I lent dollars to my overseas subsidiary — must the arm's length interest be benchmarked against Indian lending rates because I am the Indian lender?
No. The Delhi High Court held on 27 March 2015 that the arm's length interest on a loan to an associated enterprise is the market determined rate for the currency in which the loan is to be repaid, not the rate prevailing in the country of residence of either party. The loan here was advanced and repayable in US dollars, so Indian prime lending rates were irrelevant; interest rates on rupee loans reflect the Reserve Bank's policy and say nothing about a dollar debt. The 4 per cent charged by the assessee was upheld, the adjustment to 12.20 per cent set aside, and the same parameters were held to apply to inbound and outbound loans alike.
Decided by the High Court (High Court of Delhi at New Delhi; Sanjiv Khanna and V. Kameswar Rao JJ; judgment delivered by Sanjiv Khanna J. Reserved 13 February 2015, decided 27 March 2015) on 2015-03-27, reported as ITA No. 233/2014, High Court of Delhi at New Delhi. It bears on section 92C, section 92B, section 260A of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
This is the decision that settled the currency question in Indian transfer pricing on intra-group loans, and it did so by rejecting the Revenue's own stated practice. Paragraph 10.4.10.2 of the UN Practical Manual on Transfer Pricing records the Indian administration's position that because the money leaves India in rupees, the prime lending rate should be the external comparable for an outbound loan. The Court held that reasoning contrary to accepted international tax jurisprudence, and pointed out that Chapter 10 of the Manual sets out individual country viewpoints and does not reflect the view of the Subcommittee. It adopts Klaus Vogel's analysis: interest levels attach to the currency, not to a place, so a dollar loan carries the same rate in New York as in Frankfurt. It also insists that the parameters cannot differ between inbound and outbound loans.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee, an Indian company headquartered in Delhi, manufactured and exported rider apparel — breeches, jodhpurs, riding jackets, boots, saddle pads and the like — and sold in ten countries through channel partners. To market its exports in the United States it incorporated a wholly owned subsidiary, JPC Equestrian Inc. For assessment year 2007-08 its Form 3CEB disclosed apparel sales to the subsidiary of Rs.2,44,38,153 and a loan of US$10,50,000, on which it received interest of Rs.20,52,101 at 4 per cent per annum. It benchmarked both by the comparable uncontrolled price method, taking the export packing credit rate from independent Indian banks as the comparable for the interest. The Transfer Pricing Officer rejected 4 per cent, reasoning that what mattered was what the assessee could have earned lending in India to an unrelated party of the subsidiary's financial standing, that LIBOR was not appropriate and the Indian rate should be used, and that no Indian company would lend abroad unsecured at a lower return. His chart produced a rate above LIBOR plus 700 basis points, rounded up to 14 per cent. The Panel reduced it to 12.20 per cent and the assessment added Rs.42,06,807. The Tribunal deleted the adjustment.
The substantial question of law was answered against the Revenue and in favour of the assessee, and the appeal was disposed of with no order as to costs. The arm's length interest rate is the market determined rate applicable to the currency in which the loan has to be repaid; it is not to be computed on the basis of interest payable on the currency of the place of residence of either party. As the loan was advanced and repayable in US dollars, the Indian prime lending rate was not a relevant comparable and could not be applied. The same reasoning governs inbound loans to Indian subsidiaries of foreign associated enterprises as governs outbound loans, and the Revenue's argument that different parameters apply was rejected. The Court declined to follow paragraph 10.4.10.2 of the UN Practical Manual on Transfer Pricing.
The Court answered the currency question by what it called commonsensical and pragmatic reasoning, supported by Klaus Vogel on Double Taxation Conventions. Differences in interest levels do not depend on a place but on the currency: within free capital markets the rate on a US dollar loan is the same in New York as in Frankfurt. Rates on loans in a national currency turn on the central bank's fiscal policy and the government's mandate, while currency-specific rates are globally comparable, and the currency in which a loan must be repaid normally determines the return on the money lent. The point was reinforced from Indian practice itself: rates on FCNR accounts held in foreign currency differ by currency and do not follow the prime lending rate, which applies to rupee loans. On the Revenue's material, the Court accepted the first part of the UN Manual's description of Indian practice — examine the loan agreement, compare terms and conditions, determine the credit ratings of lender and borrower, identify comparable third party agreements and make suitable adjustments — and added that comparability should also take account of the business relationship and the functions the subsidiary performs for the parent. But it refused to follow the Manual's statement that the prime lending rate should be the external comparable for outbound loans, both because the reasoning is contrary to accepted international tax jurisprudence and because Chapter 10 expressly records individual country viewpoints rather than the Subcommittee's consensus. It also noted that the Transfer Pricing Officer and the Panel had themselves used LIBOR with a mark-up in applying the comparable uncontrolled price method, referring to the prime lending rate only by analogy.
The interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid.
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Handle my notice → Ask a CA on WhatsAppNo. The Delhi High Court held on 27 March 2015 that the arm's length interest on a loan to an associated enterprise is the market determined rate for the currency in which the loan is to be repaid, not the rate prevailing in the country of residence of either party. The loan here was advanced and repayable in US dollars, so Indian prime lending rates were irrelevant; interest rates on rupee loans reflect the Reserve Bank's policy and say nothing about a dollar debt. The 4 per cent charged by the assessee was upheld, the adjustment to 12.20 per cent set aside, and the same parameters were held to apply to inbound and outbound loans alike. This was decided by the High Court (High Court of Delhi at New Delhi; Sanjiv Khanna and V. Kameswar Rao JJ; judgment delivered by Sanjiv Khanna J. Reserved 13 February 2015, decided 27 March 2015) and bears on section 92C, section 92B, section 260A of the Income Tax Act 1961. It is reported as ITA No. 233/2014, High Court of Delhi at New Delhi. This is the decision that settled the currency question in Indian transfer pricing on intra-group loans, and it did so by rejecting the Revenue's own stated practice. Paragraph 10.4.10.2 of the UN Practical Manual on Transfer Pricing records the Indian administration's position that because the money leaves India in rupees, the prime lending rate should be the external comparable for an outbound loan. The Court held that reasoning contrary to accepted international tax jurisprudence, and pointed out that Chapter 10 of the Manual sets out individual country viewpoints and does not reflect the view of the Subcommittee. It adopts Klaus Vogel's analysis: interest levels attach to the currency, not to a place, so a dollar loan carries the same rate in New York as in Frankfurt. It also insists that the parameters cannot differ between inbound and outbound loans. If it applies to you, the first step is this: Benchmark the loan against rates for the currency of repayment, and put the loan agreement's repayment currency at the front of the transfer pricing study.
The assessee, an Indian company headquartered in Delhi, manufactured and exported rider apparel — breeches, jodhpurs, riding jackets, boots, saddle pads and the like — and sold in ten countries through channel partners. To market its exports in the United States it incorporated a wholly owned subsidiary, JPC Equestrian Inc. For assessment year 2007-08 its Form 3CEB disclosed apparel sales to the subsidiary of Rs.2,44,38,153 and a loan of US$10,50,000, on which it received interest of Rs.20,52,101 at 4 per cent per annum. It benchmarked both by the comparable uncontrolled price method, taking the export packing credit rate from independent Indian banks as the comparable for the interest. The Transfer Pricing Officer rejected 4 per cent, reasoning that what mattered was what the assessee could have earned lending in India to an unrelated party of the subsidiary's financial standing, that LIBOR was not appropriate and the Indian rate should be used, and that no Indian company would lend abroad unsecured at a lower return. His chart produced a rate above LIBOR plus 700 basis points, rounded up to 14 per cent. The Panel reduced it to 12.20 per cent and the assessment added Rs.42,06,807. The Tribunal deleted the adjustment. The matter was decided on 2015-03-27 by the High Court (High Court of Delhi at New Delhi; Sanjiv Khanna and V. Kameswar Rao JJ; judgment delivered by Sanjiv Khanna J. Reserved 13 February 2015, decided 27 March 2015). On those facts the High Court held as follows. The substantial question of law was answered against the Revenue and in favour of the assessee, and the appeal was disposed of with no order as to costs. The arm's length interest rate is the market determined rate applicable to the currency in which the loan has to be repaid; it is not to be computed on the basis of interest payable on the currency of the place of residence of either party. As the loan was advanced and repayable in US dollars, the Indian prime lending rate was not a relevant comparable and could not be applied. The same reasoning governs inbound loans to Indian subsidiaries of foreign associated enterprises as governs outbound loans, and the Revenue's argument that different parameters apply was rejected. The Court declined to follow paragraph 10.4.10.2 of the UN Practical Manual on Transfer Pricing.
The Court answered the currency question by what it called commonsensical and pragmatic reasoning, supported by Klaus Vogel on Double Taxation Conventions. Differences in interest levels do not depend on a place but on the currency: within free capital markets the rate on a US dollar loan is the same in New York as in Frankfurt. Rates on loans in a national currency turn on the central bank's fiscal policy and the government's mandate, while currency-specific rates are globally comparable, and the currency in which a loan must be repaid normally determines the return on the money lent. The point was reinforced from Indian practice itself: rates on FCNR accounts held in foreign currency differ by currency and do not follow the prime lending rate, which applies to rupee loans. On the Revenue's material, the Court accepted the first part of the UN Manual's description of Indian practice — examine the loan agreement, compare terms and conditions, determine the credit ratings of lender and borrower, identify comparable third party agreements and make suitable adjustments — and added that comparability should also take account of the business relationship and the functions the subsidiary performs for the parent. But it refused to follow the Manual's statement that the prime lending rate should be the external comparable for outbound loans, both because the reasoning is contrary to accepted international tax jurisprudence and because Chapter 10 expressly records individual country viewpoints rather than the Subcommittee's consensus. It also noted that the Transfer Pricing Officer and the Panel had themselves used LIBOR with a mark-up in applying the comparable uncontrolled price method, referring to the prime lending rate only by analogy. In the words reproduced by the source cited on this page: "The interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid."
It was decided by the High Court on 2015-03-27 and is reported as ITA No. 233/2014, High Court of Delhi at New Delhi. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 92C, section 92B, section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The substantial question of law was answered against the Revenue and in favour of the assessee, and the appeal was disposed of with no order as to costs. The arm's length interest rate is the market determined rate applicable to the currency in which the loan has to be repaid; it is not to be computed on the basis of interest payable on the currency of the place of residence of either party. As the loan was advanced and repayable in US dollars, the Indian prime lending rate was not a relevant comparable and could not be applied. The same reasoning governs inbound loans to Indian subsidiaries of foreign associated enterprises as governs outbound loans, and the Revenue's argument that different parameters apply was rejected. The Court declined to follow paragraph 10.4.10.2 of the UN Practical Manual on Transfer Pricing. It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 92C, section 92B, section 260A of the Income Tax Act 1961, and was decided by High Court of Delhi at New Delhi; Sanjiv Khanna and V. Kameswar Rao JJ; judgment delivered by Sanjiv Khanna J. Reserved 13 February 2015, decided 27 March 2015. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not accept a prime lending rate comparable for a foreign currency loan; point out that even Indian FCNR rates vary by currency and are unrelated to the prime lending rate. Build the file the way the Court accepted the first part of the UN Manual: the loan agreement, the terms and conditions, the credit ratings of lender and borrower, comparable third party loan agreements, and the adjustments made — and add the business relationship and the functions the subsidiary performs for the parent. Where the Revenue relies on paragraph 10.4.10.2 of the UN Manual, answer that the Court has declined to follow it and that Chapter 10 records country practice, not consensus.
Still good law. A citator search returns 237 later decisions citing this judgment; a filtered run shows none of them is a Supreme Court or High Court decision, so the whole body of treatment is Tribunal work and there is no Supreme Court pronouncement on it and no traceable pending challenge. The Kolkata Tribunal applied it as the ground of its decision in At&S Austria Technologie und Systemtechnik v DCIT (31 January 2020), holding at para 9 that 'LIBOR is the appropriate benchmark interest rate for intra-group loans denominated in foreign currency and hence, the arm's length interest rate determined by the DRP at LIBOR plus 450 basis points ... has no legal basis in the light of the decision rendered by the Hon'ble High Court in the matter of CIT vs. Cotton Natural', and deleting the adjustment. The same currency-of-the-loan principle is applied across the Tribunal - Praxair India (Bangalore, 2021, 2022 and 2023), Broadway Overseas (Amritsar, 2023), Mylan Laboratories, Adama India and Invesco (India) (Hyderabad, 29 January 2025). Nothing overruling, doubting or confining it was found. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The harvested text is clipped: about 29,775 characters from the middle are missing, covering the Tribunal's reasoning in full, the parties' arguments and the Court's discussion of the authorities, including E.K.L. Appliances. The framing of the question, the facts, and the analysis from paragraph 36 to the operative order are present. The Court expressly left several things open: the second exception in E.K.L. Appliances, where the associated enterprise has a right to recall and demand repayment, which had not been considered below or argued; thin capitalisation, which did not arise; any adjustment for lack of security; and the controversy whether the lending rate, the borrowing rate or a mid-point should be taken. One oddity in the text: the Transfer Pricing Officer's chart says the loan currency was GBP and uses six-month GBP LIBOR, with the source itself marking "(sic)", whereas the loan was in US dollars. No reporter citations were harvested; the appeal number comes from the judgment's own heading. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The substantial question of law was answered against the Revenue and in favour of the assessee, and the appeal was disposed of with no order as to costs. The arm's length interest rate is the market determined rate applicable to the currency in which the loan has to be repaid; it is not to be computed on the basis of interest payable on the currency of the place of residence of either party. As the loan was advanced and repayable in US dollars, the Indian prime lending rate was not a relevant comparable and could not be applied. The same reasoning governs inbound loans to Indian subsidiaries of foreign associated enterprises as governs outbound loans, and the Revenue's argument that different parameters apply was rejected. The Court declined to follow paragraph 10.4.10.2 of the UN Practical Manual on Transfer Pricing.
TaxSphere, “CIT v Cotton Naturals (I) P Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-cotton-naturals-i-p-ltd/ (validity last checked 2026-08-29)
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