The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, held that the appropriate LIBOR rate should be applied to determine the Arm’s Length Price (ALP) for loans borrowed in foreign currency. The bench directed considering an interest rate of LIBOR plus 80 basis points.
Tech Mahindra Limited, a joint venture between M/s Mahindra & Mahindra Limited and British Telecom Plc, filed a return of income for A.Y. 2007-08, declaring a total income of Rs. 23,05,46,624. The case, involving an international transaction with its Associated Enterprise (AE), was referred to the Transfer Pricing Officer (TPO) for determining the arm’s length price.
After TPO adjustment, the Assessing Officer noted a loan of USD 5 million extended to the AE with an interest charge at LIBOR of 4%. The TPO disagreed, asserting that the assessee had borrowed at 9% and made a TP adjustment of Rs. 1,35,44,787.
The CIT(A) relied on RBI Master Circular No.07/2006-07 and directed the Assessing Officer to re-compute interest adjustments at LIBOR (+) 350 bps.
During proceedings, the counsel for the assessee argued that the loan was for temporary liquidity situations to its own subsidiary, eliminating the element of risk. The assessee proposed LIBOR (+) 80 bps for ALP.
The Revenue’s counsel argued that the loan is akin to External Commercial Borrowing (ECB), supporting the CIT(A)’s addition of 350 basis points to LIBOR.
The Tribunal observed that, for loans borrowed in foreign currency, the appropriate LIBOR rate should be applied, considering the lower risk in the case of loans to a subsidiary compared to third parties (ECB). The bench held that LIBOR plus 80 basis points is appropriate in the assessee’s case, dismissing the revenue’s appeal.
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