INCOME TAX ACT, 1961

Section 92C

Transfer pricing - Determination of ALP - Interest attributable to resultant exchange difference -

Question for consideration was whether an interest-free debt funding of an overseas company in the nature of a special purpose vehicle (SPV), with a corresponding obligation to use it for the purpose of acquisition of a target company abroad, could be compared with a loan simpliciter, and be, subjected to an arm's length price adjustment, on the basis of Comparable Uncontrolled Price (CUP) method accordingly. The issue in dispute was an ALP adjustment of Rs. 44.26 crores on account of notional interest on a loan stated to be of this nature by the assessee company to its fully owned foreign subsidiary, which was used as an SPV for overseas acquisitions. Held: Transactions between the owner of SPV and SPV belonged to a genus different from the transactions between lenders and borrowers, such transactions between an SPV and the entity creating such an SPV, as long as it was for a specific transaction structured by the owner entity-was inherently incapable of taking place between independent enterprise. The moment this kind of funding was done, the relationship between the entity funding the SPV and the SPV would be rendered as of 'associated enterprise' within the meanings of section 92A(1) as also section 92A(2). It is also elementary that transactions between associated enterprises, even if held to be arm's length in character, cease to be valid comparable under CUP method. Such a controlled end-use of the monies was possible when the lender has functional control over the borrower, and that very control vitiated arm's length situation. Viewed thus, requirement of arm's length standards could never be met, under CUP method, so far as the nature of transaction was concerned. In a situation, therefore, when the borrower had no discretion of using the funds gainfully, the commercial interest rates did not come into play at all. Furthermore, when the base transactions were in GBP, balances reflected on account of exchange difference for such notional conversions could not be treated as outstanding dues, and, for this reason also, ALP adjustments on account of interest attributable to resultant exchange difference must stand deleted.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2010-11

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