The Chennai Bench of the Income-tax Appellate Tribunal found that an interest-free loan extended by the taxpayer to related parties was an attempt by the taxpayer to reduce its tax burden, and given this finding, interest was to be computed on notional basis by applying LIBOR rate.
The tribunal, however, determined that a corporate guarantee and a “letter of comfort” extended by the taxpayer to its related parties had no bearing on profits, income, loss or assets of the taxpayer and / or was not an international transaction, and as such, a transfer pricing adjustment was not warranted.
The case is: TVS Logistics Services Ltd. v. DCIT (ITA No. 458/Mds/2016)
The taxpayer advanced funds, interest-free, to related parties for the purpose of expanding business outside of India. The funds were advanced not from any additional borrowings by the taxpayer, but from surplus funds (equity capital). The taxpayer described this as shareholder activity. During the same year, the taxpayer paid interest on amounts it had borrowed (loans).
The Transfer Pricing Officer determined that the interest-free loan to the related parties and the payment of interest on the loan effective shifted profits outside of India. Accordingly, interest on the advanced funds was imputed using LIBOR.
The taxpayer also extended a corporate guarantee for a related party, but did not charge any fee for the guarantee. Again, the Transfer Pricing Officer made a transfer pricing adjustment using the LIBOR rate of interest.
The taxpayer issued a “letter of comfort” to a related party, and this in turn allowed the related party to borrow funds. The Transfer Pricing Officer imputed a recovery charge at 1% for the taxpayer’s risk exposure.
These findings were administratively upheld, and the taxpayer sought judicial review by the tribunal.
The tribunal concluded that:
Read a June 2016 report [PDF 370 KB] prepared by the KPMG member firm in India: Transfer pricing adjustment on free of charge corporate guarantee and letter of comfort deleted, adjustment for interest-free advances upheld