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12 April 2019
In a recent case before the tax tribunal, the taxpayer (which manufactured, exported and traded multi-micronutrient fertilisers, other nutritional products and major fertilisers) gave an unsecured loan to its associated enterprises for which it had charged interest equal to LIBOR plus 250 basis points based on the rate at which it had borrowed funds from a foreign bank.
The tribunal upheld the taxpayer's benchmarking and rejected the lower tax authority's contention that had the taxpayer advanced the loan to a third party, it would have charged a mark-up for its administrative expenses and the risk borne therein. Further, the tribunal found that the taxpayer had incurred a hedging loss on a derivative contract that it had entered into with a third party. The derivative contract had been entered into in order to hedge the foreign exchange loss that may have arisen due to the interest payments to the foreign bank in a foreign currency for the borrowed amount.
The tax tribunal held that the hedging transaction was not an international transaction and therefore was not liable to a transfer pricing adjustment. However, the derivative contract did not necessarily wholly and exclusively relate to the taxpayer's business and accordingly could be disallowed as a routine business expenditure under Indian tax law.
For further information on this topic please contact Pranay Bhatia at BDO in India by telephone (+91 22 3332 1600) or email (email@example.com). The BDO in India website can be accessed at www.bdo.in.
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