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Transfer pricing adjustment on foreign currency loan interest upheld; Tribunal rejects revenue's appeal. The Tribunal dismissed the revenue's appeal challenging the deletion of a transfer pricing adjustment related to interest paid on a foreign currency loan. ...
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Transfer pricing adjustment on foreign currency loan interest upheld; Tribunal rejects revenue's appeal.
The Tribunal dismissed the revenue's appeal challenging the deletion of a transfer pricing adjustment related to interest paid on a foreign currency loan. Upholding the DRP's decision, the Tribunal emphasized that interest rates for foreign currency loans should be based on the currency in which the loan is to be repaid, not on the lender or borrower's residence currency. The Tribunal found the TPO's use of the SBI rate for benchmarking inappropriate and concluded that no transfer pricing adjustment could be made on this basis, in line with the Delhi High Court's precedent.
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 Rs. 2,16,25,000, with a final deletion of Rs. 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.
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