Foreign currency loan benchmarking and receivables adjustments turn on currency of repayment and working capital pricing effects.

Where a foreign currency loan is repayable in that currency, arm's length interest must be benchmarked to the currency-linked market rate, so LIBOR and the applicable spread applied instead of SBI PLR. No separate transfer pricing adjustment was warranted on outstanding receivables because working capital impact had already been factored into pricing. For section 14A read with Rule 8D, only investments that actually yielded exempt income were to be included in the computation. The warranty provision required verification as to whether it had crystallised into an ascertained liability; if so, it would be allowable and not added to book profits under section 115JB. The Revenue appeal was rejected as time-barred for inordinate delay without sufficient cause.

---

---

Issues: (i) Whether interest on loans advanced to associated enterprises was to be benchmarked at SBI PLR or LIBOR based on the currency of repayment; (ii) whether no separate transfer pricing adjustment was warranted on outstanding receivables where working capital impact was already factored into pricing; (iii) whether disallowance under section 14A read with Rule 8D had to be recomputed by considering only investments yielding exempt income; (iv) whether provision for warranty was an ascertained liability and, if so, whether it was allowable and not to be added to book profits; (v) whether the Revenue appeal was liable to be dismissed for inordinate delay.

Issue (i): Whether interest on loans advanced to associated enterprises was to be benchmarked at SBI PLR or LIBOR based on the currency of repayment.

Analysis: The loan agreements and modified agreements showed that repayment was to be made in US dollar equivalent currency. In such a case, the appropriate benchmark is the market rate applicable to the currency in which the loan is repayable, and not the domestic lending rate. The reasoning follows the principle applied to foreign currency loans that the arm's length interest must correspond to the currency of repayment.

Conclusion: The issue was decided in favour of the assessee, and the interest was directed to be charged at LIBOR with the applicable spread.

Issue (ii): Whether no separate transfer pricing adjustment was warranted on outstanding receivables where working capital impact was already factored into pricing.

Analysis: The statutory explanation to section 92B brings receivables within the scope of international transaction, but the mere existence of receivables does not automatically justify an independent adjustment. Where the assessee had already demonstrated that working capital impact was reflected in its margins and its margin on AE sales was higher than on non-AE sales, a further adjustment only on receivables would distort the transaction analysis.

Conclusion: The issue was decided in favour of the assessee and the adjustment on outstanding receivables was deleted.

Issue (iii): Whether disallowance under section 14A read with Rule 8D had to be recomputed by considering only investments yielding exempt income.

Analysis: For computation under Rule 8D(2)(ii), only the average value of investments that actually yielded exempt income is relevant. Investments that did not yield exempt income could not be included for the purpose of the disallowance.

Conclusion: The issue was partly decided in favour of the assessee, and the disallowance was directed to be recomputed accordingly.

Issue (iv): Whether provision for warranty was an ascertained liability and, if so, whether it was allowable and not to be added to book profits.

Analysis: The warranty provision was supported by the assessee's past experience and the financial statements indicated utilization of a substantial part of the opening provision in the succeeding year. The issue required verification of the extent to which the provision had crystallised into actual expenditure. If the provision represented an ascertained liability, it would not warrant disallowance and would also not be added to book profits under section 115JB.

Conclusion: The issue was partly decided in favour of the assessee and was remanded for verification.

Issue (v): Whether the Revenue appeal was liable to be dismissed for inordinate delay.

Analysis: The delay was substantial and the explanation offered did not constitute reasonable cause. The appeal was not filed within time merely because appeals for other years were pending, which was held insufficient to justify condonation.

Conclusion: The Revenue appeal was not entertained and stood dismissed on limitation.

Final Conclusion: The assessee succeeded on the principal transfer pricing issues, obtained relief on the section 14A computation, and secured a remand on the warranty provision issue, while the Revenue's delayed appeal was rejected at the threshold.

Ratio Decidendi: Where a foreign currency loan is repayable in that currency, arm's length interest must be benchmarked with reference to the currency-linked market rate; receivables do not warrant a separate transfer pricing adjustment if working capital effects are already captured in pricing; and for Rule 8D, only investments yielding exempt income are to be considered.

---