Benchmarked CCD interest using SBI PLR, not LIBOR; 10% rate accepted over LIBOR-based adjustment per transfer pricing rules

ITAT Hyderabad held that bench-marking interest on CCDs must be done using the SBI PLR rate, not LIBOR. The tribunal found the assessee's 10% benchmark compared with the SBI PLR (12.5%) consistent with precedent and directed the AO/TPO to delete the addition made by applying LIBOR. The assessee's appeal was allowed and the transfer-pricing adjustment relating to CCD interest was set aside.

---

---

ISSUES PRESENTED AND CONSIDERED

1. Whether interest on Compulsorily Convertible Debentures (CCDs) denominated in Indian Rupees must be bench-marked for transfer pricing purposes by reference to domestic prime lending rate (SBI PLR) rather than London Inter-Bank Offered Rate (LIBOR).

2. Whether CCDs denominated in Indian Rupees should be treated, for the purpose of transfer pricing benchmarking of interest, as rupee-denominated loans (and thus benchmarked against domestic interest rates) rather than as foreign currency loans (and thus benchmarked against LIBOR-based rates).

3. Whether the Tribunal should follow the ratio of the Special Bench decision holding that benchmarking of interest on rupee-denominated CCDs is to be done by applying PLR and direct the Assessing Officer/Transfer Pricing Officer to delete additions made by applying LIBOR.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Appropriate benchmark for interest on rupee-denominated CCDs (SBI PLR v. LIBOR)

Legal framework

Transfer pricing requires determination of arm's length price (ALP) for related-party transactions; interest on loans/CCDs must be benchmarked against comparable market rates applicable to the transaction.

Precedent Treatment (followed/distinguished/overruled)

The Court followed the decision of the Special Bench of the Tribunal in Hyderabad Infratech Pvt. Ltd. and Others, which held that interest on CCDs denominated in Indian currency must be benchmarked using domestic PLR rather than LIBOR.

Interpretation and reasoning

The Court noted that where CCDs are denominated in Indian Rupees they are in substance rupee-denominated debt instruments for benchmarking purposes. LIBOR relates to international/foreign currency lending markets and cannot be equated to domestic rupee lending rates. Applying an international benchmark (LIBOR + margin) to rupee-denominated CCDs would therefore be inappropriate because the relevant comparables and the currency of the obligation are domestic. The Court accepted the Special Bench's reasoning that the benchmark must reflect the rate applicable to loans extended in the currency concerned (i.e., domestic rates for INR-denominated instruments), and that FCCDs/CCDs denominated in INR cannot be treated on par with foreign currency loans for benchmarking.

Ratio vs. Obiter

The holding that rupee-denominated CCD interest must be benchmarked by applying PLR rather than LIBOR is treated as the ratio of the decision and a binding determination for the matter before the Tribunal.

Conclusions

The Court directed the Assessing Officer/Transfer Pricing Officer to delete the transfer pricing addition made by benchmarking interest on CCDs at LIBOR, and to apply SBI PLR for benchmarking; the appeal was allowed on this ground.

Issue 2 - Characterisation of CCDs as rupee-denominated loans for benchmarking purposes

Legal framework

Benchmarking requires identification of the nature and currency of the instrument to determine the appropriate comparable rate; characterization affects selection of the relevant market rate.

Precedent Treatment (followed/distinguished/overruled)

The Court adhered to the Special Bench's conclusion that CCDs denominated in Indian currency must be treated, for benchmarking interest, as rupee-denominated loans/instruments rather than as foreign currency loans.

Interpretation and reasoning

The Court reasoned that CCDs denominated in INR do not exhibit the currency risk or market characteristics of foreign currency borrowings; hence, international benchmark rates applicable to foreign currency loans are not appropriate comparators. The currency of denomination is material to benchmarking because the relevant interest rates are those prevailing for loans in that currency and market.

Ratio vs. Obiter

The proposition that INR-denominated CCDs should be benchmarked with reference to domestic interest rates is part of the operative ratio relied upon by the Tribunal.

Conclusions

CCDs denominated in Indian Rupees must be benchmarked against domestic lending rates (PLR); treatment as foreign currency loans for benchmarking is inappropriate and the AO/TPO's opposite conclusion was reversed.

Issue 3 - Applicability of Special Bench precedent and directive to revenue authorities

Legal framework

Tribunal decisions, and particularly Special Bench rulings, inform consistent application of transfer pricing principles across similar factual situations; appellate authority may follow such precedents when fact patterns align.

Precedent Treatment (followed/distinguished/overruled)

The Court expressly followed the Special Bench decision (Hyderabad Infratech et al.) which answered the question in favour of benchmarking via PLR for INR-denominated CCDs; no distinction was made from that precedent on the facts.

Interpretation and reasoning

Given the special bench's reasoned conclusion that currency of denomination determines the proper benchmark, and considering concordant ratios from High Courts noted by the Special Bench, the Tribunal found the precedent directly applicable. The Court thus adopted the Special Bench's analysis without departing on any distinguishing facts.

Ratio vs. Obiter

The reliance on the Special Bench's answer - that PLR applies to rupee-denominated CCDs - constitutes the basis for the Tribunal's operative direction and is treated as binding on the appeal at hand.

Conclusions

The Tribunal directed the Assessing Officer/Transfer Pricing Officer to delete the LIBOR-based addition and to apply SBI PLR for benchmarking interest on the INR-denominated CCDs; the appeal was allowed accordingly.

Cross-references and Limitation

Whereas multiple grounds were raised (characterisation as hybrid instrument, rejection of documentation, currency-of-denomination relevance, reinstatement under accounting standards), the Court considered and decided the appeal on the singular issue of benchmarking interest on rupee-denominated CCDs by reference to PLR, following the Special Bench. The Tribunal's decision is limited to benchmarking methodology for INR-denominated CCDs and directs deletion of the TP adjustment premised on LIBOR; other grounds were not separately adjudicated beyond their relation to the benchmarking issue.

---