2016 (7) TMI 1402 - AT - Income Tax

Tribunal rejects Revenue's appeal on notional interest for delayed trade debts from Associated Enterprises

The Income Tax Officer 8 (1) (3) Mumbai Versus Dania Oro Jewellery Pvt. Ltd.

The Tribunal dismissed the Revenue's appeal against the deletion of an addition of notional interest on delayed recovery of trade debts from Associated ... Notional interest due to delayed recovery of trade debts from AE - Charging interest from both AE and Non-AE debtors for delayed realization of export proceeds - Held that:- In a case like this the proper method is to take a simple average. If we take a simple average then there has been a delay of 132 days in the case of AE and 130 days in the case of Non-AEs in realization of the export proceeds. Thus there is uniformity in the act of the assessee in not charging interest from both AE and Non-AE debtors for delayed realization of export proceeds. Respectfully following the judgment of Hon’ble Bombay High Court in the case of Indo American Jewellery Ltd. [2013 (1) TMI 804 - BOMBAY HIGH COURT] the appeal filed by the Revenue is dismissed. Issues:1. Addition of notional interest due to delayed recovery of trade debts from AE.2. Application of arm's length principle in charging interest on delayed debts.Issue 1: Addition of notional interest due to delayed recovery of trade debts from AEThe Revenue appealed against the final assessment order by the ITO-8(1)(3) Mumbai, challenging the deletion of an addition of Rs. 33,90,931 on account of notional interest due to delayed recovery of trade debts from Associated Enterprises (AEs). The Transfer Pricing Officer (TPO) had computed the interest recoverable from the AE on the delayed recovery of sale proceeds of studded jewellery, charging interest at 15.41% per annum. The Dispute Resolution Panel (DRP) deleted the addition, stating that while the apparent relationship was that of a trade creditor and debtor, the AE was allowed access to interest-free funds without compensation to the assessee. The DRP held that no interest was chargeable from the AE, considering the similar credit period exceeding that of non-AEs. The Revenue contended that delays in realization of export proceeds from both AE and non-AEs were similar, citing previous tribunal orders. The Counsel for the assessee argued that not charging interest on delayed debts from both AE and non-AEs adhered to the arm's length principle. The Tribunal, relying on the judgment of the Hon'ble Bombay High Court in a similar case, dismissed the Revenue's appeal, emphasizing uniformity in not charging interest from both AE and non-AE debtors for delayed realization of export proceeds.Issue 2: Application of arm's length principle in charging interest on delayed debtsThe Tribunal considered the application of the arm's length principle in charging interest on delayed debts from both AE and non-AEs. The Counsel for the assessee relied on the judgment of the Hon'ble Bombay High Court in a case involving outstanding balances from Associated Enterprises, where the Tribunal had deleted the addition of notional interest on outstanding export proceeds realized belatedly. The Tribunal noted complete uniformity in the assessee's practice of not charging interest from both AE and non-AE debtors for delays in realization of export proceeds. The Tribunal emphasized the relevance of the High Court decision and the uniformity in the delays in realizing export proceeds from both categories of debtors. By applying the principle of uniformity in not charging interest from both AE and non-AE debtors for delayed realization of export proceeds, the Tribunal dismissed the Revenue's appeal, aligning with the arm's length principle.This detailed analysis of the judgment highlights the issues involved, the arguments presented by both parties, and the Tribunal's decision based on legal principles and precedents.