Thin Capitalisation or interest free debt

some years back bata india was in problem n their foreign promoters had given interest free loan to their indian subsidary.

These situation may show you a way out.

Hi Kunal, 

Thanks a lot for your prompt reply.

This helped me a lot to research right direction. Can you guide me to find relevant rules, regulation, notification etc. in this regard.

Thanks again for providing guidance.

As far Tax Regulations are concerned, it is the other way round which is examined by Indian Authorities from Transfer Pricing point of view. There is no bar on interest free loans from foreign promoter/ holding company as the same does not result in flight of taxable income beyond Indian Jurisdiction.

Hi Vineet,

Thanks for your guidance. Even I think that Indian authorities should have no problem on interest free loan to subsidiary company by its foreign holding company as it it does not result in tax evasion. Further, there will be no issue of "Transfer Pricing" in this situation. However, it will be of great help if you could  guide me to find relevant judgement, rules, regulation, notification etc. to substantiate my opinion in this regard.

Thanks again for providing guidance.

Regards.

Dear Rohit

It is not a matter of tax evasion and more of a concern for flight of taxabale income beyond respective jurisdiction which bothers the Tax Administration. In your case, there will be no problem to Indian authorities as no interest is being paid to overseas Associated Enterprise.

Section 92 and chapter X of I T Act deals with income arising from international transaction with associated enterprise. So if Indian Entity is not paying any interest on overseas borrowing thereby reducing their Indian Taxable Income, the provisions will not be invoked.

As a matter of fact you have to look for restrictive provisions regarding such interest free loan in the country from where these loan are originating.

Yes no transfer pricing problem will arise in India as interest free loan will not result in decrease in the income of the subsidiary company in India as a result of such loan. However It may attract transfer pricing provisions in that country where from the interest free loan is to be given.