Tribunal Adjusts Interest Rate in Transfer Pricing Appeal Decision

The tribunal allowed the appeal partly, modifying the interest rate for re-computation of the adjustment to 6% on outstanding receivables at the year-end, instead of the initially applied 14.75%. The decision highlighted the importance of a balanced approach in determining the arm's length price (ALP) rate for transfer pricing, ensuring compliance with transfer pricing principles without unjustly benefiting associated enterprises. The tribunal's judgment addressed the condonation of delay in filing the appeal, the transfer pricing adjustment for interest on trade receivables from associated enterprises, and the appropriate interest rate to be applied, providing clarity on these crucial aspects.

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Issues Involved:
1. Condonation of delay in filing the appeal.
2. Transfer pricing adjustment towards interest on trade receivables from associated enterprises (AEs).
3. Applicability of interest rate for transfer pricing adjustments (LIBOR vs. SBI short-term deposit rate).

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appeal filed by the assessee was delayed by 72 days. The delay was attributed to the lockdown imposed by the central government due to Covid-19. The assessee filed an affidavit requesting the condonation of the delay, citing reasons beyond their control. The tribunal relied on the case laws of Collector Land Acquisition Vs. Mst. Katiji & Ors, 1987 AIR 1353 (SC) and University of Delhi Vs. Union of India, Civil Appeal No. 9488 & 9489/2019 dated 17 December 2019, to condone the delay. The tribunal held that the delay was neither intentional nor deliberate but due to unavoidable circumstances, thus allowing the appeal to be taken up for adjudication on merits.

2. Transfer Pricing Adjustment Towards Interest on Trade Receivables from AEs:
The assessee challenged the transfer pricing adjustment of Rs.3,59,67,697 towards interest on trade receivables from AEs, which was made by applying an interest rate of 14.75% (SBI short-term deposit rate). The assessee argued that no interest was charged on trade receivables from non-AEs, and thus, no adjustment should be made for AEs. The tribunal noted that the TPO had only considered the account receivables from AEs without considering the account payables to AEs, which were higher than the receivables. The tribunal remitted the issue back to the DRP to give clear findings after reviewing the material on record.

3. Applicability of Interest Rate for Transfer Pricing Adjustments:
The central issue pressed by the assessee was the appropriateness of the interest rate applied by the TPO/DRP. The assessee contended that if interest is to be charged, it should be at LIBOR + 200 basis points rather than the SBI short-term deposit rate. The DRP had adopted the SBI short-term fixed deposit interest rate of 14.75% as the ALP rate, considering it appropriate for the Indian market conditions. The tribunal referred to the decision in the case of Zeta Interactive Systems (India) Pvt. Ltd., where it was held that applying LIBOR + 200 points would result in shifting profits to the AE, which is not permissible under Chapter X of the Income-tax Act. The tribunal concluded that the interest rate should be 6% on outstanding receivables at the year-end, following the precedent set by Zeta Interactive Systems.

In conclusion, the tribunal modified the DRP's order and directed the TPO to re-compute the adjustment to the total income of the assessee by applying a 6% interest rate on outstanding receivables at the year-end, instead of 14.75%. The appeal of the assessee was partly allowed.

Conclusion:
The tribunal's judgment addressed the condonation of delay, the appropriateness of transfer pricing adjustments for interest on trade receivables, and the correct interest rate to be applied. The decision emphasized the need for a balanced approach in determining the ALP rate, ensuring that it aligns with the principles of transfer pricing without shifting profits to associated enterprises. The appeal was partly allowed, modifying the interest rate to 6% for re-computation of the adjustment.

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