Loan agreements were entered into between Cotton Naturals (I) Pvt. and a US subsidiary on 13th April, 2002, 7th May, 2003 and then on 8th September, 2003. The rate of interest had been fixed at 4% per annum on the principal sum. The CUP method had been applied to determine the rate. The tax authorities held that the arm’s length interest rate should instead be set at 14% p.a. Following an objection to the assessment, at partial relief was granted in the form of a reduction of the rate to 12,20%. An appeal was filed by Cotton Naturals with the Tax Appellate Tribunal Cotton Naturals (I) Pvt. Ltd. where in February 2013 the assessment was set aside. An appeal was then filed with the High Court by the tax authorities. Decision of the High Court The High Court decided in favor of Cotton Naturals (I) Pvt. Ltd. and set aside the tax assessment. Excerpts “Transfer pricing determination is not primarily undertaken to re-write the character and nature of the transaction, though this is permissible under two exceptions. Chapter X and Transfer Pricing rules do not permit the Revenue authorities to step into the shoes of the assessee and decide whether or not a transaction should have been entered. It is for the assessed to take  commercial decisions and decide how to conduct and carry on its business. Actual business transactions that are legitimate cannot be restructured.” “Transfer pricing is a mechanism to undo an attempt to shift profits and correct any under or over payment in a controlled transaction by ascertaining the fair purpose is to ascertain whether the transfer price is the same price which would have been agreed and paid for by unrelated enterprises transacting with each other, if the price is determined by market forces. The first step in this exercise is to ascertain the international transaction, which in the present case is payment of interest on the money lent. The next step is to ascertain the functions performed under the international transaction by the respective AEs. Thereafter, the comparables have to be selected by undertaking a comparability analysis. The comparability analysis should ensure that the functions performed by the comparables match with the functions being performed by the AE to whom payment is made for the services rendered. These aspects have been elucidated in detail in Sony India Ltd. (supra) by referring to the OECD Guidelines as well as United Nations Practical Manual of Transfer Pricing for Developing Countries.” “The finding of the TPO that for this reason the interest rate should be computed at 14% per annum i.e. the average yield on unrated bonds for Financial Years (FY, for short) 2006-07, has to be rejected.” “We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e. the rate of interest.” “In the light of the aforesaid discussion, the substantial question of law mentioned above has to be answered against the appellant i.e. the Revenue and in favour of the respondent-assessee. The appeal is accordingly disposed of. There will be no order as to costs.” ...