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 control, the unsecured nature of the advances did not by itself show higher risk, and the interest rates had been accepted in earlier years with no adjustment in later years on the same loans. On those facts, imputing a higher arm's length return was unjustified, and the disallowance of interest could not be sustained. The assessee's ground was allowed.

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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.

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