The Karnataka High Court has dismissed the Income Tax Department’s appeal against a tribunal ruling directing the adoption of six-month LIBOR plus 200 basis points to compute interest on delayed receivables from associated enterprises.
The Bench of Chief Justice Vibhu Bakhru and Justice K.S. Hemalekha has observed that held that determining the appropriate interest rate for such receivables is essentially a question of fact and that the Revenue had produced no material showing that the tribunal’s determination was perverse or inconsistent with prevailing interest rates.
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The dispute before the High Court was confined to the interest-rate spread: whether the tribunal was justified in applying LIBOR plus 200 basis points instead of LIBOR plus 450 basis points adopted by the Transfer Pricing Officer.
The petitioner/assessee provides end-to-end connectivity services relating to satellite, broadband, IPTV, hybrid, over-the-top and electronic programme guide services. During the financial year relevant to assessment year 2020–21, it entered into various international transactions with its associated enterprises.
The company classified these transactions into three segments: research and development software development services, technical support services, and marketing support and distribution services. It furnished a transfer pricing study benchmarking its international transactions using the Transactional Net Margin Method.
During the transfer pricing proceedings, the Transfer Pricing Officer found that certain receivables from associated enterprises remained outstanding beyond the agreed credit period. The officer treated the delayed receivables as a separate international transaction and imputed interest for determining their arm’s length price.
The transfer pricing order was passed on July 27, 2023. Based on that order, the Assessing Officer issued a draft assessment order on August 29, 2023.
The company challenged the proposed adjustments before the Dispute Resolution Panel. After the panel rejected its objections on April 18, 2024, the Assessing Officer passed the final assessment order on May 17, 2024. The company subsequently approached the Income Tax Appellate Tribunal.
Tribunal Retained the Adjustment but Reduced the Interest Rate
The tribunal accepted the Revenue’s contention that delayed receivables had to be benchmarked as a separate international transaction. However, it disagreed with the interest rate applied by the Transfer Pricing Officer.
The officer had adopted six-month LIBOR plus 450 basis points, representing a spread of 4.5 percentage points over the benchmark rate.
Following the decision in DCIT v. Hewlett Packard India Software Operations Private Limited, reported in (2022) 149 taxmann.com 280 (Bangalore Tribunal), the tribunal held that LIBOR plus 200 basis points—a spread of two percentage points—was the appropriate rate.
The tribunal’s order, dated March 10, 2025, therefore retained the separate benchmarking of delayed receivables while reducing the spread used to calculate the interest adjustment.
Revenue Challenged the Lower Spread
The Revenue approached the High Court under Section 260A of the Income Tax Act, 1961, questioning the tribunal’s direction to apply six-month LIBOR plus 200 basis points instead of six-month LIBOR plus 450 basis points.
Before examining the issue, the High Court condoned a delay of 340 days in filing the appeal, accepting the reasons stated in the affidavit accompanying the Revenue’s application.
The appeal was confined to the applicable interest rate. The tribunal’s conclusion that delayed receivables constituted a separate international transaction was not the issue placed before the High Court.
Foreign-Currency Receivables Require an Appropriate Currency Benchmark
The High Court explained that the appropriate interest rate for determining the arm’s length price of delayed receivables must be assessed with reference to prevailing interest rates.
It noted that the receivables in this case were undisputedly denominated in foreign currency. Accordingly, the interest rate applicable to receivables denominated in that foreign currency was the appropriate benchmark. The Court observed that such a benchmark would also take exchange-rate fluctuations into account.
The Bench further noted that LIBOR was commonly used during the relevant period to determine prevailing interest rates in the international banking system. The Transfer Pricing Officer had also accepted LIBOR as the benchmark; the disagreement concerned the additional spread.
While the officer added 450 basis points, the tribunal followed earlier precedents and adopted a spread of 200 basis points.
The High Court held that the tribunal’s determination was based on prevailing interest rates. The Revenue had placed no material before the Court to demonstrate that the selected rate was perverse or had been arrived at in disregard of those rates.
The Bench concluded that the dispute did not raise a substantial question of law warranting consideration under Section 260A.
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