Commercial expediency of loan to AE not relevant for computing ALP of interest: ITAT Special Bench

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.

3) As regards reliance on the Vodafone India Services (P.) Ltd. v. Union of India [2014] 50 taxmann.com 300 (Bombay), that deals with a situation in which the international transaction was inherently incapable of producing the income chargeable to tax as it was in the capital field. Undoubtedly, learned counsel is right in interpreting this decision to the extent that what is not in the nature of income cannot be turned into income so as to make ALP adjustment therein, and then bring the ALP adjustment to tax, since the computation is of income and it is only the price at which transaction is entered into that is to be taken as an arm’s length price in computation of that income. The ALP adjustments cannot be treated as income per se. However, the assessee does not derive any support from this decision since consideration for a loan, i.e., interest, is inherently in the nature of income. There is no, and there cannot be any, dispute or controversy about this character of income.

4) Therefore, even when no income is reported in respect of an item in the nature of income, such as interest, but the substitution of transaction price by arm’s length price results in an income, it can very well be brought to tax under Section 92. - [2016] 71 taxmann.com 193 (Kolkata - Trib.) (SB)