Viraj Solar Maharashtra Private Limited Vs ITO (ITAT Mumbai)
Transfer Pricing Adjustment on Interest-Free Loans Unsustainable Where Business Has Not Commenced and No Profits Exist
The Mumbai ITAT held that transfer pricing adjustments on interest-free or low-interest loans to associated enterprises cannot be sustained when the assessee has not commenced business and has not earned any income during the year. In this case, the assessee, engaged in the solar power sector, had advanced loans to its group entities—interest-free to one AE and at 8.5% to another. The TPO applied an arbitrary mark-up and proposed ALP-based interest adjustments, alleging profit shifting and invoking provisions linked to concessional tax regimes.
The Tribunal observed that the assessee’s entire expenditure was capitalized as capital work-in-progress, with no operational income or profits for the year. In such circumstances, the very foundation for alleging profit shifting collapses, as there is no profit to shift. Relying on a coordinate bench decision in the group case (Avaada MH Khamgaon Pvt. Ltd.), the ITAT reiterated that transfer pricing provisions, including specified domestic transaction concepts and concessional tax provisions, presuppose the existence of taxable income.
The ITAT further held that mechanically applying benchmark rates and mark-ups without considering the commercial realities and the absence of business commencement is unsustainable. Since the assessee had not availed any concessional tax benefit and no taxable income arose even after adjustments, the TP adjustment lacked legal basis.
Accordingly, the Tribunal deleted the entire TP adjustment, allowed the assessee’s appeal in full, and set aside the DRP/AO orders
FULL TEXT OF THE ORDER OF ITAT MUMBAI
