Rupee-denominated CCD interest must be benchmarked to domestic rates, not LIBOR, in transfer pricing analysis.

Interest on rupee-denominated compulsorily convertible debentures issued to an associated enterprise was required to be benchmarked against the domestic interest rate applicable to Indian currency, not LIBOR. Applying a foreign-currency benchmark to an instrument denominated in Indian currency was found inappropriate, so the transfer pricing addition based on that method was unjustified. The arm's length price adjustment on the interest component was deleted.

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Issues: Whether interest paid on compulsorily convertible debentures denominated in Indian currency was to be benchmarked by applying prime lending rate rather than LIBOR, and whether the transfer pricing adjustment made on that basis was sustainable.

Analysis: The dispute concerned benchmarking of interest on rupee-denominated CCDs issued to an associated enterprise. The Tribunal followed the Special Bench view that where the instrument is denominated in Indian currency, the comparable benchmark is the domestic interest rate applicable to such currency, and foreign-currency benchmarks like LIBOR are not appropriate. On that basis, the addition made by applying the contrary benchmark was held to be unjustified.

Conclusion: The adjustment on account of arm's length price of interest on the CCDs was deleted, and the assessee succeeded on the substantive transfer pricing issue.

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