The issue before the special bench of ITAT was as under:
Whether ALP adjustment was required to be made in respect of interest free loan granted by the assessee, a non-resident company, to its wholly owned subsidiary in India?
The Special Bench of Kolkata ITAT held as under:
1) The commercial expediency of a loan to subsidiary is wholly irrelevant in ascertaining arm’s length interest on such a loan. There is indeed no bar on anyone advancing an interest free loans to anyone but when such transactions are covered by the international transactions between the associated enterprises, Section 92 of the Act mandates that the income from such transactions is to be computed on the basis of arm’s length price.
2) The assessee is not really correct in contending that when the assessee has not reported any income from a particular international transaction, the ALP adjustment cannot compute the same. The computation of income on the basis of arm’s length price does not require that the assessee must report some income first, and only then it can be adjusted for the ALP. Section 92(1) is not an adjustment mechanism; it is a computation mechanism. The arm’s length price principle requires that an arm’s length price is assigned to the transactions between the associated enterprise, and if the income in computed, if any, on the basis of the
arm’s length price so assigned.