Tribunal upholds DRP's decision on interest adjustments for FCD and ECB, emphasizing arm's length rates and RBI compliance.

The Tribunal upheld the DRP's decision to delete adjustments made on interest payments on Fully Convertible Debentures (FCD) and External Commercial Borrowings (ECB), finding the assessee's rates were at arm's length and compliant with RBI guidelines. The decision stressed the need to consider loan terms in determining prices. The Revenue's appeal against the DRP's order was dismissed.

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Issues Involved:
1. Adjustment on the payment of interest on Fully Convertible Debentures (FCD).
2. Adjustment on the payment of interest on External Commercial Borrowings (ECB).

Detailed Analysis:

1. Adjustment on the Payment of Interest on Fully Convertible Debentures (FCD):

The assessee issued 1.7 crore unsecured fully convertible debentures (FCD) of Rs. 10 each, aggregating Rs. 17 crores to Devgen Singapore, with a fixed interest rate of 4% for the first two years, and 12% from the third to the fifth year. The average rate of interest paid by the assessee to the AE was 8.8% per annum. The TPO observed that the interest rate should be compared with LIBOR/SIBOR under the Comparable Uncontrolled Price (CUP) method. The average one-year SIBOR during the year was 0.86%, much less than the interest paid by the taxpayer, necessitating an adjustment. The TPO worked out the ALP of interest on FCD as Rs. 48,62,000, resulting in an excess payment of Rs. 19,38,000, which was adjusted accordingly.

2. Adjustment on the Payment of Interest on External Commercial Borrowings (ECB):

The assessee borrowed SGD 24.3 million from Devgen Singapore at a fixed interest rate of 5.94% per annum, determined at 3 months SIBOR + 500 basis points. The TPO observed that the interest to be paid on ECB should be compared with the PLR prevailing in the country which extended the loan, not India's PLR. The average 3-month SIBOR during the year was 0.50%, necessitating an adjustment. The TPO worked out the ALP of interest on ECB as Rs. 37,60,672, resulting in an excess payment of Rs. 51,74,685, which was adjusted accordingly.

Appeal and Decision:

The assessee appealed to the DRP, which deleted the interest adjustments made by the TPO. The DRP held that the interest paid for the AY at 4% on FCD was much less than the interest charged by independent banks for working capital loans. Regarding ECB, the DRP observed that the interest rate of 5.94% was reasonable and within the arm’s length, given that the interest paid to the bank (considered as internal CUP) was at 11.7%.

Revenue's Appeal:

The Revenue appealed against the DRP’s order, arguing that the interest rate should be based on LIBOR/SIBOR as per various judicial pronouncements. The Revenue contended that the DRP erred in deleting the adjustments without properly appreciating the facts.

Tribunal's Analysis and Conclusion:

The Tribunal considered the rival submissions and various judicial pronouncements. It noted that in international transactions, the LIBOR-based interest rate is generally adopted. The Tribunal found that the assessee had benchmarked the interest rates based on LIBOR/SIBOR and that the spread of 500 basis points was within the RBI guidelines. The Tribunal observed that the interest rates and spreads cannot be universally fixed and should be determined based on the terms, risk, and other factors of the loan.

The Tribunal upheld the DRP’s order, finding no infirmity in deleting the adjustments made on interest on ECB/FCD. The appeal of the Revenue was dismissed.

Conclusion:

The Tribunal dismissed the Revenue’s appeal, upholding the DRP’s decision to delete the adjustments made on the interest payments on FCD and ECB, finding that the assessee’s interest rates were within the arm’s length and in compliance with RBI guidelines. The decision emphasized the importance of considering the specific terms and conditions of international loans in determining the arm’s length price.

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