Tribunal cancels interest on outstanding receivables in line with GSS Infotech Ltd.

The Tribunal allowed the assessee's appeal, canceling the interest levied on outstanding receivables. The decision aligned with the precedent set in GSS Infotech Ltd., emphasizing that reasonable outstanding periods should not attract interest charges.

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Issues Involved:
1. ALP adjustment on account of interest on receivables from Associated Enterprise (AE).
2. Whether outstanding receivables can be equated to 'capital financing' under the amended definition of international transaction u/s 92B.
3. Consideration of Jurisdictional Tribunal ruling in the case of Pegasystems Worldwide India Private Limited.
4. Nature of receivables arising out of services transaction.
5. Comparison of interest on receivables from AEs and non-AEs.
6. Reference to the case of Evonik Degussa India Private Limited for notional adjustment.
7. Determination of interest rate (domestic term deposit rates of SBI vs. LIBOR).

Issue-wise Detailed Analysis:

1. ALP Adjustment on Account of Interest on Receivables from Associated Enterprise (AE):
The assessee contested the ALP adjustment on account of interest on outstanding receivables from AE, arguing that such receivables should not be considered as 'capital financing'. The Transfer Pricing Officer (TPO) proposed to charge interest at 14.45% on receivables exceeding the 30-day credit period stipulated in intercompany agreements. The CIT(A) confirmed the adjustment but directed the AO/TPO to use the domestic term deposit rates of SBI instead of 14.45%.

2. Whether Outstanding Receivables Can Be Equated to 'Capital Financing' Under the Amended Definition of International Transaction u/s 92B:
The assessee argued that outstanding receivables should not be equated to 'capital financing' as per the amended definition of international transaction under section 92B. The TPO, however, considered receivables as international transactions requiring ALP determination, citing that independent parties would charge interest if payments are delayed beyond the credit period.

3. Consideration of Jurisdictional Tribunal Ruling in the Case of Pegasystems Worldwide India Private Limited:
The assessee contended that the CIT(A) ignored the Jurisdictional Tribunal ruling in Pegasystems Worldwide India Private Limited, which held that interest should not be charged on receivables. The CIT(A), however, upheld the TPO's findings without addressing this specific ruling.

4. Nature of Receivables Arising Out of Services Transaction:
The assessee argued that receivables arose out of service transactions and should not be treated as independent international transactions. They claimed that re-characterizing these as loan transactions was not permissible. The CIT(A) confirmed the TPO's view that receivables are international transactions requiring ALP adjustment.

5. Comparison of Interest on Receivables from AEs and Non-AEs:
The assessee pointed out that no interest was charged on receivables from non-AEs, arguing that the same treatment should apply to AEs. The TPO and CIT(A) did not accept this argument, maintaining that interest should be charged on delayed payments from AEs.

6. Reference to the Case of Evonik Degussa India Private Limited for Notional Adjustment:
The CIT(A) referred to the case of Evonik Degussa India Private Limited to support the notional adjustment towards interest on receivables. The assessee argued against this, stating that notional interest should not be imputed when there is no finance cost or external borrowings.

7. Determination of Interest Rate (Domestic Term Deposit Rates of SBI vs. LIBOR):
The CIT(A) directed the AO/TPO to use the domestic term deposit rates of SBI instead of LIBOR for computing the notional interest on outstanding receivables. This provided some concession to the assessee regarding the interest rate to be applied.

Tribunal's Decision:
The Tribunal considered the assessee's submissions and the coordinate bench's decision in GSS Infotech Ltd., which held that imposing a two-month credit period was arbitrary and that no interest should be levied on reasonable outstanding periods. Following this precedent, the Tribunal set aside the CIT(A)'s order and allowed the grounds raised by the assessee, canceling the interest levied on outstanding receivables.

Conclusion:
The appeal of the assessee was allowed, and the Tribunal directed the cancellation of the interest levied on receivables, aligning with the precedent set in GSS Infotech Ltd. The decision emphasized that reasonable outstanding periods should not attract interest charges.

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