2015 (6) TMI 175 - AT - Income Tax

Tribunal upholds LIBOR rate for price adjustment, considers credit period in transfer pricing.

Asstt. Commissioner of Income Tax Circle–2 (2), Aayakar Bhavan, Mumbai Versus Information Systems Resource Centre Private Limited

The Tribunal dismissed the Revenue's appeal challenging the application of the LIBOR-based interest rate, upholding the use of LIBOR for arm's length ... LIBOR based interest rate - whether such rate may be applied where Indian entities borrow loans from overseas whereas the position is totally reverse in the present case and the A.O. had correctly applied SBI PLR based interest rate? - Held that:- The issue of adopting the PLR of the public sector banks or LIBOR for the purpose of arm's length interest has been considered by this Tribunal in the series of decisions. See Micro Inc. Ltd. v/s ACIT [2013 (8) TMI 332 - ITAT AHMEDABAD] - Decided against revenue. Transfer pricing adjustment - adjustment of interest levied on selective trade receivables received from related party - Held that:- The Tribunal has taken a view that the transaction of allowing the credit period to the A.E. on realisation of sale proceeds has to be considered along with the main international transaction in respect of sale to A.E. A similar view has been taken by the Tribunal, Delhi Bench, in Kusum Healthcare Pvt. Ltd. (2015 (4) TMI 180 - ITAT DELHI) empirically demonstrates that the differential impact of working capital of the vis-a-vis its comparables has already been factored in the pricing/profitability of the assessee which is more than that working capital adjusted margin of the comparables. Hence, any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified. Thus set aside this issue to the record of the Assessing Officer / Transfer Pricing Officer and direct to re–do the exercise of determination of arm's length price in the light of the above decisions of the Tribunal. - Decided in favour of assessee for statistical purposes Issues Involved:1. Application of LIBOR vs. SBI PLR interest rate for arm's length price adjustment.2. Treatment of extended credit period to Associated Enterprises (A.E.) as a separate international transaction.Detailed Analysis:Issue 1: Application of LIBOR vs. SBI PLR Interest Rate for Arm's Length Price AdjustmentThe Revenue's appeal challenged the application of the LIBOR-based interest rate by the Commissioner (Appeals), arguing that the SBI PLR-based interest rate should be applied instead. The Transfer Pricing Officer (TPO) had observed that the assessee provided an additional credit period beyond the mutually agreed 60 days without charging interest, leading to an adjustment of Rs. 10,87,343 using the SBI PLR as the arm's length interest rate.The Commissioner (Appeals) upheld the transaction under transfer pricing provisions but directed the use of the LIBOR-based interest rate for the adjustment. The Tribunal noted that the issue of adopting PLR or LIBOR for arm's length interest had been considered in several decisions, including the Tribunal's decision in 'Micro Inc. Ltd. v/s ACIT,' which emphasized that the LIBOR or other bank rate linked rate is generally taken for comparable uncontrolled transactions.The Tribunal further referenced the decision, highlighting that differences between the international transaction and comparable uncontrolled transactions must be adjusted. The Tribunal concluded that the application of LIBOR plus rate was inappropriate due to fundamental differences in the nature of transactions and the commercial relationship between the parties.In line with previous Tribunal decisions, the Tribunal found no error in the Commissioner (Appeals)'s order applying the LIBOR-based interest rate and dismissed the Revenue's appeal.Issue 2: Treatment of Extended Credit Period to A.E. as a Separate International TransactionThe assessee's cross objection challenged the adjustment of interest levied on selective trade receivables from related parties, arguing that the credit period provided to the A.E. was not a separate international transaction but closely linked with the sale transaction. The Tribunal considered the rival submissions and referenced the Tribunal's decision in 'Goldstar Jewellery Ltd. v/s JCIT,' which held that the transaction of allowing a credit period to A.E. is not an independent international transaction but closely linked with the sale transaction.The Tribunal also referenced the decision in 'Kusum Healthcare Pvt. Ltd. v/s ACIT,' which emphasized that instead of making a separate adjustment for the credit period, a working capital adjustment for the operating margin of the comparable company should be considered.The Tribunal concluded that the transaction of allowing the credit period to A.E. should be considered along with the main international transaction of sale to A.E. and directed the Assessing Officer/Transfer Pricing Officer to re-do the exercise of determining the arm's length price in light of these decisions.Conclusion:The Tribunal dismissed the Revenue's appeal regarding the application of the LIBOR-based interest rate and allowed the assessee's cross objection for statistical purposes, directing a re-evaluation of the arm's length price considering the credit period as part of the main international transaction of sale to A.E. The Tribunal's order emphasized consistency with previous decisions and the importance of considering closely linked transactions in transfer pricing adjustments.