The Ahmedabad Bench of the Income-tax Appellate Tribunal differentiated a “quasi-capital transaction” from a simple loan. The case involved issues of notional interest on convertible loans and corporate guarantee fees.
The case is: Cadila Healthcare Ltd. v. ACIT 
The taxpayer, a leading pharmaceutical company, entered into international transactions with related parties. The taxpayer advanced convertible loans to a subsidiary in Ireland, with the lender having an option to convert the loans to equity. In other situations, the taxpayer provided corporate guarantees relating to the borrowings of its related parties, and in two instances, the taxpayer did not charge any guarantee fees.
The Transfer Pricing Officer made transfer pricing adjustments relating to the notional interest on convertible loans and the guarantee fees. The Transfer Pricing Officer determined that the taxpayer ought to have charged interest on the convertible loans, and imposed 3% as the arm’s length guarantee commission. The Dispute Resolution Panel granted partial relief, and reduced to 1% the arm’s length guarantee commission.
In this judicial action, the tribunal directed the Transfer Pricing Officer to “delete” both adjustments. The tribunal recognized the concept of a “quasi-capital” transaction that cannot be compared with a “simple” loan transaction.
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