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.

[Bakul Gandhi]

If your facts suggests that as business startegy, instead of entire partly as equity capital contribution by way of shares, this part- investment is made as interest free loan. If this Rs 10 crore  had been invested in shares, TPO would not have considered LIBOR. This argument may be supplemented if there are rules and regulations of RBI or of USA which does not permit larger equity holding. Also if the subsidiary has declared any dividend, that fact may also help.

 

AI Summary

Transfer pricing: imputed interest on an intra-group interest-free loan can be contested using business-structure and regulatory constraints. An Indian parent gave an interest-free intra-group loan to its wholly owned US subsidiary; the Transfer Pricing Officer seeks to impute interest at LIBOR. The primary justification is that the funding was a deliberate business decision substituting debt for equity, and that regulatory limits on equity holdings or the subsidiary's dividend payments can support treating the funds as equity-like, thereby contesting a LIBOR-based imputed interest adjustment.