India: Loan guarantees for foreign related parties | KPMG | GLOBAL
Share with your friends

India: Convertible loans, loan guarantees for foreign related parties

India: Loan guarantees for foreign related parties

The Ahmedabad Bench of the Income-tax Appellate Tribunal differentiated a “quasi-capital transaction” from a simple loan. The case involved issues of notional interest on convertible loans and corporate guarantee fees.


Related content

The case is: Cadila Healthcare Ltd. v. ACIT [2017]


The taxpayer, a leading pharmaceutical company, entered into international transactions with related parties. The taxpayer advanced convertible loans to a subsidiary in Ireland, with the lender having an option to convert the loans to equity. In other situations, the taxpayer provided corporate guarantees relating to the borrowings of its related parties, and in two instances, the taxpayer did not charge any guarantee fees.

The Transfer Pricing Officer made transfer pricing adjustments relating to the notional interest on convertible loans and the guarantee fees. The Transfer Pricing Officer determined that the taxpayer ought to have charged interest on the convertible loans, and imposed 3% as the arm’s length guarantee commission. The Dispute Resolution Panel granted partial relief, and reduced to 1% the arm’s length guarantee commission.

In this judicial action, the tribunal directed the Transfer Pricing Officer to “delete” both adjustments. The tribunal recognized the concept of a “quasi-capital” transaction that cannot be compared with a “simple” loan transaction.


Read a May 2017 report [PDF 280 KB] prepared by the KPMG member firm in India

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us


Request for proposal