Interest Rate Must Be Market-Determined Based on Currency Of Repayment: ITAT Directs Adoption of LIBOR Rate for AE Loans Repayable in USD, Rejects SBI PLR [Read Order]

The Delhi bench of the Income Tax Appellate Tribunal (ITAT) directed the Assessing Officer (AO) to adopt the London Interbank Offered Rate (LIBOR) rate for benchmarking loans advanced to Associated Enterprises (AEs), ruling that the interest rate must be market-determined based on the currency of repayment, which in this case was the US Dollar.

M/s. ACME Cleantech Solutions (P) Ltd., the assessee, had advanced loans to its AEs. The AO and the Transfer Pricing Officer (TPO) made a transfer pricing adjustment of Rs. 11.02 crore by applying the domestic SBI PLR rate. The Revenue authorities contended that the loans were repayable in Indian Rupees, justifying the use of a domestic interest rate benchmark instead of the international rate pleaded by the assessee.

Aggrieved by the application of the domestic rate, the assessee approached the ITAT. The assessee submitted that the loan agreements, specifically the modified agreements filed with the return, explicitly provided for repayment in US Dollars or USD equivalent currency. It was argued that since the currency of repayment was USD, the applicable arm's length interest rate should be the LIBOR rate, not the SBI PLR.

The Revenue counsel supported the lower authorities' orders, arguing that the AO/TPO had correctly applied the State Bank of India Prime Lending Rate (SBI PLR) rate based on their interpretation of the repayment terms.

The bench comprising S. Rifaur Rahman (Accountant Member) and Vimal Kumar (Judicial Member) perused the modified loan agreements placed in the paper book. The Tribunal observed that specific clauses in the agreements with AEs in Mauritius and Cyprus clearly stipulated that repayment would be made in US Dollar equivalent currency.

Relying on the jurisdictional Delhi High Court decision in CIT-I vs. Cotton Naturals (I) (P.) Ltd., the Tribunal held that the interest rate for a loan must be market-determined and applicable to the currency in which the loan is to be repaid.

The ITAT allowed the assessee's ground on this issue, directing the AO to reject the SBI PLR rate and charge interest on the loans at the LIBOR rate, further increased by a factor of 5.5% as applicable at the relevant time.

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