LIBOR vs. Domestic Rates: Harsco India on Cross-Border Loan Pricing

Introduction: When Interest Rates Spark a Global Tax Dispute

Take an Indian company that lends to its foreign subsidiary. It prices the loan in USD, pegs the interest rate to LIBOR, and assumes the file is closed. That is how global loans are often priced. Then the tax office steps in. It says the lender should have earned interest at India's domestic deposit rates. The result is a transfer pricing adjustment. The company ends up in court.

Harsco India Pvt. Ltd. faced exactly this. Many foreign groups in India now face the same. The Hyderabad Bench of the ITAT has ruled on it, in Harsco India (P.) Ltd. vs. DCIT [2025] 172 taxmann.com 692. The bench settled one point: should an Indian company use domestic rates, or a global benchmark such as LIBOR, to fix arm's length interest on a cross-border loan or an overdue receivable?

The verdict favours LIBOR. It gives Harsco relief. It also sets a clear line for like cases in other sectors. The reasoning matters as much as the result.

The Core Issue: How Do You Benchmark a Loan in Foreign Currency?

Harsco India held receivables from its Associated Enterprises (AEs). The Tax Officer treated the balance as a loan. He computed notional interest at SBI short-term deposit rates, which are domestic benchmarks. That led to a transfer pricing adjustment: Harsco had not earned enough interest from its AEs.

Harsco argued that the deal was in foreign currency. The arm's length price (ALP) should then rest on a global benchmark, such as LIBOR (London Interbank Offered Rate), plus a markup.

The Tribunal’s Reasoning: Commercial Reality Must Govern Tax Logic

The ITAT held that the benchmark must follow global norms where two facts hold. The loan or receivable is in foreign currency. The deal is between an Indian entity and its foreign AE.

The tribunal relied on settled precedents:

• Cotton Naturals (Delhi High Court) – interest should follow the currency in which the loan is written.

• Tata Autocomp Systems (Bombay High Court) – upheld a loan benchmarked at EURIBOR, not at domestic lending rates.

• Shiva Industries & Holdings Ltd. (ITAT Special Bench) – for an outbound foreign currency loan, domestic rates do not apply.

The ITAT held that the TPO was wrong to use SBI deposit rates. It directed that the receivables be benchmarked at LIBOR + 200 basis points (LIBOR + 2%). It also allowed a 60-day credit period. That is normal trade practice, and no interest is expected within it.

Why This Ruling Matters Beyond This Case

1. Reasserts the Commercial Substance Doctrine in Transfer Pricing

The ruling says commercial reality should guide tax. If a company lends in USD or EUR, the price should mirror that currency's market. It should not follow the interest an Indian bank pays on INR.

This is about more than legal correctness. It puts economic sense back into cross-border pricing. Transfer pricing is not a tool to invent gains. It is a compliance step that keeps prices in line with world practice.

2. Addresses Judicial Inconsistency and Administrative Overreach

In past years the tax office has used shifting tests, at times within one group's own years. That made results hard to call and drove litigation. In Harsco's case the Dispute Resolution Panel (DRP) made it worse. It ignored rulings in the taxpayer's favour from earlier years, on the ground that res judicata does not apply to tax matters.

The tribunal took a calmer view. It held that courts should stay in line where the facts have not changed, and an earlier ruling favours the taxpayer.

3. Offers Precedential Clarity to Industry

IT services, pharmaceuticals, engineering and manufacturing groups often lend across borders. They also give their AEs long payment cycles. This ruling gives them a workable benchmark for setting the rate, at least where the loan or receivable is in foreign currency.

By backing LIBOR or EURIBOR plus a markup, the judgment brings order to one of the most argued areas in transfer pricing.

Is LIBOR Still Relevant in 2025? A Forward-Looking Note

One point matters when reading the judgment: LIBOR is being wound down worldwide. By end-2021 most markets had moved to alternative reference rates (ARRs). These include SOFR (Secured Overnight Financing Rate) in the US, €STR in the EU and SONIA in the UK.

Harsco's assessment year was 2021–22, when LIBOR was still an accepted benchmark. For later years, use the risk-free rate that replaced it, plus a spread, as OECD guidance expects.

The tax office in India must update its approach too: from LIBOR-based tests to ARR-based models, above all for years after 2022.

Conclusion: An Economic Win with Legal Clarity

The Harsco ruling is a win for the taxpayer. It is also a win for tax practice that follows global norms. Cross-border dealings should be tested against world finance, not local yardsticks.

The case leaves three points:

• For a loan or receivable in foreign currency, price the interest off a global rate, such as LIBOR, EURIBOR or its replacement. Do not use Indian deposit or lending rates.

• Allow a normal credit period, such as 60 days, before you impute notional interest.

• The tax office should keep to settled positions and should not reopen an issue without new facts.

Review your group financing policy against this principle. Write down why you chose each benchmark. In transfer pricing, clarity, consistency and commercial sense are not ideals. They are the defence.