Transfer pricing on interest-free financing fails where business has not commenced and no taxable income exists.

A transfer pricing adjustment on interest-free related-party financing was treated as unsustainable where the company had not commenced business, had capitalised all expenditure to capital work-in-progress, and had no taxable income for the year. On those facts, the premise of profit shifting to associated enterprises did not survive because there was no business profit or distributable income to benchmark. The note further states that section 115BAB has relevance only where income exists for computation, and in the absence of income there was no basis to sustain such an adjustment. Following a coordinate bench decision on materially similar facts, the addition was deleted and the issue was resolved in favour of the assessee.

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Issues: Whether the transfer pricing adjustment on interest-free loan transactions was sustainable when the assessee had not commenced business and had no taxable income during the year.

Analysis: The assessee had not commenced business and had capitalised all expenditure to capital work-in-progress, so no business profit arose during the year. On these facts, the premise of profit shifting to associated enterprises did not survive. The adjustment was sought on interest-free lending and benchmarking of related-party financing, but the foundational requirement of taxable income or distributable profit was absent. The reasoning also recognised that the concessional regime under section 115BAB has relevance only where income exists for computation, and in the absence of income there was no basis to sustain an adjustment of this nature. Following the coordinate bench decision in the group case on materially similar facts, the transfer pricing addition was held unsustainable.

Conclusion: The transfer pricing adjustment was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The appeal was allowed and the impugned addition did not survive.

Ratio Decidendi: Where a company has not commenced business, has incurred no taxable income, and has capitalised expenditure to work-in-progress, a transfer pricing adjustment premised on profit shifting from interest-free or related-party financing is not sustainable.

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