Tribunal Upholds LIBOR + 200 Basis Points for Transfer Pricing on Interest Payments 'sLength

The Tribunal upheld the Transfer Pricing Officer's adoption of LIBOR + 200 basis points as the benchmark interest rate for computing arm's length interest rates in the case involving interest payments to overseas associate enterprises. The Tribunal dismissed the assessee's appeals and partly allowed the Revenue's appeals, leading to the overall dismissal of four appeals and allowance of two cross-appeals by the Revenue.

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Issues Involved:
1. Arm's Length Price (ALP) adjustment regarding interest payment to overseas associate enterprises.
2. Adoption of LIBOR + 200 basis points as the benchmark interest rate.
3. Section 14A read with Rule 8D disallowance.

Issue-wise Detailed Analysis:

1. Arm's Length Price (ALP) Adjustment Regarding Interest Payment to Overseas Associate Enterprises:
The primary issue in the appeals was the ALP adjustment related to interest payments made by the assessee to its overseas associate enterprises (AEs) at an interest rate of 11%. The Transfer Pricing Officer (TPO) had adopted a LIBOR + 200 basis points interest rate, which amounted to 2.9%, later enhanced to 9.72% by the CIT(A)/DRP. The assessee contended that the interest payments should be benchmarked using the domestic prime lending rate, given that the compulsory convertible debentures (CCDs) involved domestic currency. However, the Tribunal found no merit in the assessee's stand, noting that the corresponding FDI had been remitted in Euros, and the interest payments had also witnessed foreign exchange fluctuation losses. The Tribunal upheld the TPO’s adoption of LIBOR + 200 basis points, dismissing the assessee's appeals for the relevant assessment years.

2. Adoption of LIBOR + 200 Basis Points as the Benchmark Interest Rate:
The Tribunal examined whether the interest rate for the CCDs should be based on the Indian Prime Lending Rate (PLR) or the LIBOR + 200 basis points adopted by the TPO. The assessee argued that the CCDs were subscribed in Indian Rupees and should be benchmarked against domestic interest rates. However, the Tribunal found that the CCDs were received in Euros, and the basis for the 11% interest rate was not substantiated. The Tribunal agreed with the TPO’s approach, noting that the relevant case laws cited by the assessee were distinguishable and not applicable to the facts of the case. Consequently, the Tribunal upheld the TPO’s adoption of LIBOR + 200 basis points for computing the arm's length interest rate.

3. Section 14A Read with Rule 8D Disallowance:
The Revenue's appeal for the assessment year 2014-15 included a substantive ground seeking to revive the disallowance under Section 14A read with Rule 8D, amounting to Rs. 23,09,741/-. The CIT(A) had restricted this disallowance to the extent of exempt income only, which was Rs. 522/-. The Tribunal declined this ground, thereby partly accepting the Revenue's appeal for the assessment year 2014-15.

Conclusion:
The assessee's four appeals (ITA Nos. 134/Hyd/2017, 565/Hyd/2017, 1507/Hyd/2018, and 1682/Hyd/2018) were dismissed. The Revenue's two cross appeals (ITA Nos. 149/Hyd/2017 and 1506/Hyd/2018) were allowed, and the third appeal (ITA 1811/Hyd/2018) was partly allowed. The Tribunal pronounced the order in the open court on 14th December 2021.

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