2016 (7) TMI 760 - ITAT KOLKATA

Transfer pricing adjustment - interest free advances granted by the assessee to its Indian AE - base erosion theory - Held that:- We are not inclined to accept the base erosion argument, in principle, nor do we find anything in the facts on record to even support the factual elements embedded in the plea of the assessee. We reject this plea. The intervener has picked up an aspect of the matter totally “divorced from its context” and proceeded to treat the same as “a full exposition of law on a question when the question did not even fall to be answered in that judgment”. The approach adopted by the learned counsel for the intervener, therefore, does not merit our approval.

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 enterprise, Section 92 of the Act mandates that the income from such transactions is to be computed on the basis of arm’s length price.

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.

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. The point of dispute is whether zero interest, or no interest, is good enough for computing the income or whether an arm’s length interest must substitute this zero interest. The answer is obvious. As long as the transaction is an international transaction between the AEs, the computation of income has to be on the basis of arm’s length interest. Therefore, in our considered view, 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. This plea of the assessee is also, therefore, unsustainable in law.

In view of the above we reject the contention of the assessee that, in principle, no arm’s length price adjustments can be made in respect of the interest free advances granted by the assessee to its Indian AE, i.e. Datex Ohmeda India Pvt Ltd. However, so far as quantification of the arm’s length price adjustment is concerned, the same will have to be dealt with the division bench as no arguments, with respect to the quantification part, were advanced before us. It is also open to the parties to take up any other issue, not specifically dealt with above, before the division bench in accordance with law.