenue challenging the deletion of an addition made by the TPO on account of transfer pricing (TP) adjustment related to the interest paid on a loan. The assessee, a subsidiary of a foreign company, had given a loan to its associated enterprise (AE) and received interest. The TPO calculated the ALP interest rate based on the SBI rate, resulting in an adjustment of ?2,16,25,000, with a final deletion of ?1,87,24,348. The DRP, considering the judgment of the Delhi High Court in a similar case, held that the arms-length interest rate for a foreign currency loan should be based on EURIBOR/LIBOR and not the SBI rate. The DRP accepted the assessee's benchmarking of the interest rate transaction.

The Tribunal observed that the loan was given in foreign currency and should be benchmarked with reference to the market-determined interest rate applicable to the currency in which the loan has to be repaid. Citing the judgment of the Delhi High Court, the Tribunal emphasized that interest rates should be based on the currency in which the loan is to be repaid, not on the currency of the lender or borrower's residence. The Tribunal agreed with the DRP's decision that the TPO had no rational basis for treating the foreign currency loan as an INR loan. Therefore, the Tribunal upheld the DRP's direction, stating that no TP adjustment could be made by applying the SBI base rate. Consequently, the appeal of the revenue was dismissed.

In conclusion, the Tribunal upheld the DRP's decision based on the principle established by the Delhi High Court, emphasizing that interest rates for foreign currency loans should be determined based on the currency in which the loan has to be repaid. The Tribunal found no fault in the direction given by the DRP and dismissed the revenue's appeal.