HC upholds LIBOR rates for interest on delayed payments under cost of funds approach, confirming loan characterization

The HC upheld the Tribunal's order applying LIBOR rates to compute interest on delayed payments to AEs, finding that extending credit beyond the normal 60-day period effectively constitutes a loan to the AE. Since the respondent did not charge interest on delayed payments from either AEs or non-AEs, the court held that the cost of funds approach is appropriate. The ruling affirmed that when the cost of local funds is lower than interest payable elsewhere, the enterprise would secure local loans to meet payment obligations timely. The Tribunal's use of LIBOR as the benchmark rate was consistent with established precedent and was not erroneous under the facts of the case.

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Issues:
1. Application of SBI PLR rate vs. LIBOR for charging interest on receivables.
2. Consideration of local rates vs. international lending rates for loans related to export receivables.

Analysis:
1. The appeal challenges the Tribunal's order regarding the application of interest rates on delayed recovery of export receivables and expenses. The respondent, engaged in providing EPC services to its Associated Enterprises (AEs), argued for benchmarking interest at LIBOR, while the TPO applied SBI PLR rate. The Tribunal, in its impugned order, found that no interest was charged by the respondent to AEs or non-AEs for delayed payments, and the operating margin with AEs was higher. The Tribunal determined the ALP of notional interest at LIBOR rates, citing a previous court decision. The Court upheld this finding, stating that the normal price in competitive conditions between non-AEs is the key consideration in determining ALP.

2. The second issue revolves around the consideration of local rates vs. international lending rates for loans related to export receivables. The DRP rejected the respondent's plea to benchmark the ALP at LIBOR rates, leading to a final assessment order by the Assessing Officer. The Tribunal, in its order, emphasized that extending credit beyond the normal period is akin to granting a loan to AEs. The Court agreed with the Tribunal's decision to compute interest at LIBOR rates, aligning with the principles established in a previous court ruling. The Court dismissed the appeal, stating that the proposed questions of law did not raise substantial issues.

In conclusion, the Court upheld the Tribunal's decision to compute notional interest at LIBOR rates for delayed recovery of export receivables and expenses, emphasizing the importance of competitive pricing and local vs. international lending rates in transfer pricing assessments.

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