High Court’s detail
The is the High Court case of KPHDN v Watsons Personal Care Stores (M) Holdings Limited (2020)/Judgment was issued on the 18.04.2023.
Brief Fact
In 2003 & 2012, the Company A borrowed USD36million and USD1.2million from Watson Labuan to buy Watson Shares in Malaysia. Company A is an interrelated company.
The amount borrowed from Watson Labuan is subjected to a 3% plus the London Interbank Offered Rate (LIBOR) on a yearly basis and the principal amount borrowed to be paid on demand by Watson Labuan.
DGIR’s arguments
On 2014, the DGIR informed the Company that the money borrowed from 2010 to 2012 will be taxed under section 140A of the ITA and Rules 8(1)(b) and 8(2) of the Income Tax (Transfer Princing) Rules 2012 (TP Rules). Further, the interest paid back to Watson Labuan is not allowed as deduction because the money borrowed is not at arm’s length transactions.
Taxpayer Company’s arguments
In this case, the Company has prepared a transfer pricing documents to prove that the loan transactions were done in arm’s length. The taxman on the other hand, did not give any justification on why they ignored the Company TP justification. Under Rule 8 of the TP Rules, there is an obligation on the taxman to give their adjustment of the interest loan rate.
Court’s Judgment
The High Court judge has held that if the DGIR disagreed with the TP documentation, the DGIR has to come up with their own set of Transfer Pricing documentations. The DGIR has to provide a satisfactorily explanation on why they think the taxpayer’s company loan transaction were not at arm’s length.
The taxpayer company has also complied with the TP Guidelines 2012, and in the absence of a contrary transfer pricing report by the DGIR, the company’s version of the TP must be accepted.
The fact that the DGIR did not forward any evidence to challenge the taxpayer’s TP analysis amounts to the DGIR bare denial.
The DGIR reliance on Investopedia as an authority to disregard the taxpayer’s company position was disregard by the Court. Investopedia is not an authority.
What does a TP documents provide?
- The TP documents provide the analysis on the functions, assets and risks of the loan transaction;
- The considerations on the contractual terms and information regarding economic circumstance;
- The benchmarking analysis or comparability analysis to determine the independent companies with similar characteristics based on the findings in the functional analysis;
- The applicable interest rate was at arm’s length
Conclusion
If you are an interrelated company, and you have carried out interrelated transfer of loan/money, make sure you prepare a transfer pricing documents to justify the transaction. This is a good example where this Company A has done good tax planning. When the DGIR queried on them, they have the TP document to justify to clear the doubt of tax avoidance under section 140A of the ITA 1967.
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