Transfer Pricing for Intra-Group Loans: Currency, SOFR, Credit Spreads and Interest Limits

Separate the pricing, deduction and foreign exchange tests

For the historical examples, the 1961 Act treats capital financing between associated enterprises (AEs) as an international transaction where the statutory conditions are met. The explanation to section 92B includes borrowing, lending, guarantees and certain advances, deferred payments or receivables. Apply the arm’s-length methods under section 92C. For the year beginning 1 April 2026, use the corresponding provisions and forms under the 2025 Act and the 2026 Rules. Check whether the financing is debt, equity or another instrument before choosing the analysis. Accounting and FEMA classifications answer different questions and do not settle income-tax treatment by themselves.

Use the currency in which the loan is repayable

In Cotton Naturals, the Delhi High Court rejected a domestic INR benchmark for a foreign-currency loan merely because the lender was Indian. The repayment currency normally determines the market benchmark. For a USD loan, compare USD financing with comparable terms. For an INR liability, look for INR financing. Separately account for tenor, date, reset structure, credit, security, seniority, covenants and options. The judgment does not make a particular rate or spread mandatory for all loans.

A group advance does not become equity simply because it carries no interest or supports a start-up. Examine the terms, expected cash flows, repayment capacity, conduct and realistic financing alternatives. A convertible instrument may need comparisons or adjustments that capture the value and conditions of conversion. Do not assume that a straight loan benchmark or an equity label resolves its pricing or deductibility.

Reference rates and legacy LIBOR contracts

For a legacy LIBOR contract, identify the original currency, tenor, fallback language and governing rules. The contractual fallback spread compensates for a benchmark difference and is distinct from the borrower’s credit margin. The often-cited USD LIBOR fallback adjustments of 11.448, 26.161 and 42.826 basis points for one, three and six months are for specified historical fallback settings. They are not mandatory add-ons for new SOFR loans. Document the economic effect of a legacy change and any further modification; replacing the reference rate does not decide whether the amended instrument should be analysed as a new financing.

Support the credit margin with comparable evidence

• Select the most appropriate method on the facts. Comparable uncontrolled price can be useful where independent loans or bonds provide sufficiently comparable information. A reference rate plus a spread is a way to analyse comparable prices, not a substitute for establishing comparability.
• Assess the borrower’s credit from leverage, interest coverage, liquidity, cash flows, sector and business risks. Explain any modelled rating and its limits. Evaluate the effect of implicit group support on these facts, including strategic importance and financial capacity. No fixed number of rating notches is prescribed.
• Distinguish passive association from an explicit guarantee. If there is an explicit guarantee or security, analyse its effect on pricing and any separate transaction where relevant. Use deal-date or otherwise applicable evidence and adjust for currency, term, security, covenants, seniority, amortisation, fees, and fixed or floating rate differences.

Safe harbour is a separate election for eligible outbound loans

For AY 2025–26 and AY 2026–27, use sections 92CB and Rules 10TB–10TE under the 1961 regime and the applicable Form 3CEFA. For tax year 2026–27 under the 2025 Act, use Rules 87–90 of the 2026 Rules and Form 49. Confirm the year, assessee, eligible loan and required filing steps before using these figures. For example, the 2026 definition covers an advance to a non-resident AE and excludes loans by specified financial or ordinary-course lending or borrowing enterprises, as well as a credit line or other loan facility without a fixed repayment term. The declared rate must meet or exceed the prescribed benchmark plus spread. Safe harbour acceptance is conditional and does not remove reporting or permit use of a modelled rating as if it were a qualifying agency rating.

One basis point is 0.01 percentage point. Use the aggregate foreign-currency intra-group loan amount prescribed at 31 March and the statutory currency reference on 30 September. The table reflects Rule 10TD(2A) as amended and Rule 89 for tax year 2026–27; confirm the exact rating bands and definitions in the applicable rule. If there are several qualifying agency ratings, use the lowest where prescribed. INR loans have a separate schedule using SBI’s one-year MCLR at 1 April and prescribed INR rating and amount conditions.

These additions form part of the statutory reference rate; they are separate from the rating spread and from contractual LIBOR fallbacks. Do not substitute a market overnight rate for the prescribed term reference.

Interest limitation: section 94B and section 177

For section 94B, an Indian company or an Indian permanent establishment of a foreign company generally enters the rule if deductible interest or similar expenditure on debt issued by a non-resident AE exceeds ₹1 crore, subject to statutory exclusions. Certain third-party debt is deemed to be AE debt where an AE provides an implicit or explicit guarantee or matching deposits. Section 94B(1A) separately excludes interest on debt issued by the Indian permanent establishment of a non-resident banking business. Section 94B(3) covers specified borrower exclusions. Check the conditions for banks, insurers, notified non-banking financial companies and qualifying finance companies in an IFSC for the period.

The excess is the lower of total interest paid or payable above 30% of borrower EBITDA, and interest paid or payable to AEs. No excess arises if the first amount is zero or below. Calculate this after testing the deductible base and any pricing adjustment, and reconcile EBITDA and total interest rather than netting unrelated interest income mechanically. Excess interest may be carried forward for up to eight immediately succeeding assessment years, subject to available capacity under section 94B(4). For tax years under the 2025 Act, section 177 contains the corresponding threshold, deeming, exclusion, limitation and eight-year rules.

Six worked cases

All facts and market rates are illustrative. Evidence of a rate or range at a real date must come from the deal records and applicable market or statutory source.

1. Outbound five-year USD loan

On 1 April 2024 an Indian parent lends USD 8 million to its US subsidiary for five years, at 7.50% and with no security. At an assumed ₹83/USD the principal is ₹66.40 crore. A proposed 12.25% INR rate would raise interest by 4.75 percentage points, or ₹3,15,40,000 for a full year at that constant rate and principal. Under Cotton Naturals, examine USD evidence rather than relying on the lender’s INR rates. If the appropriate USD base is 4.60% and comparable spreads are 220–310 basis points, the indicated interval is 6.80%–7.70%. The contract rate is within that arithmetic interval. To conclude that it is arm’s length, establish the data, comparability, adjustments and statutory method or range applicable to the assessment; do not assume the adjustment was deleted.

2. Electing safe harbour for an unrated EUR borrower

An Indian parent advances EUR 5 million to an unrated German subsidiary in FY 2024–25. At an illustrative ₹90/EUR, that is ₹45 crore. Assume the loan has a fixed repayment term, the lender and loan are otherwise eligible, and the prescribed year-end conversion and all other foreign-currency loans to AEs put the aggregate within ₹250 crore. If the prescribed six-month EURIBOR reference on 30 September 2024 is assumed to be 3.60%, the Rule 10TD minimum for this unrated case is 7.60%, including 400 basis points. A full year at that coupon gives EUR 380,000 or ₹3,42,00,000 at the illustrative conversion. The 3.60% is a hypothetical input, not a published historical quote. Test the eligibility and election and use Form 3CEFA for the historical regime. Any estimated ₹35 lakh commercial rating fee is a separate budgeting assumption; no filing or scrutiny exemption follows from avoiding that cost.

3. Section 94B and carry-forward of interest

For FY 2024–25 assume an Indian borrower has profit before tax of ₹10 crore, ₹15 crore depreciation and amortisation, ₹18 crore deductible interest on foreign parent debt before section 94B, and ₹7 crore on unguaranteed third-party debt. On a simplified reconciliation, EBITDA is ₹50 crore and 30% is ₹15 crore. The current excess is the lower of ₹25 crore less ₹15 crore, and ₹18 crore: ₹10 crore. If there are no other book-to-tax differences, taxable business income rises from ₹10 crore to ₹20 crore. Carry the ₹10 crore forward subject to section 94B(4). If next year’s EBITDA is ₹100 crore and current interest is ₹25 crore, the simplified capacity is ₹5 crore and the remaining pool after a permitted claim is ₹5 crore. On the old Act’s counting, AY 2025–26 plus eight immediately succeeding assessment years ends at AY 2033–34; apply the 2025 Act’s transition and carry-forward provisions to later tax years.

4. Resident bank loan guaranteed by the foreign parent

An Indian company borrows ₹100 crore from a resident bank at 9.50%. A non-resident AE gives the lender an explicit guarantee. On these assumptions the first proviso to section 94B(1) treats the debt as AE debt, subject to the statutory tests and any exclusion. Full-year interest is ₹9.50 crore. If total interest is also ₹9.50 crore and EBITDA is ₹20 crore, 30% is ₹6 crore and the illustrative excess is ₹3.50 crore. Do not treat every form of passive group support used in rating analysis as a statutory guarantee.

5. INR compulsorily convertible debentures

An Indian issuer pays an 11.50% annual coupon on ₹200 crore of INR CCDs. A 7.20% comparison, assumed to be 5.20% SOFR plus 200 basis points, yields a coupon difference of ₹8.60 crore for one year. If the economic exposure and terms are in INR, begin with INR evidence. A simple 11.20%–12.40% interval for straight INR bonds contains 11.50%, but it does not establish the price of a convertible instrument. Assess conversion terms, settlement, seniority, security and tax character. Do not assume an adjustment was deleted or that the coupon is automatically deductible or subject to section 94B.

6. Overdue trade receivables

An Indian exporter gives a UK AE 60 days to pay. A receivable outstanding for 420 days has 360 days beyond the agreed period. If the receivable is denominated in GBP, ₹30 crore is its assumed constant INR equivalent, the evidence supports separate pricing at 8.00%, and the convention is simple Actual/365, the illustrative amount is ₹2,36,71,233 rounded to rupees. The assumed rate could represent a 5.00% GBP base plus 300 basis points; neither rate nor adjustment is automatic. Compare the actual payment pattern for unrelated customers, the contract, currency and working capital already reflected in the main pricing analysis. Avoid pricing the same extension twice.

Treasury and reporting checklist

• Before funding, record the instrument, use of funds, credit analysis, comparable terms and pricing method. Maintain a dated rate and comparable evidence pack.
• Document repayment currency, rate conventions, reset and maturity dates, security, guarantees, covenants, options and later amendments in the actual financing agreement.
• Reconcile overdue receivables to the contract and real third-party practice. Test whether working capital adjustments already account for the delay.
• Track interest limitations and the carry-forward year for each amount. Use the appropriate accountant report: Form 3CEB, including historical lending and borrowing particulars, or Form 48 under section 172 and Rule 85 for the new regime.

Frequently asked questions

1. Does compliance with the ECB rules settle the transfer price?

No. FEMA and income-tax pricing have separate tests. The amended 2026 ECB framework generally requires borrowing costs in line with prevailing market conditions and separately requires related-party ECBs to be at arm’s length. Eligible ECBs with average maturity under three years are subject to the trade-credit cost ceiling. Verify the framework applicable to the borrowing date and substantiate the price under the tax method.

2. Can interest income be netted against AE interest expense?

Do not assume an offset. Test the actual interest expenditure and EBITDA under the applicable section and document the treatment of any cash-pooling or linked arrangement.

3. Are all debts from Indian branches of foreign banks excluded?

Check whether the actual lender is an Indian permanent establishment of a non-resident banking business within section 94B(1A) or section 177(3)(a). A loan through a branch and one from an overseas office can have different facts.

4. Must a legacy loan switch to Term SOFR plus a published adjustment?

Follow the agreement, benchmark fallback and governing law. Compare compounded and term conventions where relevant; a historical fallback number does not prescribe a margin for a new agreement.

5. Are all CCD coupons deductible and limited by thin capitalisation?

No single answer follows from the label or accounting classification. First determine the instrument and whether the coupon is deductible under the applicable tax law. Then test the statutory interest limitation if the payment is within it.

6. Does a debt-free exporter avoid a receivables adjustment?

No blanket exception applies. Examine credit terms, payment patterns, the transaction actually priced and working capital already included in the analysis. A second adjustment for the same effect needs separate justification.

Sources

• Delhi High Court: Cotton Naturals (I) Pvt Ltd, ITA 233/2014
• Income-tax Act, 1961: sections 92B, 92C, 92CB, 92E and 94B
• CBDT Notification 104/2023: historical safe harbour references and spreads
• CBDT Notification 22/2026: Income-tax Rules, 2026, Rules 85 and 87–90
• Income Tax Department: Form 49 safe harbour guidance
• Income-tax Act, 2025: transfer pricing and interest deduction provisions
• New York Fed: overnight SOFR
• New York Fed: SOFR averages and index
• CBDT Notification 21/2025: extension of historical safe harbour rules
• RBI Borrowing and Lending First Amendment Regulations, 2026: ECB costs and related parties
• Income Tax Department: historical Form 3CEB
• Income Tax Department: Form 48 and the 2025 Act
• ARRC: historical USD LIBOR fallback spread adjustments
• OECD Transfer Pricing Guidelines, Chapter X: financial transactions