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Facts
The assessee advanced a loan in AED (United Arab Emirates Dirham) to its associated enterprise in Dubai, charging interest at 3.8% (LIBOR + 2.5%). The Assessing Officer (AO) treated the loan as an INR loan and computed interest at 11% (SBI PLR), adding the difference to the assessee's income. The assessee contended that the loan was in AED and Form 3CEB erroneously showed it as INR due to a clerical error.
Held
The Tribunal noted that the currency in which the loan is to be repaid determines the applicable interest rate. The primary issue was whether the loan was in AED or INR, and consequently, which interest rate was appropriate. Due to the ambiguity in documentation regarding the repayment currency, the Tribunal remitted the issue back to the AO/TPO for denovo consideration.
Key Issues
Whether the loan advanced to the associated enterprise was in AED or INR, and consequently, what is the appropriate arm's length interest rate for computing the addition to income.
Sections Cited
263, 143(3), 92CA(3)
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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SMT. BEENA PILLAI & SHRI GIRISH AGRAWAL
Per: Smt. Beena Pillai, J.M.: The present appeal filed by the assessee arises out of order dated 30/01/2025 passed by Faceless Assessment Unit, for assessment year 2017-18 on following grounds of appeal :
2 ITA 1435/Mum/2025; A.Y. 2017-18 Gemini Property Developers India LLP “1. On the facts and circumstances of the case and in law, the Ld. AO, Ld. TPO and Hon'ble DRP, have erred in making an addition of Rs. 67,20,937to the income returned by the Appellant. The Appellant prays that the addition be deleted and the returned income be accepted.
2. On the facts and circumstances of the case and in law, the Ld. AO, Ld. TPO and Hon'ble DRP, have erred in considering the loan granted to Gemini Global Real Estate Limited, the Associated Enterprise of the Appellant, as an Indian Rupee loan, without considering the documents and evidences filed by the Appellant.
On the facts and circumstances of the case and in law, the Ld. AO, Ld. TPO and Hon'ble DRP, have erred in calculating interest at 11% p.a. (base rate of 9.5% of the State Bank of India as on30.06.2016 + 150 basis points), instead of the rate of 3.8% p.a. (LIBOR 1.3% plus 2.5%) adopted by the Appellant.
4. The Appellant craves leave to, add to or alter, by deletion, substitution, or otherwise, any or all of the foregoing grounds of appeal at or before the hearing, and to submit such statements, documents” Brief facts of the case are as under:
The assessee filed its return of income on 06/02/2018 declaring total income of Rs.20,110/-. The case was selected for scrutiny and order u/s.133(3) was passed on 10/02/2019 assessing the taxable income at Rs.20,110/-. 2.1 Subsequently, since the assessing officer completed the assessment without making reference to Transfer Pricing Officer, in respect of the international transaction. The PCIT – 27 thus Mumbai passed order u/s.263 of the Act on 15/03/2023 directing the assessing officer to refer the international transaction reported by the assessee in form 3CEB of the transfer pricing officer for computing arms length price. 2.2 On receipt of the reference, the Ld.TPO observed that, the assessee paid Rs.48,38,753/- towards purchase of 51% of shares 3 ITA 1435/Mum/2025; A.Y. 2017-18 Gemini Property Developers India LLP of Gemini Global Real Estate Ltd, Dubai associated enterprise of assessee in Dubai. The Ld.AO also noted that, assessee gave loan to its AE in Dubai amounting to Rs.2,60,00,000/- United Arab Emirates Dirham of Dubai currency equivalent to Rs.49,25,13,625/- against which interest at the rate of 1 year LIBOR + 2.5% p.a. being 3.8% on the outstanding at the end of the each financial year was charged. 2.3 The Ld.AO was of the opinion that, the entire loan given by the assessee to its AE in Dubai from Shri Sudhakar Raghvendra Rao and Shri Prabhakar Raghvendra Rao, and Smt. Radha Sudhakar being the key management personal cum directors of the assessee and the AE at Dubai. 2.4 The Ld.AO further noted that, as per loan agreement dated 02/02/2017, the assessee and the AE in Dubai will be governed only by Indian laws and as per the jurisdictional courts in Mumbai. It was thus concluded by the Ld.AO that the interest charged by the assessee against the loan must be as per the SBI PLR rate. The Ld.AO thus computed interest at the rate of 11% p.a. from 02/02/2017 to 31/03/2017 on the outstanding loan amount of Rs. 49,25,13,625/- in Indian rupees mentioned in serial No. 14 of Form 3CEB, as against 3.8% computed by the assessee based on LIBOR rate. 2.5 The Ld.AO noted that, during the year under consideration the assessee offered to tax interest at the rate of 3.8% p.a. on accrual basis though no interest was received from the receiver of loan being AE at Dubai. The Ld.AO thus purposed to tax the difference being Rs.67,20,937/- for the year under consideration.
4 ITA 1435/Mum/2025; A.Y. 2017-18 Gemini Property Developers India LLP 3. On receipt of the transfer pricing order under 92CA(3) the Ld.AO passed draft assessment order on 30/01/2025 proposing addition as per the transfer pricing order.
4. On receipt of the draft assessment order, the assessee preferred objection before the DRP. 4.1 Before the DRP the assessee submitted additional evidence which was remanded to the Ld.AO/TPO. The additional evidence contained documents reflecting loan remittance by the assessee in foreign currency. The assessee also filed rejoinder in respect of the remand report and objected for the proposed addition. 4.2 After considering the submissions of the assessee the DRP observed as under : “6.4. Discussion and Directions of the DRP: Applicant argues the loan was in AED (UAE Dirham) and interest should be calculated at 3.8% as per LIBOR. TPO treated the loan as an INR loan, calculating interest at 11%. The applicant claims that Swift messages and RBI acknowledgment confirm the loan was in AED. However, form 3CEB submitted by the applicant itself mentions the transaction currency as INR. Form 3CEB is a statutory filing under the Income Tax Act and takes precedence over ancillary documentation like Swift messages unless an amendment or correction to the form was submitted. The applicant's mention of the transaction currency as INR in Form 3CEB contradicts their current claim of AED as the currency. The applicant failed to revise or correct the filing despite being aware of the discrepancy, weakening their argument. Interest rates are tied to the loan's currency. The applicant asserts LIBOR-based interest at 3.8% but does not provide evidence of this being agreed upon in a formal loan agreement. The absence of clear contractual terms specifying the interest rate and currency supports the TPO's application of an 11% rate as appropriate for INR loans, remand report finds no compelling evidence supporting the applicant's claim of AED as the loan currency, this reinforces the DRP's position to uphold the addition. The applicant's reliance on Swift messages and RBI acknowledgment does not conclusively refute the Form 3CEB filing 5 ITA 1435/Mum/2025; A.Y. 2017-18 Gemini Property Developers India LLP Under income tax law, the assessee bears the burden of substantiating claims with evidence. The applicant's failure to reconcile discrepancies between From 3CEB and ancillary documentation, coupled with the lack of a revised filing, undermines their objection. Direction- The applicant's objection lacks merit due to inconsistencies in documentation and inadequate substantiation of claims regarding loan currency and interest rate. The TPO's approach to treating the loan as an INR transaction and applying the 11% interest rate is justified and Panel agrees with it. AO's reasoning aligns with legal principles of consistency, burden of proof, and adherence to statutory filings”
5. On receipt of the DRP direction, the Ld.AO passed the final assessment order on 30/01/2025 making addition in the hands of the assessee as proposed by the transfer pricing officer.
Aggrieved by the order of the Ld.AO the assessee is in appeal before this Tribunal.
The Ld.AR furnished written submission summarising all hear arguments which is scanned and reproduced as under: “A. Brief facts 1. The Appellant is a Limited Liability Partnership incorporated on 26/10/2016 under the Limited Liability Partnership Act, 2008, engaged in the business of development of residential and commercial complexes across India. The subject assessment year is the first year of operation of the Appellant. 2. Gemini Global Real Estate Limited, UAE, is an Associated Enterprise (AE) of the Appellant. The Appellant held 51% shares in the said AE. Under a Loan Agreement dated 02/02/2017, the Appellant had advanced United Arab Emirates Dirham (AED') 26 Million (equivalent to Rs. 49,25,13,625) to the said AE. The amount was advanced in two tranches of AED 14,750,000 on 17/02/2017 and AED 11,250,000 on 1/03/2017. The advances were made out of capital contribution made by the partners of the Appellant LLP and not out of any loans taken by the Appellant from third parties. 3. Under the said agreement, the loan was liable to interest at one year LIBOR + 2.5%. The Appellant accordingly accrued an interest of Rs. 18,87,931 in its books of accounts for the year ended 31.03.2017, 6 ITA 1435/Mum/2025; A.Y. 2017-18 Gemini Property Developers India LLP computed at 3.8% (prevailing LIBOR of 1.3% plus 2.5%) on the outstanding loan amount.
The return filed by the Appellant was picked up for scrutiny, and the assessment was concluded u/s 143(3) of the Act, without making any addition to the returned income. The assessment was subsequently set aside by the CIT in exercise of his powers vested under Section 263 of the IT act, on the ground that the international transaction entered into by the Assessee has not been referred to the Transfer Pricing Officer. The order of the CIT was not challenged by the Assessee.
The TPO noted that, though the loan was advanced by the Appellant to the AE in AED, in clause 14 of Form 3CED, the assessee had disclosed the loan to be in INR (page 10-11 of the Paperbook]. As the loan has been advanced in INR, the TPO determined the ALP of the interest to be earned from the loan at 11%, being SBI base lending late, as against the rate of 3.8%, being LIBOR + 250 basis points adopted by the Appellant. Before the TPO as well as the DRP, the Appellant had advanced numerous evidences to prove that the loan was advanced in AED and not in INR. The TPO and DRP rejected the claim solely based on the disclosure in FORM 3CEB, overlooking the other primary evidences.
6. The Assessee states and submits that the following documents filed before the lower authorities clearly establishes that the loan was given in AED and not in INR. (i) Loan Agreement dated 02.02.2017 At page 2, the agreement expressly states that "the Lender shall disburse the necessary amount of foreign exchange aggregating United Arab Dirhams 26,000,000 (AED Twenty Six Million only) to the borrower. At page 3, the borrower is required to pay interest at LIBOR +2.5% per annum. [pages 29-33 of the Factual Paperbook] The Appellant submits that the fact that the interest is benchmarked to LIBOR itself shows that the loan in in a foreign currency and not in INR. (ii) TP Report-In its transfer pricing study report itself, the Appellant has stated that the loan is provided in AED. But for the purpose of reporting, the loan amount has been mentioned in INR. (page 18 of the Factual Paperbook] (iii) Form ODI filed with RBI - As per Foreign Exchange Management (Overseas Investment) Directions issued by the RBI, all investments by Indian residents have to be reported to the RBI in Form ODI notified therein. Loans advanced are also required to be reported under the said regulations. The Appellant had duly reported the transaction in 2017 itself to the RBI, in Form ODI, 7 ITA 1435/Mum/2025; A.Y. 2017-18 Gemini Property Developers India LLP indicating the advances to be in AED. [Pages 25-28 of the Factual Paperbook] (iv) Remittance transaction advice received from Kotak Mahindra Bank evidencing that the loan is in AED. The remittance advice explicitly states that the currency of the loan was AED, with a corresponding conversion into INR for reporting purposes. [Pages 36-40 of the Factual Paperbook] (v) SWIFT messages received on remittances by Kotak Mahindra Bank to Emirates NBD Bank, Dubai, which specifically state that the remittance is in AED (UAE DIRHAM). The accompanying SWIFT message confirms that the funds were remitted in AED, thereby evidencing the denomination and disbursement of the loan in foreign currency. [Pages 40-42 of the Factual Paperbook] 7. The Appellant submits that in clause 14 of the Form 3CEB filed for the year under consideration, the Appellant inadvertently states that the currency of the loan is in INR. This was a clerical error. The amount of loan mentioned under the column "Amount paid/received or payable/receivable in the transaction" correctly reflects the INR equivalent amount of the loan amounting to AED 26 million based on the prevailing exchange rate at that time. (Page 10-11 of the Factual Paperbook] Further, in the annual report of the Appellant, for the purpose of reporting in India, the loans have been shown in the equivalent value of INR [Schedule 5 (Short-Term Loans and Advances) of the annual report (Page 5 of the Factual Paperbook). From a reading of these two documents, on cannot come to a conclusion that the loans were advanced in INR, 8. The Appellant submits that reporting the loan amount in the Form 3CEB in INR is a mere clerical error. Further, the INR amount disclosed is not a round or whole figure, but a non-standard amount, which would not typically reflect the actual disbursement value of a loan. No loans are ordinarily disbursed in arbitrary or fractional figures in INR. On the contrary, the figure of AED 26 million is a clear, round value and consistent with commercial lending practice.
On similar facts, the Tribunal in numerous cases has held that disclosure made in statutory forms filed before the Income-tax Authorities cannot solely form the basis of a conclusion, where the factual evidence indicates to the contrary. (i) In DLF Hotel Holdings Ltd v. Dy CIT [2016] 71 taxmann.com 300 (Delhi - Trib.), the assessee advanced certain sums to its Cyprus subsidiary, with the intention of converting it into equity within 3 months. The advance was disclosed as interest free loan in Form 3CEB. Before the TPO, the assessee contented that the transaction was not of in the nature of loan, but capital infusion, 8 ITA 1435/Mum/2025; A.Y. 2017-18 Gemini Property Developers India LLP and hence cannot be subject to transfer pricing adjustment. The Tribunal accepted the contention of the assessee and held that disclosed in Form 3CEB is not conclusive of the real nature of the transaction, and that real nature of the transaction have to be construed from the evidences relating to the transaction. (ii) In Asst CIT . Thane Acid and Chemical Company [2019] 12 TMI 369-ITAT Mumbai, the assessee was a reseller of acids. In the Tax Audit report filed, it was mistakenly mentioned that the assessee was a manufacturer and that it had opening/closing stock of raw material/ finished goods. The AO, based on the disclosure in the Tax Audit report made adjustment to the returned income of the assessee. The Tribunal set aside the addition and held that no addition can be made merely based on disclosure in Form 3CD.
The Appellant further submits that the documents furnished by the assessee in support of its claim that the loan was advanced in AED have not been refuted by the TPO or the DRP.
LIBOR has been accepted as the most suitable bench mark for judging Arms' length price in case of a foreign currency loan, over Indian prime lending rate. Reliance in this regard is placed on the following judgments – (i) Commissioner of Income-tax -I v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523 (Delhi HC) (ii) Sasken Communication Technologies Ltd. v. Dy CIT [2018] 92 taxmann.com 486 (Bangalore-Trib.) (iii) Alok Industries Ltd. v. Deputy Commissioner of Income Tax, Central Circle-6(2), Mumbai [2019] 109 taxmann.com 49 (Mumbai - Trib.)” 6.1 The Ld.DR on the contrary submitted that, the assessee in loan agreement dated 02/02/2017 does not mention clearly the currency in which loan is going to be repaid by the AE in Dubai. He further submitted that, as per all loan agreement, disputes arising out of it will be governed by the Indian laws and the jurisdiction of the courts will be in the state of Maharashtra. The Ld.DR thus supported the action of the Ld.AO by submitting that Ld.TPO/AO correctly computed the interest rate by considering the SBI PLR rate.
9 ITA 1435/Mum/2025; A.Y. 2017-18 Gemini Property Developers India LLP 6.2 The Ld.DR also submitted that, assessee considered LIBOR based on US dollar, whereas the transaction of loan is with AE in Dubai where the currency is United Arab Emirates Dirham (UAED) of Dubai. The Ld.DR thus submitted that, in any event the rate of interest computed by the assessee is also not correct as they have used the US LIBOR rate.
We have perused the submissions advance by both sides in the light of record placed before us.
The question that is raised before us is to consider whether the interest rate prevailing in India should apply because the lender is in India, or the lending rent prevailing in US$ is to be apply though the receiver of the loan is a resident of Dubai. It is relevant to note the observation of the Hon’ble Delhi High Court in case of CIT vs. Cotton nature India Pvt. Ltd. In (2015) 55 taxmann.com 523 wherein, Hon’ble Court categorically observed that, the currency in which the loan is to be repaid, determines the rate of return on the money lent. We refer to the following observation on the Hon’ble High Court that submission the above:
“39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of 10 ITA 1435/Mum/2025; A.Y. 2017-18 Gemini Property Developers India LLP the Government and several other parameters. 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. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:- "The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt-at least within the framework of free capital markets (subject to the arbitrage). In regard to the question as to whether the level of interest rates in the lender's State or that in the borrower's is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt.B1. II 725 (1994), re. 1 § AStG). A differentiation between debt-claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt-claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no 'special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Art. 11(6), at least its wording, allows the authorities to 'eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in 11 ITA 1435/Mum/2025; A.Y. 2017-18 Gemini Property Developers India LLP the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money."
The aforesaid methodology recommended by Klaus Vogel appeals to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply.” 7.1 In the present facts of the case it is not clear from the documents placed on record, as to what is currency in which the loan will be repaid, or is agreed to be repaid by the AE in Dubai. The assessee is therefore directed to furnish relevant documents in support to established the currency in which the repayment of loan is to take place. Based on such evidences the Ld.AO/TPO shall consider the manner in which the interest attributable to such is loan is to be computed. 7.2 We accordingly remit this issue back to the Ld.AO/TPO for denovo consideration. Needless to say that proper opportunity of being heard must be granted to the assessee. Accordingly the grounds raised by the assessee stands partly allowed for statistical purposes. In the result the appeal filed by the assessee stands partly allowed for statistical purposes.