CUP & LIBOR most appropriate to determine ALP of Loan Transaction

CLR Editorial Notes: The case refers to a case of Transfer pricing on a loan transaction made by the assessee and the appellant in this case. The assessee was an Indian company which gave a loan of more than USD 1 Million to its USA based Associated Enterprise (AE) at a interest rate of 4%.

The Transfer Pricing Officer compared the Indian market Loan rates for benchmarking the interest rate given to the AE. It held that considering the assessee, i.e. the Indian company, as the tested party the rate which the assessee would have earned by providing loans in a corresponding Indian market had to be taken under Arms Length Pricing regime.

The TPO also held in order to factor in the risk involved, an addition has to be made to the interest rate given to the AE. With this factoring, the interest rate was calculated at 17.25%. The assessee objected to this assessment, however the Revenue department held that the ALP had to be taken at the Prime Lending Rate provided by the RBI – which was at 13.25%. The assessee appealed to the Tribunal against this assessment. The following are the excerpts from the Tribunal’s judgement which reversed the orders by the TPO & subsequently by the DRP:

(i) CUP is the most appropriate method for ascertaining the arms length price of an international transaction of lending money. Where the transaction is of lending money in foreign currency to its foreign subsidiaries, the comparable transactions have to be of foreign currency lent by unrelated parties. The financial position and credit rating of the subsidiaries will be broadly the same as the holding company. In such a situation, domestic prime lending rate would have no applicability and the international rate fixed being LIBOR should be taken as the benchmark rate for international transactions. On facts, the assessee had an arrangement for loan with CitiBank for less than 4% and on the loan provided to its AE™s it had charged 4% interest. Hence, the adjustment made by the TPO was not warranted (Siva Industries 59 DTR 182 (Che), Four Soft 62 DTR 308 (Hyd), Tech Mahindra 46 SOT 141 (Mum) & Tata Autocomp Systems 73 DTR 220 (Mum) followed); 

(ii) Further, the assessee™s profits are exempt u/s 10B and so there was not a case where the assessee would benefit by shifting profits outside India (Philips Software Centre 26 SOT 226 (Bang) & Zydus Altana Health Care 44 SOT 132 (Mum) followed).


The case file is available for download


Tags: ALPArm's length principleCitiBankCommonwealth Law ReportsIndiaLIBORPrime Lending RateTPOtransfer pricingUnited States

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