By Geeta Jani, Dhishat B. Mehta Chartered Accountants
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Section 92B – Advancing loans to subsidiary is an international transaction; interest to be imputed as per transfer pricing provisions. Article 11 of India-Mauritius DTAA does not dilute this as the Article is applicable only in cases where interest actually arises in a contracting state and accrues to the resident of another contracting state and not in respect of notional income taxed under TP.
Facts:
The Taxpayer advanced loans to its subsidiary in Mauritius (FCo) without charging any interest. Tax Authority imputed notional interest on loan provided to F Co by determining the arm’s length interest. The Taxpayer contended that when no interest was charged by the Taxpayer no notional interest can be added under Transfer pricing (TP) adjustment. Alternatively, as the interest was not ‘paid’ by F Co to the Taxpayer, it would not be taxable in India as per the provisions of Article 11 of India-Mauritius DTAA
Held:
Transaction of loan given to the AE is an international transaction as per the provisions of section 92B; hence the arm’s length price has to be determined as per the transfer pricing provisions of the Act.
Article 11 of India-Mauritius DTAA applies to a case where interest actually arises in a contracting state and is paid to the resident of another contracting state. It is contemplated under Article 11 that payment is a pre-condition for taxing interest only in the circumstances when interest is arising in the contracting state and accrued to the resident of another contracting state. In other words, the provision of Article 11 defers the taxability of the interest arising but not received and, therefore, it is taxed only when it is received. In the case on hand, when the Taxpayer has not even admitted that the interest has arisen and accrued to it on the loan given to the AE, provisions of Article 11 of India-Mauritius treaty cannot be pressed into service and the same is hence taxable as per the TP provisions.
