2017 (6) TMI 1087 - HC - Income Tax

Arm's-length interest for foreign affiliate loans set at LIBOR plus 2% on monthly closing balance; replaces LIBOR+3%

HC held that advances to a foreign affiliate warrant arm's-length interest determined using LIBOR as base and that LIBOR plus 2% on the monthly closing ... Determining the Arm's Length interest - considering the LIBOR (London Inter Bank Operative Rate) plus 2% on the monthly closing balance of the advances - Held that:- It is not disputed that advances were made to the company situated abroad. The LIBOR rate naturally will be considered to determine the Arms Length interest, the same would be reasonable and proper in applying the commercial principle. The Tribunal has directed the appropriate rate would be LIBOR plus 2% instead of LIBOR plus 3% applied by the TPO. No substantial question of law arises for consideration Issues involved:- Determination of Arm's Length interest based on LIBOR plus 2% on monthly closing balance of advances for Assessment Year 2007-2008.Analysis:The primary issue in this case revolves around the determination of the Arm's Length interest for advances made during the Assessment Year 2007-2008. The Tribunal, in its order, directed the Assessing Officer to calculate the interest using the LIBOR (London Inter Bank Operative Rate) plus 2% on the monthly closing balance of the advances. The Appellant, represented by Mr. Malhotra, contested this direction, arguing that since the advances were given in India, the interest rate applicable in India should have been considered. The Appellant further contended that the judgment cited by the Tribunal did not establish any legal precedent, and the observations therein were merely obiter dicta, thus not binding as a direction.In response, the Respondent, represented by their counsel, supported the Tribunal's order, indicating a difference in opinion between the parties regarding the appropriate interest rate calculation methodology. Upon considering the arguments presented by both sides, the Court referred to previous judgments, particularly one involving VVF Ltd. vs. DCIT, to establish a precedent. The Court highlighted that the interest rate for loans to Associate Enterprises should be determined based on the rate applicable in the country where the loan is received or consumed. The Court also referenced another case involving Tech Mahindra Ltd., emphasizing the importance of commercial principles in international transactions and the choice between different interest rates based on the currency involved.Ultimately, the Court concluded that the LIBOR rate, along with a 2% markup, was a reasonable and proper approach to determine the Arm's Length interest for the advances made to a company situated abroad. The Court dismissed the appeal, stating that no substantial question of law arose for consideration in this case. Therefore, the Tribunal's decision to use LIBOR plus 2% instead of LIBOR plus 3% applied by the Transfer Pricing Officer was upheld, and the appeal was dismissed without any costs incurred by either party.