Funding as a function itself is very dynamic, especially when you add cross-border and related party elements, it becomes complex to analyze and measure. The TP implications on intra-group financing have been a matter of significant dispute in almost all jurisdictions where the TP regime or ALP exists. The Organisation for Economic Co-operation and Development (OECD)'s response to this issue was also largely applauded by all when it released a comprehensive paper titled "TP guidance on Financial Transactions" in February 2020.
In the given case, the appellate authorities (first as well as second) rightly distinguished the trade credit facility from a typical loan. At the same time, the arguments such as – the AE's inability to borrow from third parties and similar credit period offered to third parties have not been appreciated by the appellate authorities.
In our view, business situations (loss-making/liquidity crunch) are an important factor to be kept in mind while one assesses or identifies the tax base erosion potential in an intra-group transaction. If the taxpayer provides adequate evidence and reasoning in support of a genuine business situation and if it is documented in the TP documentation, the tax authorities ought to appreciate/accept that. In fact, there are a plethora of court judgments that have held that the tax authority can not step in the taxpayer's shoes while challenging the taxpayer's transactions.