Tribunal adjusts interest rate for arm's length price calculation

The Tribunal partially allowed the Revenue's appeal, directing the Assessing Officer/Transfer Pricing Officer to compute the interest rate based on the LIBOR rate for the relevant period, adjusted for the credit score of the Associated Enterprises. This decision aligns with international financial principles, ensuring a fair arm's length price for delayed receivables from AEs.

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Issues Involved:
1. Determination of the appropriate interest rate for delayed receivables from Associated Enterprises (AEs).

Issue-Wise Detailed Analysis:

1. Determination of the Appropriate Interest Rate for Delayed Receivables from AEs:

The Revenue's appeal challenges the order of the Commissioner of Income-tax (Appeals) [CIT(A)], which directed the application of the London Inter-Bank Offered Rate (LIBOR) instead of a 16% interest rate on delayed receivables from AEs. The Assessing Officer (AO) and Transfer Pricing Officer (TPO) had applied a 16% interest rate based on the State Bank of India (SBI) prime lending rate plus 300 basis points, treating receivables pending beyond six months as loans to AEs.

The Tribunal noted that the CIT(A) had relied on a previous decision in the case of Kohinoor Foods Limited, which upheld the application of the LIBOR rate for international loans. The Tribunal referenced multiple decisions supporting the use of LIBOR, including cases like Tech Mahindra Ltd. and Cotton Naturals (I) (P) Ltd., which emphasized that the interest rate should be based on the currency in which the receivables are denominated, not the lender's or borrower's country.

The Tribunal agreed with the CIT(A) and directed the AO/TPO to apply the LIBOR rate plus suitable basis points considering the credit score of the AEs. This approach aligns with the principle that the interest rate should reflect the market-determined rate applicable to the currency of the receivables, ensuring a fair and reasonable arm's length price.

Conclusion:

The Tribunal partially allowed the Revenue's appeal for statistical purposes, directing the AO/TPO to compute the interest rate based on the LIBOR rate for the relevant period, adjusted for the credit score of the AEs. This decision reinforces the application of international financial principles in determining transfer pricing adjustments for delayed receivables.

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