2017 (12) TMI 197 - AT - Income Tax

Rate of interest for the purpose of computation of arm s length price - determination of arms length rate of interest - Held that - In the case in hand before us, the invoices have been raised in Australian Dollars and US Dollars and these amounts are receivables to the assessee, therefore, the receivables are payable to the assessee in respective currencies. Thus, following the finding of the Hon ble Delhi High Court in the case of Cotton Naturals (I) (P) Ltd. (2015 (3) TMI 1031 - DELHI HIGH COURT ), we direct the AO/TPO to compute the interest rate applying the LIBOR rate prevalent during the relevant period in case of Australian Dollar/US Dollar plus suitable basis point keeping in view the credit score of the AEs. Accordingly, we restore the issue of computation of arm s length price of the international transaction of the receivables in the case of the assessee in view of the above directions. The assessee shall be afforded adequate opportunity of being heard. The ground of the appeal is accordingly allowed partly for statistical purposes.

Summary

Issues Involved:
1. Determination of the appropriate interest rate for delayed receivables from Associated Enterprises (AEs).

Issue-Wise Detailed Analysis:

1. Determination of the Appropriate Interest Rate for Delayed Receivables from AEs:

The Revenue's appeal challenges the order of the Commissioner of Income-tax (Appeals) [CIT(A)], which directed the application of the London Inter-Bank Offered Rate (LIBOR) instead of a 16% interest rate on delayed receivables from AEs. The Assessing Officer (AO) and Transfer Pricing Officer (TPO) had applied a 16% interest rate based on the State Bank of India (SBI) prime lending rate plus 300 basis points, treating receivables pending beyond six months as loans to AEs.

The Tribunal noted that the CIT(A) had relied on a previous decision in the case of Kohinoor Foods Limited, which upheld the application of the LIBOR rate for international loans. The Tribunal referenced multiple decisions supporting the use of LIBOR, including cases like Tech Mahindra Ltd. and Cotton Naturals (I) (P) Ltd., which emphasized that the interest rate should be based on the currency in which the receivables are denominated, not the lender's or borrower's country.

The Tribunal agreed with the CIT(A) and directed the AO/TPO to apply the LIBOR rate plus suitable basis points considering the credit score of the AEs. This approach aligns with the principle that the interest rate should reflect the market-determined rate applicable to the currency of the receivables, ensuring a fair and reasonable arm's length price.

Conclusion:

The Tribunal partially allowed the Revenue's appeal for statistical purposes, directing the AO/TPO to compute the interest rate based on the LIBOR rate for the relevant period, adjusted for the credit score of the AEs. This decision reinforces the application of international financial principles in determining transfer pricing adjustments for delayed receivables.