Tribunal sets interest rate on deferred receivables, corrects calculation error

The Tribunal upheld the treatment of interest on deferred receivables as an independent international transaction, setting the interest rate at LIBOR + 2%. The Tribunal also addressed an arithmetical error in the interest calculation, instructing correction by limiting the delay period to the relevant year. The appeal by the assessee was partly allowed.

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Issues Involved:
1. Notional interest adjustment on outstanding receivables.
2. Treatment of receivables as a separate international transaction.
3. Benchmarking of interest rate for delayed receivables.
4. Arithmetical error in the computation of interest by the TPO.

Detailed Analysis:

1. Notional Interest Adjustment on Outstanding Receivables:
The primary issue in this case revolves around the notional interest adjustment concerning the outstanding receivables of the assessee. The revenue authorities computed this interest at 6 months LIBOR + 450 basis points, resulting in an effective rate of 5.875%. The assessee, a subsidiary of Maxim Integrated Products Sales Ltd., engaged in marketing integrated circuits and software, rendered several international transactions during the year under consideration, including marketing and sales support services, reimbursement of expenses paid, and recovery of expenses.

2. Treatment of Receivables as a Separate International Transaction:
The TPO treated the receivables as a separate international transaction to be benchmarked independently. The TPO relied on various judicial pronouncements to justify this treatment, arguing that aggregation of transactions is permissible only when the underlying international transactions are continuously and closely inter-linked. The TPO chose the Comparable Uncontrolled Price (CUP) method as the Most Appropriate Method (MAM) for computing the Arm's Length Price (ALP) and computed the interest based on the standard credit period of 120 days as per the intercompany agreement between the assessee and its Associated Enterprise (AE).

3. Benchmarking of Interest Rate for Delayed Receivables:
The Tribunal referenced the decision in the case of Swiss Re Global Business Solutions India Pvt. Ltd., where it was held that deferred receivables constitute an independent international transaction and must be benchmarked separately. The Tribunal agreed with this view and held that the interest rate to be adopted should be LIBOR rate + 2%, following the judgment of the Bombay High Court in CIT v. Aurionpro Solutions Ltd. The Tribunal emphasized that the transaction between the assessee and AE, involving receivables, should be evaluated using commercial principles applicable to international transactions.

4. Arithmetical Error in the Computation of Interest by the TPO:
During the hearing, the assessee pointed out an arithmetical error in the TPO's computation of interest on delayed receivables. The TPO had incorrectly calculated the number of days of delay beyond 31.3.2017. The Tribunal acknowledged this error and directed the TPO to limit the calculation of the delay period to the year under consideration, i.e., up to 31.3.2017, as initially mentioned in the TPO's order. The Tribunal instructed the TPO to recompute the interest accordingly.

Conclusion:
The Tribunal upheld the treatment of interest on deferred receivables as an independent international transaction and directed that the interest rate should be LIBOR + 2%. Additionally, the Tribunal addressed the arithmetical error in the computation of interest and directed the TPO to correct it by limiting the delay period to the year under consideration. The appeal by the assessee was partly allowed.

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