ITAT Holds SBI PLR Applicable for Arm’s Length Interest on INR-Denominated FCCDs [Read Order]

The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) held that for debentures denominated in Indian Rupees (INR), the correct benchmark for arm’s length interest is the State Bank of India Prime Lending Rate (SBI PLR) and not the London Interbank Offered Rate (LIBOR), thereby upholding the order of the Commissioner of Income Tax (Appeals) [CIT(A)].

The assessee, ZF Wind Power Coimbatore Pvt. Ltd., a private limited company engaged in manufacturing gearboxes for wind turbine generators, filed its revised return of income for the Assessing Year (AY) 2012–13 declaring a loss of ₹22,25,56,267 and was selected for scrutiny, the Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) to benchmark its international transactions.

During the assessment, the TPO examined interest paid on Fully Compulsorily Convertible Debentures (FCCDs) amounting to ₹100 crore, issued in Indian Rupees at 13.5% interest.

The assessee had benchmarked the rate using the SBI Prime Lending Rate (PLR), which stood at 14.46% for Financial Year (FY) 2011–12, as its interest payment at arm’s length. However, the TPO rejected this analysis, substituted LIBOR, and made an adjustment of ₹2.03 crore.

On appeal, the Commissioner of Income Tax (Appeals) directed the TPO to adopt the average SBI PLR since the FCCDs were denominated in INR. The Revenue challenged this, arguing that LIBOR should govern the benchmarking.

The bench comprising George George K (Vice President) and S.R. Raghunatha (Accountant Member) observed that the determinative factor is the currency in which the loan or debenture is denominated, not the residence of the lender or borrower and noted that FCCDs issued in INR are related to a domestic loan must be benchmarked against domestic lending rates

The tribunal emphasized that the currency of the loan determines the applicable market rate of interest. Since ZF Wind Power’s FCCDs were rupee-denominated, the correct benchmark was SBI PLR by relying on the Special Bench ruling in ACIT vs. Hyderabad Infratech Pvt. Ltd.(2018).

Accordingly, the ITAT upheld the CIT(A)’s order and held that the assessee’s 13.5% rate was well within arm’s length against the prevailing PLR of 14.46%.

The assessee was represented by Ashik Shah along with Soundariya, while P.K. Senthil Kumar represented the revenue.

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