Arm's length interest on rupee debentures accepted, with transfer pricing adjustment corrected to match the assessment record.

Transfer pricing treatment of interest on rupee-denominated non-convertible debentures turns on whether a 10% coupon paid to an associated enterprise is arm's length. The note records acceptance of the same rate in the prior year, treats the CBDT notification as relevant to the statutory ceiling for rupee-denominated instruments, and notes that the SBI PLR benchmark was used as supporting comparability while the MCLR objection was not accepted on the facts. It also corrects a computational error in the adjustment amount to match the figure actually adopted in assessment proceedings.

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Issues: (i) whether the interest paid at 10% on rupee-denominated non-convertible debentures issued to the associated enterprise was at arm's length and whether the appellate authority could rely on the CBDT notification and the SBI PLR benchmark. (ii) whether the correct amount of transfer pricing adjustment in respect of interest on non-convertible debentures was Rs. 8,27,24,756.

Issue (i): whether the interest paid at 10% on rupee-denominated non-convertible debentures issued to the associated enterprise was at arm's length and whether the appellate authority could rely on the CBDT notification and the SBI PLR benchmark.

Analysis: The transaction concerned rupee-denominated debentures payable and redeemable in Indian currency. The earlier transfer pricing exercise for the immediately relevant prior year had accepted the same 10% interest rate as arm's length after comparing it with SBI PLR. The notification relied upon by the assessee was treated as relevant for the statutory ceiling on interest for rupee-denominated bonds and as a supporting benchmark, while the Revenue's objection that MCLR had to be applied was not accepted on the facts found. The Tribunal also found no infirmity in the appellate authority's approach in accepting the assessee's material at the appellate stage for deciding the arm's length character of the interest.

Conclusion: The 10% interest on the rupee-denominated non-convertible debentures was rightly accepted as arm's length, and the Revenue's challenge failed.

Issue (ii): whether the correct amount of transfer pricing adjustment in respect of interest on non-convertible debentures was Rs. 8,27,24,756.

Analysis: The record showed that the transfer pricing officer had proposed, and the assessment order had adopted, an adjustment of Rs. 8,27,24,756 for the year under consideration. The appellate authority had inadvertently carried forward figures from the earlier year while discussing the amount of interest. That computational mistake required correction to align the order with the actual adjustment made in the assessment proceedings.

Conclusion: The correct amount of adjustment was Rs. 8,27,24,756, and the assessee's cross-objection on this point succeeded.

Final Conclusion: The transfer pricing addition on interest to the associated enterprise was sustained in principle, but the order was corrected to reflect the proper quantum of adjustment, resulting in dismissal of the Revenue's appeal and allowance of the assessee's cross-objection.

Ratio Decidendi: For rupee-denominated debentures, an arm's length interest benchmark may validly be assessed on the factual matrix and comparable domestic rate accepted in the record, and a computational error in the quantum of adjustment must be corrected to match the amount actually determined in the transfer pricing order.

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