Currency in which the Loan is to be Re-Paid determines the Rate of Return on the Money Lent: ITAT [Read Order]

In M/s. Russell Credit Limited vs. Joint Commissioner of Income Tax, Kolkata Bench of Income Tax Appellate Tribunal (ITAT) held that the interest rate should be the market-determined interest rate applicable to the currency concerned in which the loan has to be repaid.

The assessee lend an interest free amount of 5 Lakh Australian Dollar (AUD) to its Associated Enterprise (A.E.) Technico Pty. Ltd. Australia (TPL). For the purpose of determining the arm’s length, the assessee adopted the CUP method and took the rate of interest at 8.91% as was prevailing in Australia. The assessee determined the arm’s length rate of interest using the average rate of interest which was the borrowing rate applicable to corporate’s which prevailed in Australia during the concerned year. Accordingly, the assessee computed the arm’s length interest of AUD 44,550 which was converted into Indian currency i.e. 15,75,444/-. However, the Assessing Officer (A.O) disagreed with the interest rate adopted by the assessee and computed it at 10% interest rate. According to A.O. the expression bank rate noted in the loan agreement does not expressly specifies whether it refers to the bank rate prevailing in India or Australia. Therefore, he had adopted the bank rates in India and was of the opinion that 10% interest need to be computed for the amount given to the AE and thereafter, made an addition.

Aggrieved an appeal was preferred before the CIT (A). The CIT (A) dismissed the appeal of the assessee and confirmed the action of the A.O in computing the chargeable interest at 10%.

Relying on the decisions of Delhi High Court in CIT Vs. Cotton Naturals (I) (P) Ltd. and Bombay High Court in CIT Vs. the Great Eastern Shipping Co.Ltd. the ITAT Kolkata Bench comprising of Judicial Member Aby. T Varkey and Accountant Member J. Sudhakar Reddy observed “the action of the assessee in adopting the bank rate prevailing in Australia is correct and the AO erred in adopting the Indian bank rate. The loan amount was given in Australian currency and as per the promissory note the AE has to return the amount in Australian Dollar. Therefore, applying the ratio laid by the Hon’ble High Courts discussed above, we hold that there was no necessity of any arm’s length adjustment in this case and, therefore, we direct the deletion of the addition made on this count. Ground of appeal of assessee in respect to Transfer Pricing raised by it is allowed.”