23 October 2009
As per Section 372A (8)(c) of Companies act, holding companies can lend to wholly owned subsidiaries with out any restrictions contained in Section 372A. When an Indian Holding company lends to its wholly owned foreign susbsidiary without charging any interest, transfer pricing regulations under IT Act would be applicable. In such case, what interest rate could be be considered as Arms Length Price for such transaction ? Normally this test has to be done considering this question --- would the borrower be eligible to avail similar credit lines from an unrelated lender on identical terms and conditions ? The answer to this question would be NO, in respect of case of holding company loan to subsidiary. In such case what could be the benchmark rate to be treated as ALP. Can one take an argument that considering Comparable Uncontrolled Price (CUP) Method , the interest rate charged by any other holding company to its wholly owned subsidiary as the benchmark ALP. Considering the fact that there could be many holding companies lending to foreign subsidiaries at ZERO interest rate, can such ZERO rate be considered as benchmark ALP for lending between holding and subsidiary company ? Any answers from colleagues in CA fraternity ?
23 October 2009
Another angle of these type of transactions is if a holding company is paying interest on finance obtained by him from Bank or other lending institutions and then giving loan to it's subsidiaries at concessional rate then Income Tax authorities can disallow the proportionate Interest paid by the holding company.
The logic is it's claiming the interest as expenditure but not using for business purpose.
Moreover in my opinion as far TP is concerned the lending rate should not be lower than the PLR ( prime lending rate) to satisfy the arms length pricing as nobody will lend to a third person at a rate below market rate or even below than what its paying to it's own lender.
26 October 2009
Thanks Sanjay. U/s 372A reference is to Bank rate. As far as loans to foreign susbsidiaries their bench mark rate could be the possible rate for borowing in those countries. Can the Overall ceiling on ECB (300 to 500 basis points above 6 month USD LIBOR) be used a benchmark ALP ?
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