Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
Popular Search: VAT Audit :: list of goods taxed at 4% :: TAX RATES - GOODS TAXABLE @ 4% :: ACCOUNTING STANDARDS :: empanelment :: TDS :: due date for vat payment :: ACCOUNTING STANDARD :: form 3cd :: articles on VAT and GST in India :: ARTICLES ON INPUT TAX CREDIT IN VAT :: Central Excise rule to resale the machines to a new company :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: VAT RATES :: cpt
« From the Courts »
  Dr. Gautam Sen vs. CCIT (Bombay High Court)
 Dr. Gautam Sen vs. CCIT (Bombay High Court)
 DCIT vs. Shivshankar R. Sharma (ITAT Mumbai)
 ACIT vs. Jawaharlal Agicha (ITAT Mumbai)
 CIT vs. M/s. D. Chetan & Co (Bombay High Court)
 Makes further amendments to Notification no. 157/90-Customs dated 28th March, 1990 regarding temporary admission under the ATA Carnet
 Appointment of Common Adjudicating Authority by DGRI - 2/2016-Customs
 ransfers Of Hon’ble Members Of The ITAT (September 2016)
 M. G. Contractors Pvt. Ltd vs. DCIT (ITAT Delhi)
 Haryana State Road & Bridges Development Corporation Ltd vs. CIT (P&H High Court)
 Dharamshibhai Sonani vs. DCIT (ITAT Ahmedabad)

Micro Inks Ltd vs. ACIT (ITAT Ahmedabad)
August, 27th 2013

Transfer Pricing: Law on adjustment for notional interest on interest-free loan & excess credit period to AE explained

The assessee advanced an interest-free loan to its wholly owned subsidiary called Micro USA. It claimed that the said loan was in the form of equity capital and was advanced to meet the business needs of the subsidiary and that no interest was required to be computed thereon. The assessee also extended credit of 165 days to the said subsidiary in respect of the goods supplied by it which it claimed to be in the normal course of business. The TPO held that the assessee ought to have charged interest on the loans advanced by it and that the credit period should not have exceeded 120 days. He computed notional interest at the rate of 11% on the loan and excess credit period and made an adjustment. The CIT(A) upheld the adjustment in principle though he reduced the interest to LIBOR. On cross appeals, HELD by the Tribunal:

(i) The question which really needs to be adjudicated, in the context of s. 92A, is whether, but for the management, capital or control being in the same hands, the AE would have entered into the transaction on the same terms. In other words, whether there is such a commercial justification for the values at which transactions have been entered or not, so as not to attract the adjustment in the arm’s length price, has to essentially depend on factors other than the factors regarding management, capital or control. In still other words, merely because the entity receiving interest free funds is a subsidiary wholly owned by the assessee cannot be reason enough to justify such loans or advances being interest free and not warranting an arm’s length price adjustment, so far as transfer pricing provisions are concerned;

(ii) On facts, the assessee’s claim that the loans were in the nature of “quasi capital” deserves to be accepted. Under the RBI’s guidelines, while a loan from the EEFC account could be given without permission, the subscription to the equity capital required permission. The assessee applied for the permission and on receipt of it converted the loan into equity capital;

(iii) Further, the entity receiving the interest-free advance was not only a wholly owned subsidiary of the assessee company but also played a very significant role in its sale and distribution chain. Micro USA was a significant part of the marketing apparatus of the assessee and there was a significant commercial relationship between the two. The relationship between the assessee and Micro USA was not that of a lender and borrower simplicitor;

(iv) Further, in applying the CUP method, an adjustment has to be made under Rule 10B(1) “to account for differences …. which could materially affect the price in the open market”. There are significant differences between a typical transaction of loan of money and this transaction. LIBOR cannot be adopted in this situation because (a) the transaction is not a simplictor financing transaction but is a transaction of investing in a subsidiary as quasi capital pending formal approval of the RBI and (b) it is not a case of granting advance to a business concern without significant and decisive commercial considerations. The monies were given for strengthening the assessee’s marketing apparatus in the USA and to keep alive its biggest exports customer. The comparable uncontrolled price for interest on such a transaction in which advances are made pending capital subscription in a company which plays strategically significant commercial role in assessee’s business would be nil;

(v) As regards the excess credit period allowed to Micro USA, no adjustment can be made because it was part of the arrangement that specified credit period was allowed. The cost of funds blocked in the credit period was inbuilt in the sale price. Also, the question of excess credit period arises only when the goods are sold to third parties and the credit period allowed to the AE is more than the credit period allowed to others. Here, as similar products are not sold to any other concern, the question does not arise (Perot Systems 130 TTJ 685 (Del) & VVF Ltd 1 ITR (Trib) 326 (Mum) distinguished).

Home | About Us | Terms and Conditions | Contact Us
Copyright 2016 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Web Application Development Web based Software Solution Web Application Deployment Web Application Solutions Web Application Software Development Web Application Deployment Web Application Programming Web Application Design and Development

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions