2020 (10) TMI 294 - AT - Income Tax

Tribunal decision: Reclassify account receivables as loans, demand interest compensation

Bharti Airtel Services Ltd Versus DCIT, Circle-4 (2), New Delhi

The Tribunal upheld the CIT(A)'s decision to recharacterize outstanding account receivables as unsecured loans, requiring compensation for extended credit ... TP Adjustment - ‘international transactions’ on account of notional interest on outstanding balance of receivables from Associated Enterprises (‘AE’) - characterizing of outstanding account receivables as loan - CIT-A benchmark notional interest on account receivables at the rate of LIBOR plus 300 basis points - whether outstanding balance of receivables from the AE is not an international transaction as it does not impact the profits, incomes, losses or assets of the appellant? - HELD THAT:- Services charge and payments as well as the method of providing invoices in making payment. It provides that the company shall raise invoices on the recipient on the first day of every subsequent month for the services fee, and the recipient shall pay the services for within 15 days of receipt of the invoice by the company. Service costs shall constitute full consideration for the company for the providing of services to the recipient. This agreement clause clearly shows that if the payment is beyond 15 days, it does not include the cost of service for withholding the payment beyond 15 days by the associated enterprises. This shows that in the service cost, the cost of outstanding which remains overdue is not factored. Hence, We do not find any infirmity in the order of the ld CIT A. Working capital adjustment was denied to the assessee in absence of any reliable data provided by the assessee. Even before us same is not provided. Therefore it is apparent that in the present case working capital adjustment was not factored into by determining the arm’s-length price of the international transaction of provision of the services. Therefore, outstanding debtors beyond an agreed period is a separate international transaction of providing funds to its associated enterprise for which the assessee must have been compensated in the form of interest at LIBOR + 300 BPS as held by CIT (A) . In the result order of the learned CIT – A confirmed and all the grounds of appeal of assessee are dismissed. Issues:1. Transfer pricing adjustment on outstanding balance of receivables from Associated Enterprises.2. Characterization of outstanding account receivables as a loan.3. Working capital adjustment profitability results.4. Treatment of interest on outstanding account receivables.5. Acceptance of internal Comparable Uncontrolled Price (CUP) for benchmarking.6. Benchmarking of notional interest on account receivables.Transfer Pricing Adjustment on Outstanding Balance of Receivables:The appellant contested the addition made by the Assessing Officer (AO)/Transfer Pricing Officer (TPO) to the arm's length price of international transactions due to notional interest on outstanding receivables from Associated Enterprises (AE). The appellant argued that outstanding receivables do not impact profits, losses, or assets. The CIT(A) recharacterized the account receivables as unsecured loans, leading to a dispute regarding the commercial distinction between a loan and account receivable. The Tribunal upheld the CIT(A)'s decision, emphasizing that outstanding receivables beyond the agreed period constitute a separate international transaction necessitating compensation in the form of interest.Characterization of Outstanding Account Receivables as a Loan:The appellant challenged the characterization of outstanding account receivables as a loan by the CIT(A) and the TPO. The Tribunal analyzed the service agreement terms, noting that the agreement specified payment within 15 days. The Tribunal found that outstanding receivables beyond the agreed period constitute a separate international transaction, rejecting the appellant's argument regarding working capital adjustment and confirming the application of LIBOR + 300 basis points for calculating interest on outstanding receivables.Working Capital Adjustment Profitability Results:The appellant's argument for working capital adjustment profitability results was not accepted by the TPO, citing lack of reliable data. The Tribunal upheld this decision, emphasizing the absence of working capital adjustment in determining the arm's-length price of international transactions. The appellant's failure to provide reliable data led to the denial of working capital adjustment.Treatment of Interest on Outstanding Account Receivables:The Tribunal affirmed the CIT(A)'s decision to apply LIBOR + 300 basis points for calculating interest on outstanding account receivables, considering them as a separate international transaction. The Tribunal rejected the appellant's argument that interest on outstanding receivables is a matter of commercial policy, emphasizing the need for compensation for extended credit to the associated enterprise.Acceptance of Internal Comparable Uncontrolled Price (CUP) for Benchmarking:The appellant's reliance on internal CUP in the form of contracts between Airtel Group and third parties for staffing services was not accepted by the TPO and CIT(A) for benchmarking the international transaction related to outstanding receivables. The Tribunal dismissed this argument, emphasizing the need for applying LIBOR + 300 basis points for interest calculation on outstanding receivables.Benchmarking of Notional Interest on Account Receivables:The Tribunal rejected the appellant's appeal against the CIT(A)'s decision to confirm the transfer pricing adjustment related to notional interest on account receivables. The Tribunal found the facts of the case distinct from the decisions cited by the appellant's representative, leading to the dismissal of all grounds of appeal and upholding the CIT(A)'s order.This detailed analysis of the judgment highlights the key issues raised by the appellant regarding transfer pricing adjustments, characterization of outstanding receivables, working capital adjustment, interest treatment, benchmarking methods, and the final decision of the Tribunal on each issue.