Income-tax

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25 December 2012 Dear Sir,

The Company had taken unsecured loan from relatives(definition as per income tax act,)/directors/shares hoders, now shares holders/directors/relatives wants to charge interest on unsecured loan at the concessional rate, which is lower than Bank rate, my query is that does the domestic transfer pricing act 2012 applicableon this transaction? yes or no, and second question is that which amount covered under this transection, interest or amount of unsecured loan? kindly express brifly the provision of income tax.

Thanks
Vinod

Jinesh Bhagdev

Jinesh Bhagdev (Expert)

25 December 2012 Any payment u/s 92BA(i) will be covered. Accordingly, payment of interest to the relatives of the directors / shareholders will be covered under the domestic transfer pricing provisions.

The threshold limit for Specified Domestic Transaction is 5 crores. So, you will have to determine that all the transactions (from payment / payable perspective) is aggregating to Rs. 5 crores or not.

If the transactions specified under Section 92BA(i) are aggregating to Rs. 5 crores, than the proposed interest transaction will be covered. For. Eg. Payment of Director's Remuneration + Purchases from the enterprise where the key personnel are interested, etc. aggregates to Rs. 5 crores, than Domestic Transfer Pricing Regulations will appply

If not, than your company will be outside the ambit of domestic transfer pricing regulations.

As far as my experience in transfer pricing is concerned, only items of expenditure will be covered under domestic transfer pricing [going by wordings of section 92BA(i)].

Accordingly, your unsecured loan may not be subjected to domestic transfer pricing. But we will have to see how the law evolves.

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