November 2019

Section 92C of the Act, Article 11 of India-Germany DTAA – In respect of loans advanced to AE, arm’s length rate of interest should be determined on the basis of the rate prevalent in the country where loan is given – EURIBOR / LIBOR is not average interest rate at which loans are advanced and hence, they cannot be considered comparable uncontrolled rate of interest

Geeta Jani | Dhishat B. Mehta
Chartered Accountants

7. [2019] 109 taxmann.com 48 (Trib.) Pune DCIT vs. iGate Global Solutions Ltd. ITA No.: 286 (Bang.) of 2013 A.Y.: 2007-08 Date of order: 5th August, 2019

 

Section 92C of the Act, Article 11 of India-Germany DTAA – In respect of loans advanced to AE, arm’s length rate of interest should be determined on the basis of the rate prevalent in the country where loan is given – EURIBOR / LIBOR is not average interest rate at which loans are advanced and hence, they cannot be considered comparable uncontrolled rate of interest

 

FACTS

The assessee, an Indian company, was a subsidiary of an American company. It acted as a single source of a broad range of information technology applications, solutions and services that included client / server position and development. The assessee advanced loans to its German AE in Euro and to its American AE in USD. The assessee had charged interest @ 1.50% to its German AE and @ 6% to its American AE.

 

 

The TPO observed that the arm's length interest rate on such loans should be the rate which the assessee would have earned if it had advanced loan to an unrelated party in India. Applying the Comparable Uncontrolled Price (CUP) method as the Most Appropriate Method (MAM), the TPO determined the arm's length rate interest as per BBB bonds in India and accordingly recommended transfer pricing adjustment.

 

Aggrieved, the assessee appealed before the CIT(A). The CIT(A) held that the domestic Prime Lending Rate would have no application and the interest rate prevalent in the country in which the loan is received should be considered for determining arm’s length rate of interest. Since the loan was given in Germany and in the USA, international rates like LIBOR or EURIBOR should be considered.

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