No TP Additions for Shift to Fixed Interest Rate from Floating to Mitigate Business Risk

Case Details: BG Exploraton & Production India Ltd. v. DCIT, DDIT/ADIT (International Taxation) - [2023] 148 taxmann.com 272 (Delhi-Trib.)

Judiciary and Counsel Details

• • Kul Bharat, Judicial Member & Dr B.R.R Kumar, Accountant Member
  • Ajay Vohra, Sr. Adv. for the Appellant.
  • Mayak Kumar, JCIT, DR for the Respondent.

Facts of the Case

Assessee-company, engaged in the business of prospecting for, or extraction of or production of mineral oils. Assessee took an unsecured foreign currency loan from its Associate Enterprise (AE) at an interest rate of London Inter-Bank Offer Rate (“LIBOR”) plus 2 percent per annum payable annually. After a few years, concerning the significant variations in the global interest rates, AE and the assessee agreed to migrate from a floating interest rate to a fixed interest rate. The agreed rates were in line with those quoted by independent enterprises (bank quotation).

However, the Transfer Pricing Officer (TPO) rejected the interest rates adopted by the assessee, carried out fresh search and arrived at a set of comparable rate of interests. The TPO then made additions to the income in accordance with the differential amount of interest.

The matter reached the Delhi Tribunal.

ITAT Held

The Tribunal held that the assessee gave a detailed rationale behind its decision to shift from a floating rate of interest regime to a fixed rate of interest, i.e., it reduces the risk of changes in the interest rates.

It is a well-settled proposition of law that TPO is not supposed to question the business decision of the assessee. The assessee gave ample reasons for its business decision, even stating that most of the reported loans in that period had a fixed rate of interest clause. Therefore, the decision to shift from the floating rate was based on commercial considerations and to protect the business operations. Only a businessman can decide such a proposition, and it is beyond the TPO’s authority to question the wisdom of the assessee.

Further, such an issue was settled by the orders of the Tribunal in the case of the assessee for all the earlier years. Thus, in the absence of any change in the facts of the case and legal proposition, the Tribunal remitted the case back to the TPO for benchmarking of the interest as per the similar directions of the Tribunal.

List of Cases Reviewed

• • BG Exploration & Production India Ltd. v. Jt. CIT (International Taxation) [2017] 82 taxmann.com 446 (Delhi – Trib.) (para 23) followed.

List of Cases Referred to

• • BG Exploration & Production India Ltd. v. Jt. CIT (International Taxation) [2017] 82 taxmann.com 446 (Delhi – Trib.) (para 23)
  • B.G. Exploration & Production India Ltd. v. Dy. CIT (International Taxation) [2020] 116 taxmann.com 948 (Delhi – Trib.) (para 25)
  • Alfa Laval India Ltd. v. Dy. CIT [2003] 133 Taxman 740/[2004] 266 ITR 418 (Bom.) (para 45)
  • CIT v. Alfa Laval India Ltd. [2008] 170 Taxman 615/[2007] 295 ITR 45 (SC) (para 48)
  • IAC v. Consolidated Pneumatic Tool Co. (India) Ltd. [1986] 15 ITD 564 (Bom.) (para 51)
  • CIT v. Wolkem India Ltd. [2009] 315 ITR 211/221 CTR 767 (Raj.) (para 51)
  • Emersons Process Management India (P.) Ltd. v. Addl. CIT [2011] 13 taxmann.com 149/47 SOT 157 (Mum. – Trib.) (URO) (para 51)
  • Gillete India Ltd. v. Asstt. CIT [2016] 66 taxmann.com 221 (Jp. – Trib) (para 51.1)
  • M. Appukutty v. STO [1966] 17 STC 380 (Ker.) (para 53).