Arm’s length interest rate computable based on market determined rate applicable to currency in which loan is repayable

Adani Power Ltd. Vs DCIT (ITAT Ahmedabad)

ITAT Ahmedabad held that arm’s length interest rate for loan advanced to foreign subsidiary by Indian company should be computed based on market determined interest rate applicable to currency in which loan has to be repaid.

Facts- Assessee M/s Adani Power Ltd has contributed a sum of Rs. 1,35,42,00,000/- to M/s Adani Power Pte Ltd and a sum of Rs. 2,89,30,91,520/- to M/s Adani Shipping Pte Ltd, both being Associated Enterprises of the assessee.

Assessee was of the view that the sums advanced by the assessee company to its AEs were in the nature of quasi equity and the assessee company in its transfer pricing report also reported the aforesaid transactions as quasi equity.

TPO was of the view that the aforesaid amount advanced by the assessee company to its overseas AE’s were not in the nature of quasi capital but was in the nature of loan and the same was required to be benchmarked u/s. 92 of the Act. The TPO held that providing of loan by the assessee company to overseas AEs without charging any interest goes against the principal of arm’s-length price (ALP) since unrelated lenders do not provide interest free loans to independent unrelated Enterprises. TPO held that the nature of advances made by the assessee to the AE’s was in the nature of debt and had no character of equity funding. The AO accordingly held that the assessee should have charged interest at the rate of 5.3 8% which was the prime lending rate-PLR prevailing in Singapore.

Please become a Premium member. If you are already a Premium member, login here to access the full content.