Afton Chemical India Private Limited. (“Assessee”) issued INR-denominated Compulsory Convertible Debentures (CCDs) to its AE and paid interest at 9%, benchmarking the transaction under the CUP method. The TPO benchmarked the interest using 12-month LIBOR + 200 bps, treating the CCDs as foreign currency borrowings, against which Afton Chemical India Private Limited preferred an appeal before the Mumbai ITAT.
Assessee’s Contentions | Revenue’s Contentions | Tribunal’s Judgment |
The CCDs were denominated in INR and therefore the arm's length interest rate should be benchmarked using the domestic SBI PLR. | The TPO benchmarked the interest on CCDs using 12-month LIBOR + 200 bps, treating them as foreign currency borrowings. | The Tribunal held that the arm's length interest rate must be determined with reference to the currency in which the borrowing is denominated and repayable. |
Since the CCDs were issued and interest was payable in Indian Rupees, LIBOR was not an appropriate benchmark for determining the ALP. | Since CCDs function as debt instruments until conversion, LIBOR + 200 bps was considered the appropriate benchmark. | Following the decisions in Cotton Naturals and Hyderabad Infra Tech, the Tribunal held that INR-denominated CCDs should be benchmarked using the domestic PLR and not LIBOR. |
The 9% coupon rate, benchmarked under the CUP method, satisfied the arm's length standard under the transfer pricing provisions. | Accordingly, the Revenue contended that the TP adjustment made by the TPO and upheld by the DRP should be sustained. | Accordingly, the Tribunal held that benchmarking based on LIBOR + 200 bps was unsustainable in law and deleted the TP adjustment made on interest paid on the CCDs. |
Ruling Summary -
The Mumbai ITAT held that interest on INR-denominated CCDs should be benchmarked using the domestic PLR and not LIBOR, as the arm's length interest rate must be determined based on the currency of the borrowing. Accordingly, the TP adjustment made by applying LIBOR + 200 bps was deleted.
