ITAT Holds PLR Applicable for Benchmarking Interest on Rupee-Denominated CCDs, Deletes ₹9.35 Crore TP Adjustment [Read Order]

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that interest paid on rupee-denominated convertible debentures cannot be benchmarked using LIBOR-based rates and must instead be tested against domestic prime lending rates.

The Tribunal ruled that applying foreign currency benchmarks to Indian currency instruments is legally unsustainable and deleted a substantial transfer pricing adjustment made by the tax authorities.

The appeal was filed by Cinepolis India Pvt. Ltd. against the assessment order passed pursuant to directions issued by the Dispute Resolution Panel for the Assessment Year 2016-17. The dispute arose from a transfer pricing adjustment of ₹9.35 crore in respect of interest paid by the assessee on compulsorily convertible debentures issued to its non-resident associated enterprise.

During the relevant assessment year, the assessee had issued CCDs aggregating to ₹367.50 crore through private placement to its associated enterprise at an interest rate of 12% per annum. The assessee benchmarked the transaction by analysing interest rates paid by 65 Indian companies on similar CCD issuances and concluded that the transaction was at arm’s length, as the average market rate was higher than the interest actually paid.

The Transfer Pricing Officer rejected the benchmarking study conducted by the assessee and adopted the SBI base rate of 9.71% without allowing any risk premium. The DRP, however, directed the TPO to apply a LIBOR-based benchmark, relying on judicial precedents dealing with foreign currency loans. Consequently, the Assessing Officer finalised the assessment by making an adjustment of ₹9.35 crore on account of interest on CCDs.

Before the Tribunal, comprising Madhumita Roy (Judicial Member) and Renu Jauhri (Accountant Member), the assessee contended that the issue was covered by the Special Bench decision in Hyderabad Infratech (P.) Ltd., wherein it was held that interest on rupee-denominated debentures must be benchmarked using domestic lending rates and not LIBOR. It was further argued that the CCDs and interest payments were entirely INR denominated and therefore could not be equated with foreign currency loans.

The Tribunal accepted the assessee’s submissions and observed that the nature of the instrument and the currency denomination are determinative for benchmarking purposes. It held that CCDs denominated in Indian currency are similar to rupee loans and cannot be compared with foreign currency borrowings. The Tribunal further noted that LIBOR-based rates are applicable only where the underlying transaction is denominated in foreign currency.

Relying on the ratio laid down by the Special Bench, the Tribunal held that the interest paid on rupee-denominated CCDs must be benchmarked using domestic prime lending rates. Since the interest rate paid by the assessee was within the arm’s length range, the transfer pricing adjustment made by the Assessing Officer was found to be unsustainable.

Accordingly, the Tribunal deleted the addition of ₹9.35 crore made on account of transfer pricing adjustment relating to interest on CCDs and allowed the appeal filed by the assessee.

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