Tax breather for Hindalco in transfer pricing spat

Aditya Birla Group's flagship metals arm Hindalco has received a Rs 260 crore tax breather in its ongoing transfer pricing spat with income tax authorities following an order by the Dispute Resolution Panel (DRP) hearing the matter, three sources familiar with the development told ET NOW. " The panel has reduced the interest levy on corporate guarantees issued by Hindalco to its associate enterprises from 11% to 2.5%. This brings down Hindalco's taxable income from the earlier Rs 1100 crores as part of the transfer pricing order to a greatly reduced Rs 250 crore rupees and hence the consequent tax relief, " said one of the sources cited above.

The case relates to corporate guarantees issued by Hindalco to an SPV formed for the acquisition of the Canadian giant Novelis for $6 billion in 2007. Transfer price is the amount used in accounting for transfer of goods or services from one place to another or from one company to another which belongs to the same parent company. In the case of acquisition, a company floats an overseas special purpose vehicle which raises money for completing the acquisition. Since the SPV does not have any asset or revenue stream, it relies on a guarantee by the parent.

ET had earlier reported that the government is likely to impose tax on companies giving guarantees for overseas acquisitions in its efforts to boost tax collections. Typically, a charge or fee is payable if a company gives a guarantee to unrelated parties. However, when such guarantees are given to an associated enterprise or a related party for the purpose of an acquisition, the parties involved make adjustments.

As a result of this adjustment, charges payable on such guarantees "become invisible," according to people familiar with the process, leading to a loss of revenue for the government. The I-T department has brought such under the transfer pricing net of the Income-Tax. Earlier, a division bench comprising justices DY Chandrachud and AA Sayed, while dismissing Hindalco's plea against the IT department, said there is no breach of any natural justice and the petitioner can exercise alternate remedies to go for an appeal, including the dispute resolution panel.

A Hindalco spokesperson declined to comment on the development.