Market interest rate applicable to currency in which loan is repayable to AE has to be used to compute ALP of interest

CIT v. COTTON NATURALS (I) (P.) LTD. (2015) 55 taxmann.com 523 (Delhi High Court)

 

The arm's length interest rate for loan to overseas subsidiary should be computed on basis of market rate of interest applicable to the currency in which the loan has to be repaid.

Facts:

• Assessee (an Indian Company) gave loan to its US subsidiary at interest rate of 4%.
• TPO made upward adjustment to the assessee's income as he was of the view that the rate of interest charged by assessee was not equivalent to rate of interest prevailing in Indian market.
• On objections filed by assessee with DRP, it directed TPO to take arm's length rate of interest as Prime Lending Rate ('PLR') fixed by the RBI. 
• Aggrieved by the order passed in pursuance of DRP's directions, assessee filed appeal before the Tribunal who passed its order in favour of assessee. Aggrieved by the order of Tribunal, revenue filed the instant appeal before the High Court.

The High Court held in favour of assessee as under:

• Interest rates payable on currency specific loans/deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e., the rate of interest.
• In the instant case, the loan was given in foreign currency, i.e., US dollar and such loan was to be repaid in the same currency. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate. Thus, Arm's length price of interest has to be determined on basis of market rate of interest applicable to loan taken in US dollar.