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Facts
The assessee obtained External Commercial Borrowings (ECB loans) from its Associate Enterprises in FY 2005-06 at a fixed interest rate of 5.50%, which had RBI approval and was accepted by the TPO in prior assessment years. For AY 2017-18, the TPO, however, benchmarked the interest at 5.23% based on the prevailing LIBOR, leading to a Transfer Pricing adjustment of Rs. 4,96,504/-.
Held
To avoid further litigation, the assessee offered to settle the dispute by accepting an interest benchmarking rate of 5.35%. The Tribunal found this offer fair and justifiable, directing the AO to apply the 5.35% rate for AY 2017-18, clarifying that this settlement is specific to this year and not binding for other periods or loan transactions.
Key Issues
Whether the Transfer Pricing adjustment on interest paid on ECB loans to Associate Enterprises should be based on the fixed rate approved by RBI at the time of loan inception (5.5%) or the prevailing LIBOR rate (5.23%) for the assessment year.
Sections Cited
143(3), 144C, 144C(13), 153
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: Shri Sanjay Garg & Shri Makarand Vasant Mahadeokar
Per Sanjay Garg, Judicial Member:
The present appeal has been preferred by the assessee against the assessment order passed by the Assessing Officer (AO) u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), in pursuance of the directions issued by the Dispute Resolution Panel (DRP) u/s.144C of the Act. relevant to Assessment Year (AY) 2017-18.
The assessee, in this appeal, has taken the following grounds of appeal:
“Ground No. 1:
On the facts and in the circumstances of the case and in law, the order passed by the learned Assessing Officer ('AO') is bad in law and in facts.
Ground No. 2:
The learned AO has erred by passing the final assessment order on March 31, 2022 which is beyond the period of time stipulated in section 144C(13) r.w.s 153 of the income Tax Act, 1961 ('Act'), thereby invalidating the entire assessment.
Ground No. 3:
The learned Transfer Pricing Officer (hereinafter referred to as "TPO") erred in computation of Arm's Length Price (hereinafter referred to as "ALP") with respect to Interest on External Commercial Borrowings (hereinafter referred to as "ECB") obtained from the associated enterprise. In doing so, they have grossly erred by not accepting the LIBOR based fixed rate of interest agreed at the time of entering into the ECB agreement which is within the permissible all-in-cost rate as per Reserve Bank of India norms.
Ground No. 4:
The Learned TPO erred in considering the LIBOR rate for the Financial Year 2016-17 instead of the LIBOR rate at the time of commencement of loan agreement between the appellant and associated enterprises.
The Appellant prays that above grounds be considered discretely and without prejudice to each other.
The Appellant craves leave to add, omit or alter grounds of appeal before or during the hearing of the appeal.”
3. The brief facts of the case are that certain External Commercial Borrowings (ECB loans) were taken by the assessee in the Financial Year (FY) 2005-06 from its Associate Enterprises. The said loan was taken after obtaining approval of the Reserve Bank of India (R.B.I.) dated 16/08/2005, the rate of interest provided in the agreement was duly accepted by R.B.I. It has been submitted that the rate of interest was fixed in the agreement after taking the six months LIBOR (London Interbank Offered Rate), which is taken as global Benchmark for interest rates representing the average rate of interest for the inter-banking loans and financial deeds, and by adding a maximum of 200 BPS of spread prevailing in Financial Year 2005-06 resulting into the final fixed rate of 5.50%. It has been pleaded that the said fixed rate of interest of 5.50%was taken into consideration by the Transfer Pricing Officer (TPO) for AY 2008-09 onwards and that the Transfer Pricing Officer during the course of assessment for AYs 2008-09, 2009-10, 2010-11, 2011-12, 2012-13, 2013-14 & 2016-17 had accepted the same at Arm’s Length Price (ALP). It has been further pleaded that the said rate of interest @ 5.5%, throughout the period since 2005, has never been changed as the loans were taken by the assessee at a fixed rate of interest after taking approval from the RBI. However, for the year under consideration, the TPO applied the comparative interest rate of 5.23% to benchmark the transactions of the assessee with its Associate Enterprises and citing that the upper rate of interest rate prescribed by the RBI is not a transaction itself, and that the same is prescribed for FERA/FEMA purposes. The Assessing Officer (AO) as per the directions of the DRP, considered the LIBOR for the FY 2017-18 as bench marking rate at 5.23% and held that the assessee paid excessive interest to its Associate Enterprises (AEs) and thereby made the transfer pricing adjustment/addition of Rs.4,96,504/- in to the income of the assessee.
4. Before us, the Ld. AR of the assessee has submitted that the interest @ 5.5% was fixed rate of interest and the same has been accepted throughout since the year 2005-06, as noted above, and no Transfer Pricing adjustment has ever been made on this issue. He has submitted that merely for the year under consideration the LIBOR was less, that cannot be made a ground to make transfer pricing adjustment as the assessee had taken loan on fixed rate of interest after availing approval from the RBI and which was according to the LIBOR/market rate prevailing at the time as discussed above.
4.1. Before going into the controversy in detail, we find that in this case, there is a small dispute as to whether in respect of the loan transaction of the assessee with it’s AEs, the earlier interest rate @ 5.5% is to be bench marked or the LIBOR rate for the year under consideration as taken by the TPO @ 5.23% is to be considered. The Ld. AR of the assessee has contended that though the said standard rate of 5.5% has been accepted throughout in the past many years by the TPO and no adjustment has ever been made as discussed above, however, to settle the dispute once for the all, the assessee is ready for accepting the bench-marking of interest rate @ 5.35% and is ready to pay the tax on the corresponding Transfer Pricing adjustments. He has submitted that the assessee has agreed for the same to avoid future/continuation of litigation on this issue and it will be in the interests of the assessee to settle all its disputes and concentrate on its business.
The Ld.DR, however, has relied upon the findings of the TPO/AO.
After considering the rival submissions, we find that though, there is a strong merit in the case of the assessee as the assessee has taken loan after obtaining approval of RBI at a fixed rate of interest and even the said bench- marking of interest rate @ 5.5% has been accepted in the past many years by the TPO, However, since the Ld.AR has fairly agreed to close the dispute once for the all by accepting the bench-marking of interest rate @ 5.35%, we find that the same is very fair and justifiable and we are inclined to hold that it will serve the purpose of justice and close the dispute once for the all on this issue. Accordingly, it is directed to the AO to bench-mark the interest rate@ 5.35% for the year under consideration. It is made clear that our observation/settlement of the dispute for the year under consideration will not have any binding effect for any other year or in respect of any other loan transaction of the assessee with its Associate Enterprises.
With the above observations, the appeal of the assessee is treated as partly allowed.
Order pronounced in the Open Court on 23 /12/2025.