In a case involving an Indian company’s provision of an interest-free loan and software services to its wholly owned U.S. subsidiary the Delhi Income Tax Appellate Tribunal has held that the loan was distinct from the supply of software and thus, the arm’s-length price of each transaction should be independantly determined.

 The Indian parent had argued that, when combined, the two transactions yielded a profit margin much higher than that of the average comparables for similar services.   According to the Indian parent, no comparable uncontrolled loans were available for transfer pricing study, so the intercompany loan was factored into the profit margin analysis of the software services and determined by thet axpayer to approximate arm’s length.

Nonetheless, the tribunal rejected this position and sided with the audit, ruling that the supply of software services and the provision of the loan were two distinct and separate transactions and could not be aggregated in the transfer pricing analysis.

The tribunal also ruled that uncontrolled cross-border comparables in US currency should be used to determine the arm’s-length price of the interest on the loan and requested that the audit officer and the Indian parent recompute the arm’s-length interest accordingly.