ITAT Mumbai Upholds Deletion of ₹47.76 Crore Interest Disallowance; LIBOR Benchmark and TPO Acceptance Prevail

Key Facts and Tribunal Findings

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, dismissed the Revenue’s appeal and upheld deletion of disallowance of ₹47.76 crore made under Section 36(1)(iii) in the case of Reliance Coal Resources Pvt. Ltd. for Assessment Year 2020–21.

The dispute arose from interest charged by the assessee on loans advanced to its Netherlands-based subsidiary at 5%, while it had borrowed funds from its holding company at 15%. The Assessing Officer held that the lower rate of interest resulted in understatement of income and disallowed a portion of interest expenditure.

The CIT(A) deleted the disallowance, noting that the loans to the overseas subsidiary were in foreign currency, whereas borrowings from the holding company were in Indian rupees. It was further observed that the subsidiary operated in jurisdictions where prevailing interest rates were significantly lower.

The Tribunal affirmed these findings. It held that benchmarking of interest rates in cross-border transactions must be aligned with the market conditions of the borrower’s jurisdiction. The LIBOR-based rate of 3–4% prevailing internationally was considered relevant, and the assessee’s charging of 5% was found to be consistent with such benchmarks.

The Tribunal also placed significant reliance on the Transfer Pricing Officer’s order, which had accepted the interest rate as being at arm’s length without proposing any adjustment.

Further, it noted that the assessee had earned substantial foreign exchange gains on account of currency fluctuations, which had been offered to tax, undermining the Assessing Officer’s allegation of loss.

In view of these factors, the Tribunal held that the disallowance lacked factual and legal basis and upheld the order of the CIT(A).