The Delhi High Court—in a case concerning the benchmarking of the rate of interest on an inter-company loan made to a foreign related party—held that a transfer pricing determination is not to be undertaken principally to re-characterize the character and nature of business transactions, and that actual business transactions that are legitimate cannot be restructured.
The taxpayer was engaged in the business of manufacturing and exporting rider apparel. The taxpayer selected the Comparable Uncontrolled Price (CUP) method to benchmark the interest received on an inter-company loan advanced to a foreign related party.
In its transfer pricing documentation, the taxpayer declared that interest receivable (at a rate of 4%) was comparable to the export packing credit rate obtained from independent banks in India.
The Transfer Pricing Officer, noting that lending or borrowing was not one of the taxpayer’s main businesses and further noting that LIBOR was not a proper reference for calculating the corresponding interest on a loan, determined that the interest rate on outbound loans to a foreign related party would be benchmarked against interest rates in India for investing in corporate bonds or other investment avenues. The Transfer Pricing Officer determined the arm’s length interest rate to be 14%.
The Dispute Resolution Panel granted partial relief to the taxpayer reducing the interest rate to 12.20%. The tribunal, however, held that interest at a rate of 4% was at arm’s length and that no transfer pricing adjustment was needed.
The Delhi High Court held for the taxpayer. The case is: CIT v. Cotton Naturals India Pvt. Ltd. [ITA No. 233/2014 (AY 2007-08) (Delhi High Court)
The decision of the High Court may be viewed as providing relief to taxpayers facing aggressive positions taken by revenue authorities who may try to restructure business transactions, by making transfer pricing adjustments.
Read an April 2015 report [PDF 435 KB] prepared by the KPMG member firm in India: Delhi High Court held that actual business transactions that are legitimate cannot be restructured. Interest rate should be market determined and correspond to the currency of the loan