India: Arm's length interest rate on related-party borrowings

India: Arm's length interest rate

The Chennai Bench of the Income-tax Appellate Tribunal (1) allowed an adjustment to an import price to reflect an extra period of credit availed by the taxpayer on credit offered by a related party, and (2) accepted LIBOR plus 200 basis points as an arm’s length interest rate for the “external commercial borrowing” of the taxpayer.

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The case is: XYZ Pvt Ltd. v. ACIT (ITA No. 2201/Mds/2012)


The taxpayer manufactured chargers, and purchased raw materials from a related party. The related party acted as a sourcing hub, and was responsible for internal and external sourcing of components used by its group companies involved in the manufacture of chargers. The related party applied a mark-up of 5% on the third-party purchase price for the supply chain management services rendered. It also allowed the taxpayer an extended credit period of 180 to 270 days (whereas the credit period allowed by its vendors was only 30 to 60 days). 

The taxpayer made economic adjustments concerning the excess credit period of 210 days (270 days minus 60 days), and adopted the comparable uncontrolled price (CUP) method as the most appropriate method to benchmark the import transaction.

The Transfer Pricing Officer restricted the adjustment for the excess credit period to 120 days (180 days minus 60 days), and because the related party's invoices revealed interest was charged at a rate of 11% in instances of delayed payment beyond 180 days, the Transfer Pricing Officer applied an 11% interest rate. The Transfer Pricing Officer also rejected the benefit of the +/- 5% variation as claimed by the taxpayer, asserting that this benefit was only available when more than one arm's length price was determined. 

The tribunal found the taxpayer enjoyed a larger credit period than the one listed on the invoice and that it was appropriate to consider the additional credit period in determining the arm's length price. The tribunal, yet, found that the rate of interest paid by the taxpayer to its related party at LIBOR plus 200 basis points was appropriate. Accordingly, no adjustment was needed to reflect the interest paid on an "external commercial borrowing" loan.


Read an October 2016 report [PDF 334 KB] prepared by the KPMG member firm in India: Adjustment allowed to import price on account of extra credit period availed by the taxpayer from its AE; Accepts LIBOR plus 200 basis points as arm’s length interest rate on ECB loan

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