Transfer Pricing - Loan to Subsidiary companies

[TN Rajendran]

Indian company had given interest free loan  Rs.10.00 crores to its wholly owned subsidiary company  in USA towards working capital requirment. Transfer Pricing Officer wants to charge interest at the rate stated in LIBOR. Is there any way to justify not to charge interest.

AI Summary

Interest-Free Loan to US Subsidiary Challenged; TPO Proposes LIBOR-Based Interest. Strategic Equity Argument Suggested. An Indian company provided an interest-free loan of Rs. 10 crores to its wholly-owned subsidiary in the USA for working capital. The Transfer Pricing Officer (TPO) wants to apply interest based on LIBOR rates. A response suggests justifying the interest-free nature by arguing that the loan was a strategic business decision, akin to equity investment, which would not attract LIBOR. This argument could be strengthened by referencing any regulatory restrictions on equity holdings by the Reserve Bank of India or the USA, or by highlighting any dividends declared by the subsidiary.