Arm’s length price in case of interest on extended credit period granted to an Associated Enterprise shall be determined on the basis of USD LIBOR and not on any other currency denominated loan rate

On the facts and in the circumstances of the case and in law, the CIT(A) erred in determining the ALP interest rate of 2% for trade credit chargeable to the AE, without appreciating the fact that the same was required to be charged @ 10% being the rate charged by the assessee to its German AE on an euro denominated loan.

4. The relevant material facts are like this. The assessee, a joint venture between an Indian company by the name of Mahindra & Mahindra Ltd and a UK based company by the name of British Telecommunications, is engaged in the business of software services relating to telecommunication, internet technology and engineering etc. During the assessment proceedings, it was noticed that the assessee had allowed credit to its US based associated enterprises, beyond the stipulated credit period. It was in this backdrop, and pursuant to a reference made by the Assessing Officer to the Transfer Pricing Officer for determination of arms-length price, on account of notional interest relating to excess credit period granted by the assessee to its AEs, that the assessee was required to show cause as to why interest @ 10% not be treated as arms-length interest for such delayed receipts on account of services provided to the AEs. The stand of the assessee was that excess credit period was allowed to the US AE in view of the liquidity problems faced by the AE, and that, in any event, no such interest is charged from even independent enterprises. It was also submitted that interest was not charged because of the business expediency. The Transfer Pricing Officer was, however, not impressed by the stand so taken by the assessee. He was of the view that a cost should have been charged by the assessee for having allowed this excess credit period to the US AE, and the mere fact that the assessee has not charged the independent enterprises, for excess credit period allowed to them, does not help the cause of the assessee was having low level of business with such independent enterprises. The dealings with independent enterprises were thus rejected on the ground that these dealings constitute inappropriate comparables. While the Assessing Officer did observe that “it is not denied that there may be a reason for business expediency and also the genuineness of transaction”, he held that “by not charging interest on such extended period granted to the AE, the assessee has not carried out the transaction at arm’s length”. He also noted that the assessee has charged interest @ 10% from its German AE on the Euro denominated loan granted by the assessee, and, accordingly, adopted the same interest rate as an arms length interest for such excess credit period allowed. The interest on excess credit period thus allowed was computed at Rs 1,87,52,378, and an ALP adjustment was made in respect of the same. Aggrieved, assessee carried the matter in appeal before the CIT(A), who confirmed the ALP adjustment in principle but restricted the same to USD LIBOR rate ( which was 1.2 2% at that point of time) plus a mark up of 80 basis points, which was rounded off to 2%. Aggrieved by the relief so granted by the CIT(A), the Assessing Officer is in appeal before us.