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

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: 5^th 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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2.  Functional and risk analysis was recorded in
the transfer pricing study report. The report was accepted by the Transfer
Pricing Officer both, in case of I Co and in case of the assessee

HELD

1. There is almost
judicial³  consensus ad
idem at the higher appellate forums that the arm’s length rate of interest
on loans advanced to the AEs should be considered with reference to the country
(in this case, Germany / USA) in which the loan was received and not from where
it was paid. Since India was the lender country, it was not correct to
determine the rate of interest in India as arm’s length rate of interest.

2. EURIBOR was
merely a reference rate calculated on the basis of the average rate at which
Euro Zone banks offer lending in the inter-bank market. Similar was the case
with the LIBOR, Thus EURIBOR / LIBOR could not per se be considered as
comparable uncontrolled rate of interest at which loans were advanced in
Germany.

3. Thus, the
impugned order was set aside and the matter was remanded to the AO for
considering EURIBOR plus 2% as arm’s length rate of interest.