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2017 (3) TMI 1333 - AT - Income TaxTPA - ALP adjustment on the payment of interest on Fully Convertible Debentures (FCD)/External Commercial Borrowings (ECB) - DR adopted 500 bps instead of adopting 200 bps as adopted by TPO - Held that:- Assessee has borrowed the loan from its AEs in terms of FCD and ECB. For the purpose of “FCD”, the bench marking has to be done considering the internal as well as external “CUP”. Obviously, the interest charged is better than internal “CUP”. We found that there is no basis for adopting one spread of 200 bps nor it is prudent in the banking sector. We cannot adopt the 200 bps as universal rate for all types of loan. The loans are categorized as long term and short term i.e. working capital loan. We observe that the banks are adopting the 200 bps on working capital loans as spread and higher rates beyond 500 bps on the long term loans such as term loans. The Pricing of Interest on term loans are determined based on the security, net worth, ratings, term of loan etc. The more risk involved, the pricing decision of the banks will change. The RBI in its prudential norms has given windows for the pricing of interest and the spread. Based on the RBI guidelines, the term up to 5 years, can have spread of 300 bps and beyond 5 years, it can be 500 bps. Taking the clue from this guideline, we can come to understand that the assessee has properly allowed its AEs to adopt the spread of 500 bps. In our considered view, the relevant issue is to charge the interest on international transaction based on the LIBOR or any other rates which are the basis for negotiation between the contracting parties and the rates of interest or spread cannot be the same for all the international loans irrespective of their terms, risk etc. No infirmity in the order of the DRP in deleting the adjustment made on interest on ECB/FRD and accordingly, we uphold the order of the DRP and dismiss the grounds raised by the revenue. - Decided in favour of assessee.
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