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7. The Transfer Pricing Officer (TPO, for short) in his report enumerated several reasons, which we are not highlighting at this stage to avoid repetition, to hold that the arm's length interest rate should be taken as 14% p.a. He computed arm's length interest on the loan at Rs.71, 82, 354/-, in the place of interest received of Rs.20,52,101/-. The aforesaid upward revision was made as per the following table/ chart:-
―CUP Rate is thus arrived at as under:
Basic interest rate for the credit LIBOR+400 basis points rating of the AE Add: Transaction Cost 300 basis points CUP Rate LIBOR + 700 basis points Add: Adjustment for security Not computed Final CUP Rate > LIBOR + 700 basis points As the currency in which the loan is exte nded to the AE is GBP, 6-month GBP LIBOR (sic) is considered. These rates are given as per Annexure - A. The average 6-month GBP LIBOR (sic) is arrived at 5.224% p.a. Thus the CUP rate is arrived at as under.
―11. We have considered the rival submissions. A perusal of the order of the TPO clearly shows that the assessee had raised the funds by way of issuance of 0% optional convertible preferential shares. Thus it is noticed that the funds raised by the assessee company for giving the loan to India Telecom Holdings Ltd., Mauritius, which is its Associated Enterprises and which is the subsidiary company, is out of the funds of the assessee company. It is not borrowed funds. The assessee has given the loan to the Associated Enterprises in US dollars. The assessee is also receiving interest from the Associated Enterprises in Indian rupees. Once the transaction between the assessee and the Associated Enterprises is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, we are of the view that it LIBOR rate which has to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the Associated Enterprises. As it is noticed that the average of the LIBOR rate for 1.4./2005 to 31.3.2006 is 4.42% and the assessee has charged interest at 6% which is higher than the LIBOR rate, we are of the view that no addition on this count is liable to be made in the hands of the assessee. In the circumstances, the addition as made by the Assessing Officer on this count is deleted.‖

29. The TPO has referred to the decision of the Tribunal in the case of Perot Systems TSI (India) Limited versus DCIT and VVF Limited versus DCIT, 2010-TIOL-55-ITAT-MUM wherein LIBOR plus 1.64% i.e. 4.03% and LIBOR plus 3% respectively, were accepted as the arm's length rate of interest. But these decisions, he held, were unacceptable for the reasons set out in paragraph 6.1 of the TPO's order (the table has been quoted above). We have rejected the reasoning given in the table.

30. However, the TPO was right in rejecting computation of arm's length interest on the basis of Reserve Bank of India Master Circular dated 1st July, 2006 and 2nd July, 2007, fixing a ceiling on the interest rate on export credit at LIBOR plus 100 basis points etc. The reasoning given is correct and befitting. These were special schemes floated by the Reserve Bank of India for encouraging and facilitating exports with the said object and purpose. Export credit interest was available only for limited number of days and for specific purposes. The rates fixed did not reflect comparable market rates.

09.

35. The LIBOR rate plus markup or the interest rate prevailing in the United States at that time, i.e. 2003 have not been examined and are not the basis on which the TPO made the adjustment and compute the interest rate for the transaction under consideration. It claimed that the LIBOR rates in the year 2002 varied between 1.447 % to 3.006 % and in the year 2003 between 1.201% to 1.487%. Rates in the year 2004 were again marginal, with the highest at 3.100% and the lowest at 1.340%. The LIBOR rate of 5.224% quoted in the TPO's order, it is pointed out, was the rate received on the investment made during the assessment year in question by the assessed. Thus, it was argued that the present case is of a long-term loan granted to the AE and the rate of interest charged was much higher than the then prevailing LIBOR interest rate. There is no finding of the TPO, the DRP or the Assessing Officer questioning the long-term transaction as such.