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LIBOR IS THE BEST BENCHMARK UNDER TRANSFER PRICING FOR INTEREST-FREE LOANS GRANTED TO AE

DCIT V. GEODESIC LTD. [MUMBAI ITAT] ITA NO. 1656 OF 2013, DATE OF DECISION: AUGUST 12, 2015

FACTS OF THE CASE
The assessee has undertaken a transaction of giving an unsecured interest-free loan to its subsidiary Geodesic Technology Solutions Ltd. (Hong Kong) (GTSL), which is its Associated Enterprise (AE).

The TPO has applied an interest rate of 20.72% based on his consideration of credit rating of AE in Category “B”.

He also analyzed financial ratios like earning per share, debt-equity ratio, and interest coverage ratio of the AE, and based on such credit rating he held that an interest rate of 20.72% is to be charged.

 

DECISION OF THE TRIBUNAL

The Appellate Tribunal held that the manner in which credit rating had been assigned to the AE was not a correct approach, because there was ‘no specific information with regard to the AE and making an assumption of various factors for giving the credit rating actually would destroy the estimation of risk assumed.

In international transactions, LIBOR is the best basis for benchmarking the interest rate.  Since there was no independent CUP rate available to benchmark the said international transaction.

RBI guidelines should be looked into in respect of ECB rates for the borrowing by the Indian corporates for the purposes of capital account transactions.

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