CUP is the proper method for benchmarking ECB interest to an AE, ITAT holds; ALP adjustment set aside

5-Second Takeaway

For benchmarking interest paid on an external commercial borrowing from an associated enterprise, CUP is the generally accepted most appropriate method, and the assessee’s Libor plus approach should have been accepted. The transfer pricing adjustment based on Bloomberg data was set aside and the matter was remitted to the TPO to rework arm’s length price on that basis.

The dispute concerned the arm’s length character of interest paid on an ECB obtained from an associated enterprise. The assessee had sought to benchmark the transaction using the CUP method with a Libor plus spread, while the transfer pricing authorities rejected that approach and sustained an adjustment using Bloomberg-based comparisons.

The Tribunal noted that interest on a loan is a financial transaction in which the price is directly measurable. In Indian transfer pricing jurisprudence, CUP is generally the most reliable method for such lending transactions, and for foreign currency loans the relevant benchmark is Libor plus an appropriate spread.

The Tribunal also observed that the spread must reflect factors such as the borrower’s credit rating, tenure, security, subordination and market conditions. On that basis, it held that the assessee’s alternative benchmarking position should not have been rejected as an afterthought.

Accordingly, the Tribunal held that the TPO was not correct in treating the interest as not at arm’s length and set aside the DRP’s approval of the adjustment. The matter was remitted to the TPO to rework the international transactions’ ALP using the CUP method on a Libor plus basis.