2026 (4) TMI 107 - AT - Income Tax

Transfer pricing on subsidiary loans failed where no higher risk or consistency basis supported a higher arm's length return.

Transfer pricing adjustment on interest for loans advanced to wholly owned subsidiaries was rejected because the subsidiaries were under the assessee's ... TP Adjustment - Arm's length price of interest on inter-company loans - Risk adjustment in loans to subsidiaries under management and control - Consistency in transfer pricing treatment - TP adjustment on interest charged by the assessee on loans advanced to its associated enterprises HELD THAT: - The Tribunal held that where loans are advanced to subsidiary entities which remain under the assessee's management and control, the premise of higher risk warranting an upward adjustment in the interest rate is not justified. Relying on the principle noticed in Bharti Airtel Limited [2015 (2) TMI 1126 - DELHI HIGH COURT], it found that control over the subsidiary reduces, rather than increases, the lending risk, and therefore lack of security or the subsidiary's weak credit profile could not by itself support a higher arm's length rate. Tribunal also noted that the interest rates on the loans to the USA and Netherlands entities had not been questioned in the years in which the loans were granted, nor in earlier years, and no new material had been brought to show any change in risk profile. Though res judicata does not apply to income-tax proceedings, the basic risk factor could not be altered in the year under appeal without fresh supporting material. On that reasoning, the impugned adjustment was held unsustainable. [Paras 10, 11, 12, 13, 14] The adjustment to the arm's length price of interest on loans to the associated enterprises was deleted and the ground was allowed. Final Conclusion: On remand limited to the arm's length price of interest on loans advanced to associated enterprises, the Tribunal held that no higher-risk adjustment was justified and that the departure from the earlier accepted position lacked supporting material. Ground No. 3 was allowed and the impugned transfer pricing adjustment was deleted. Issues: Whether the transfer pricing adjustment and consequential disallowance of interest on loans advanced to wholly owned subsidiaries could be sustained, having regard to the rate of interest charged, the absence of higher risk, and the consistency of treatment in earlier and later years.Analysis: The loan transactions were with subsidiaries under the assessee's management and control, and the borrowing structure showed that the subsidiaries were not exposed to any higher risk merely because the advances were unsecured or supported by lower interest. The record also showed that the interest rates charged in earlier years had been accepted, and no addition was made in subsequent years on the same loans. In these circumstances, the basis adopted by the tax authorities for imputing a higher arm's length return was found to be unjustified, and the factor of alleged risk did not support the adjustment.Conclusion: The transfer pricing adjustment could not be sustained, and the ground was allowed in favour of the assessee.