Tribunal directs re-evaluation of arm's length price & considers delay in dues as international transaction

The Tribunal partly allowed the assessee's appeal, directing the Assessing Officer/TPO to re-evaluate the determination of arm's length price (ALP) in light of the observations made. The Tribunal held that the delay in realization of dues from the associate enterprise constitutes an international transaction under the expanded definition. It also concluded that the extended credit period to the AE is closely linked with the main international transaction of sale to the AE and should not be treated as a separate international transaction. The Tribunal instructed the authorities to reconsider the interest rate on outstanding amounts based on the average cost of funds available to the assessee.

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Issues Involved:
1. Whether the "Continuing debit balance" with associate enterprise constitutes an "international transaction".
2. Whether the extended credit period to the AE amounts to short-term funding without interest, thus constituting an international transaction.
3. The appropriateness of the interest rate adopted by the Assessing Officer/TPO/DRP on outstanding amounts from Associate Enterprises.
4. Levy of interest u/s 234B & 234C of the Income Tax Act.
5. Initiation of penalty proceedings u/s 271(1)(c).

Issue-wise Detailed Analysis:

1. Continuing Debit Balance as International Transaction:
The assessee argued that the continuing debit balance or amount outstanding from the AE due to delayed realization does not amount to an international transaction. This was seen as a result of another international transaction, namely, export. The Tribunal, however, noted that after the insertion of explanation to section 92B(1) by the Finance Act 2012, the payment or deferred payment or receivable or any debt arising during the course of business falls under the expression international transaction. Therefore, the delay in realization of dues from the AE in comparison to non-AE is considered an international transaction as per the expanded definition.

2. Extended Credit Period as Short-Term Funding:
The TPO observed that the AE benefitted from making late payments to the assessee, leading to a proposed adjustment of Rs. 2,49,95,139/- by applying an interest rate of 18.816% as arm's length interest. The assessee contended that the extension of the credit period to the AE on realization of sale proceeds is not a separate international transaction but arises from the international transaction of sale to the AE. The Tribunal agreed that the credit period allowed to AE is not an independent international transaction but closely linked with the sale transaction to the AE. The credit period extended to AE should be considered along with the main international transaction of sale to the AE.

3. Interest Rate on Outstanding Amounts:
The TPO applied an interest rate of 18.816% on the overdue amounts, which the DRP later reduced to 7%. The assessee argued that the interest rate should not exceed the cost of funds, which is based on LIBOR plus 2.5%. The Tribunal noted that the arm's length interest should be the average cost of the total fund available to the assessee and not the rate at which a loan is available. The Tribunal directed the Assessing Officer/TPO to re-determine the ALP considering the average cost of funds.

4. Levy of Interest u/s 234B & 234C:
The Tribunal noted that this ground is consequential in nature and does not require a separate finding.

5. Initiation of Penalty Proceedings u/s 271(1)(c):
The Tribunal found this ground premature and not arising from the impugned orders of the authorities below, thus dismissing it.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes, with the Tribunal directing the Assessing Officer/TPO to re-evaluate the determination of ALP in light of the observations made. The order was pronounced in the open court on 14.01.2015.

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