2023 (2) TMI 207 - AT - Income Tax

TP Adjustment - ALP determination - interest received on outbound loans - LIBOR v/s PLR - HELD THAT - These loans were given solely for the business expediency and business convenience but not with the aim of earning interest from the subsidiary companies. Various Hon ble Courts have held that the foreign currency loans to foreign subsidiary companies, the ALP should be computed based on the market determined interest applicable to the currency in which the loan has to be repaid ie., on LIBOR and not on PLR. The Hon ble Delhi High Court in the case of CIT vs. Cotton Naturals India (P) Ltd 2015 (3) TMI 1031 - DELHI HIGH COURT held that for outbound loans the LIBOR rate should adopted but not PLR of Indian Banks. It was also established by the assessee that the loans were given for the purpose of carrying on the business and not with an intention of earning interest. Therefore, we are of the considered view that in the instant case, the prevailing LIBOR rate should be adopted for the interest received on outbound loans. We therefore direct the Ld. TPO to calculate the interest as per the prevailing LIBOR rates. Thus, this ground raised by the assessee is allowed.

Summary

Issues:
Transfer Pricing Matter: Adjustment on interest on foreign currency working capital loan, term loan, and other loan provided to subsidiaries. Incorrect computation of interest U/s. 234D and U/s. 244A of the Act. Initiating penalty proceedings U/s. 271(1)(c) of the Act.

Analysis:
1. The appeal challenged the final order of the Assessing Officer under the Income Tax Act for the AY 2012-13 concerning international transactions. The case involved the assessee, engaged in manufacturing, revising income declarations and facing scrutiny due to international transactions.

2. The primary issue was the adjustment of interest on foreign currency loans to subsidiaries. The assessee argued for benchmarking with LIBOR, citing business reasons for loans to overseas subsidiaries. The dispute revolved around the use of LIBOR vs. PLR rates for benchmarking interest payments.

3. The assessee cited legal precedents supporting LIBOR benchmarking for international loans. The Revenue argued against LIBOR adoption due to the absence of back-to-back arrangements with EXIM Bank. The dispute focused on the applicability of LIBOR to loans originated from India to overseas subsidiaries.

4. The Tribunal analyzed the risks borne by the assessee and the purpose of loans to subsidiaries. It noted the business expediency of loans for raw material procurement and directed the use of prevailing LIBOR rates for interest on outbound loans. Legal judgments supported this approach, emphasizing market-determined interest rates for foreign currency loans.

5. Other grounds related to interest computation and penalty proceedings were considered consequential and not adjudicated upon. The Tribunal allowed the appeal, directing the TPO to calculate interest based on prevailing LIBOR rates for outbound loans.

6. The judgment highlighted the importance of market-based benchmarking for international transactions, emphasizing the specific nature of foreign currency loans to subsidiaries. The decision provided clarity on benchmarking methodologies, aligning with legal precedents and business realities.

Conclusion:
The Tribunal's decision favored the assessee, allowing the appeal and directing the use of prevailing LIBOR rates for interest on outbound loans to subsidiaries. The judgment underscored the significance of market-driven benchmarks in transfer pricing matters, ensuring fair treatment in international transactions.