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In the Bhansali & Co. vs. Assistant Commissioner of Income-tax, it was held that Interest charged as LIBOR plus 200 basis points on foreign currency loan given abroad is most appropriate method for computing arms length price. 
Facts of the case: The assessee is a partnership firm engaged in the business of manufacture of cut and polished diamonds and in sale thereof including exports. The return for the year was filed on 29.09.2009 declaring total income of Rs. 1,31,92,121/-. The return was selected for scrutiny assessment and accordingly statutory notices were issued and served upon the assessee. The AO noticed that the assessee has undertaken international transactions with its associate enterprises exceeding Rs.15 crores. The case was referred to the Transfer Pricing Officer (TPO) for determination of the arm’s length price of the international transactions. During the year the loan was repaid in full. The assessee had offered a certain sum towards interest income and had benchmarked loan transactions at LIBOR plus 200 basis points. The TPO proposed to apply LIBOR plus 500 basis points. The DRP highlighted that the loan was given from India. Therefore, the interest charged by assessee from its associate enterprise should be equivalent to the domestic cost of borrowing. The DRP directed the TPO/Assessing Officer to consider the ALP at LIBOR plus 300 basis points. Aggrieved by the order, the assessee went for appeal. It was held that: The loan was given in the year 2005. It is also undisputed fact that interest rate charged as LIBOR plus 200 basis points have been accepted in completed assessments from assessment years 2005-06 to 2008-09. ITAT viewed that taking a different view on the same set of facts will violate the rule of consistency. The fact of the matter is that it was a foreign currency loan which was given abroad. Therefore, the most appropriate method is taking the LIBOR as correct benchmark. Thus, the AO was ordered to delete the addition. The case went in favour of the assessee. Arms length price of the transaction was computed at LIBOR plus 200 basis points. ____________________________________________________________
LIBOR plus 200 basis points appropriate method for arms length price for interest on loan
Direct Taxes (including International Taxation) | By ALOK PATNIA | Last updated on Oct 5, 2017
In the Bhansali & Co. vs. Assistant Commissioner of Income-tax, it was held that Interest charged as LIBOR plus 200 basis points on foreign currency loan given abroad is most appropriate method for computing arms length price. Facts of the case: The assessee is a partnership firm engaged in the business of manufacture of cut and polished diamonds and in sale thereof including exports. The return for the year was filed on 29.09.2009 declaring total income of Rs. 1,31,92,121/-. The return was selected for scrutiny assessment and accordingly statutory notices were issued and served upon the assessee. The AO noticed that the assessee has undertaken international transactions with its associate enterprises exceeding Rs.15 crores. The case was referred to the Transfer Pricing Officer (TPO) for determination of the arm’s length price of the international transactions. During the year the loan was repaid in full. The assessee had offered a certain sum towards interest income and had benchmarked loan transactions at LIBOR plus 200 basis points. The TPO proposed to apply LIBOR plus 500 basis points. The DRP highlighted that the loan was given from India. Therefore, the interest charged by assessee from its associate enterprise should be equivalent to the domestic cost of borrowing. The DRP directed the TPO/Assessing Officer to consider the ALP at LIBOR plus 300 basis points. Aggrieved by the order, the assessee went for appeal. It was held that: The loan was given in the year 2005. It is also undisputed fact that interest rate charged as LIBOR plus 200 basis points have been accepted in completed assessments from assessment years 2005-06 to 2008-09. ITAT viewed that taking a different view on the same set of facts will violate the rule of consistency. The fact of the matter is that it was a foreign currency loan which was given abroad. Therefore, the most appropriate method is taking the LIBOR as correct benchmark. Thus, the AO was ordered to delete the addition. The case went in favour of the assessee. Arms length price of the transaction was computed at LIBOR plus 200 basis points. ____________________________________________________________