Addition of notional interest on intercompany receivables deleted where entity margin far exceeds comparable, appeal allowed

ITAT, MUMBAI held that the addition of Rs. 12,83,550 as notional interest on outstanding debtor balances with associated enterprises was not tenable. The Tribunal found that deducting notional interest (whether LIBOR+200 bps or 6.19%) still left the assessee's entity-level margin (21.17% or 19.65%) well above the comparable margin accepted by the TPO (8%), so transactions remained at arm's length. Following precedent, the addition was deleted and the appeal was allowed in favour of the assessee.

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Issues:
Appeal against order of CIT(A) regarding addition of notional interest on outstanding debtor balances treated as international transaction under section 92B of the Income Tax Act, 1961 for Assessment Year 2010-11.

Analysis:
The appellant raised multiple grounds of appeal challenging the addition of notional interest on outstanding debtor balances with associated enterprises. The primary contention was that the outstanding debtors balance should not be considered an international transaction under section 92B of the Act. The appellant argued that since they do not charge interest on overdue payments from third parties, there was no requirement to charge the same from associated enterprises. Additionally, the appellant claimed that even if the outstanding receivables constituted an international transaction, after adjusting notional interest to the ratio of Operating Profit to Operating Expenses, no further addition was warranted.

The Tribunal noted that similar additions were made in previous assessment years but were deleted based on the appellant's alternate plea. The Tribunal referred to a previous decision where the appellant's margin, after reducing notional interest, compared favorably with the average margin of comparables. The Tribunal acknowledged the appellant's working showing that after adjusting notional interest from the margin, the resultant margin was higher than that of comparable concerns. The Tribunal held that no further adjustment was necessary in such circumstances.

In the current assessment year, the appellant continued to provide a credit period of 45 days to associated enterprises. The Assessing Officer made an adjustment on account of notional interest, which was challenged by the appellant. The appellant demonstrated that even after reducing notional interest from the margin, the resulting margin was significantly higher than that of comparable concerns. Citing similarities with the previous year's case, the Tribunal concluded that the addition of notional interest on outstanding debtor balances was not justified and directed its deletion.

Ultimately, the Tribunal allowed the appeal of the assessee, emphasizing that the addition of notional interest on outstanding debtor balances was not tenable based on the presented facts and calculations. The Tribunal's decision was based on the appellant's successful demonstration that the adjusted margin remained higher than that of comparable concerns, indicating arm's length transactions with associated enterprises.

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