ITAT Rules LIBOR Rate Applies for Interest-Free Loan Transfer Pricing, Rejects 10% Domestic Rate Adjustment

The ITAT Mumbai partially allowed the appeal concerning a transfer pricing adjustment on an interest-free loan to an AE. The TPO had applied a 10% arm's length interest rate based on the taxpayer's Euro-denominated loan to a German AE. The tribunal held that since the transaction was international and in foreign currency, the domestic prime lending rate was inapplicable. Instead, the LIBOR rate was relevant, averaging 4.42% for the period. The assessee charged 6% interest, exceeding the LIBOR benchmark. Consequently, no addition was warranted, and the appeal was partly allowed.

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Issues Involved:
1. Transfer Pricing Adjustment for Interest-Free Loan
2. Determination of Arm's Length Price (ALP) for Interest
3. Applicability of LIBOR/EURIBOR Rates
4. Set-off of Unabsorbed Depreciation

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment for Interest-Free Loan:
The assessee challenged the addition of Rs. 1.76 crores made by the AO due to a transfer pricing adjustment related to an interest-free loan given to its Associate Enterprise (AE), TACO Kunstsofftechnik GMBH (TKT). The assessee argued that the loan was granted on account of business reasons and commercial expediency, highlighting the strategic importance of TKT for its business with Ford Europe. The assessee contended that lending interest-free funds to subsidiaries is a normal business practice and justified by genuine business reasons.

2. Determination of Arm's Length Price (ALP) for Interest:
The TPO proposed a 10.25% interest rate for determining the ALP, using the Comparative Uncontrolled Price (CUP) method and applying the lending rate applicable in India. The TPO rejected the argument that the interest-free loan was given due to commercial considerations and held that in an uncontrolled transaction, interest would have been charged. The TPO emphasized that the ALP rate should be based on the lender's transactions and not the borrower's geography.

3. Applicability of LIBOR/EURIBOR Rates:
The assessee argued that if interest were to be charged, it should be restricted to 4.15%, based on the EURIBOR rate. The TPO dismissed this, stating that LIBOR is not applicable for loans where the currency of the origin country is not the currency in which the loan is extended. The assessee cited various judicial rulings supporting the use of LIBOR/EURIBOR rates for determining ALP in international transactions. The tribunal agreed with the assessee, referencing cases like Tech Mahindra Ltd. and Siva Industries & Holdings Ltd., and directed the AO to adopt the EURIBOR rate for the TP adjustment.

4. Set-off of Unabsorbed Depreciation:
The assessee sought the set-off of unabsorbed depreciation of Rs. 6.68 crores against business income. Both parties agreed to remand this issue to the AO for fresh consideration, with a direction to allow the claim in accordance with the law.

Conclusion:
The tribunal partly allowed the appeal, directing the AO to work out the TP adjustment using the EURIBOR rate and remanding the issue of set-off of unabsorbed depreciation for fresh consideration.

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