Transfer pricing could not be applied on the interest rate computed on a loan or money advanced by a company to its group entity, Mumbai Income Tax Appellate Tribunal ruled.
The tax tribunal was ruling in the case of Essar Power, the power generation company. The company had calculated interest on money advanced to another group company. The advance was towards share application. The tax department had questioned this transaction and the rate of interest under the transfer pricing.
Transfer pricing is a tax levied on companies within India and overseas on transactions within the group. As per the regulations a company has to undertake transactions at an “arm’s length.” Arm’s length is a concept in transfer pricing that determines the price (or interest rate) at which a transaction should happen.
The underlying principal is that the transaction should be as if it’s happening between two companies that have no relation and no preferential treatment, price or interest rate has to be extended as doing so could lead to a loss to the Indian revenue authorities. The tax department can challenge the price and slap tax if they think the price paid was below or above the arm’s length.
The tax department had questioned Essar Power’s loan under transfer pricing