2019 (6) TMI 782 - AT - Income Tax

Tribunal allows appeal for statistical purposes, adjusts interest on collection period deviations

The Tribunal allowed the appeal for statistical purposes, directing verification of the average collection period. If within industry average, no TP ... TP Adjustment - ALP adjustment towards interest on receivables from AEs - HELD THAT:- As relying on assessee's own case [2019 (4) TMI 672 - ITAT HYDERABAD] the assessee has submitted the no need to charge interest on receivables as the average collection period of the assessee is less than that of the comparable average We direct the AO/TPO to verify the submissions of the assessee and if the average collection period is less than the industry average, there is no need to make any TP adjustment. Appeal of the assessee is treated as allowed for statistical purposes. Issues Involved:1. Arm's Length Price (ALP) adjustment for interest on receivables from Associated Enterprises (AEs).2. Non-charging of interest on receivables from both AEs and Non-AEs.3. Consideration of industry average collection period for determining ALP adjustment.4. Application of LIBOR for interest calculation on receivables.Detailed Analysis:1. Arm's Length Price (ALP) Adjustment for Interest on Receivables from AEs:The assessee, engaged in software development services, declared an income of Rs. 11,82,640 for AY 2014-15. The case was selected for scrutiny, and the Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP) for international transactions amounting to Rs. 41,52,68,595. The TPO observed that the margin of the assessee was higher than the average margin of comparables, thus no adjustment was proposed for software development services. However, the TPO noted outstanding trade receivables of Rs. 6,09,86,754 from related parties and proposed an ALP adjustment of Rs. 8,47,788 towards interest on these receivables, considering the SBI term deposit rates as the appropriate Comparable Uncontrolled Price (CUP).2. Non-Charging of Interest on Receivables from Both AEs and Non-AEs:The assessee argued that it did not charge interest on receivables from both AEs and Non-AEs to maintain long-term business relationships. The assessee contended that since it had no borrowed funds and did not incur any interest costs, it was unjustified to charge interest on delayed payments. The assessee relied on several judicial precedents, including the Supreme Court's decision in Bechtel India Pvt. Ltd., which held that no interest should be charged when the principal transaction is at arm's length.3. Consideration of Industry Average Collection Period for Determining ALP Adjustment:The assessee submitted that its average collection period was less than the industry average. The Tribunal directed the AO/TPO to verify the industry average and the assessee’s average collection period. If the assessee's collection period was found to be within the industry average, no TP adjustment would be required. The Tribunal referred to its earlier decision in the assessee's own case for AY 2013-14, where it was held that the outstanding trade receivables beyond a reasonable period would constitute international transactions as per the amended Section 92B of the Income-tax Act.4. Application of LIBOR for Interest Calculation on Receivables:The assessee argued that if an adjustment was warranted, the interest should be calculated using the LIBOR rate, as the export turnover was brought in foreign exchange. The Tribunal agreed with the assessee's contention and directed that only the collection period beyond the industry average should be charged with interest based on the LIBOR rate.Conclusion:The Tribunal allowed the appeal of the assessee for statistical purposes and directed the AO/TPO to verify the submissions regarding the average collection period. If the assessee's collection period was within the industry average, no TP adjustment would be necessary. The Tribunal emphasized that only the collection period beyond the industry average should be charged with interest based on the LIBOR rate.Pronouncement:The judgment was pronounced in the open court on 12th June 2019.