Transfer pricing benchmarking for external borrowings must reflect changed lender terms, tenor and rate structure, not regulatory caps alone.

Transfer pricing for interest on external commercial borrowings must be benchmarked on contemporaneous facts where lender identity, jurisdiction, tenor, or rate structure materially change. The Tribunal noted that a shift from a Mauritius lender to a United States lender, together with changes from floating to fixed interest and an extended maturity period, required fresh benchmarking and made the original comparability analysis unreliable. It also held that RBI's all-in-cost ceiling is only a regulatory cap and cannot by itself establish arm's length price, though it may support the analysis. For the second borrowing, fixed-rate and period mismatches required re-benchmarking, and consistency could not override materially changed facts.

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Issues: Whether the transfer pricing adjustment on interest paid on external commercial borrowings was sustainable, including the correctness of benchmarking for the two borrowings and the relevance of changed lender jurisdiction, interest structure, tenor and RBI all-in-cost ceiling.

Analysis: The Tribunal found that in respect of the first borrowing, the lender had changed from a Mauritius entity to a United States entity during the relevant year, the interest terms were altered from floating to fixed, and the maturity period was extended. It held that the fresh benchmarking carried out by the Transfer Pricing Officer proceeded on an incorrect factual footing because the lender's jurisdiction and the altered commercial terms were not properly taken into account. It further held that the assessee's own and corroborative benchmarking exercises also failed to fully account for the changed economic conditions, including the revised tenor. The issue was therefore restored for fresh adjudication. On the RBI ceiling argument, the Tribunal held that the all-in-cost ceiling is only a regulatory cap and does not by itself establish arm's length price, though it remains a relevant corroborative factor. On the second borrowing, the Tribunal found that the Transfer Pricing Officer benchmarked a fixed-rate borrowing as though it were floating, and also used the wrong period for comparability. It directed fresh benchmarking after considering the assessee's corroborative Bloomberg analysis and the adjustments made therein. The Tribunal rejected the plea based on consistency because each assessment year requires contemporaneous benchmarking and the facts had materially changed.

Conclusion: The transfer pricing adjustment on interest on external commercial borrowings was set aside for fresh determination, with the assessee succeeding on the substantive transfer pricing grounds.

Ratio Decidendi: Where the borrowing terms, lender identity or jurisdiction, tenor, or rate structure materially change, arm's length price must be determined afresh on the correct contemporaneous facts, and a regulatory interest ceiling cannot substitute for transfer pricing benchmarking under the most appropriate method.

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