When an Indian company provides interest-free funds to its wholly-owned subsidiary, the Transfer Pricing Officer (TPO) should not add the prevailing interest rates in India but the ones in the country where the subsidiary is located, held the Income-Tax Appellate Tribunal, Mumbai, in Tata Autocomp Systems Ltd vs Assistant Commissioner of Income-Tax .
The appellant is engaged in the business of manufacture of indoor plastic, rendering engineering services, supply chain management services and administrative support for joint venture companies and had entered into international transactions with its German 100 per cent subsidiary Company TACO Kunstsofftechnik GmbH.
Finding that the appellant had also made advances of €26,25,000 to it without interest, the TPO had issued a show cause notice as to why the interest foregone should not be reckoned at the rate of 10.25 per cent, the interest that could have been earned in India.
The appellant, however, contended that the purpose of the deal was not to evade tax but to promote its business interest that lied in cashing in on the opportunity to supply components to Ford in Europe towards which the agreement was the big parts would be manufactured by the subsidiary in Germany and child parts in India to save on transportation cost on heavier parts.
Rejecting this, the TPO had recommended addition of Rs 1.76 crore to the appellant’s income against which it had appealed to the tribunal.
The Tribunal while rejecting the contention of the appellant that no interest can be added given the objective of business promotion however held that the tax authorities should not have zeroed in on the interest rates in India but the ones prevailing in Germany 4.15 per cent the EURIBOR (European inter-bank offer rate).