ITAT Delhi overturns AO's interest adjustment on sales/services transactions, emphasizing working capital-adjusted margin.

The ITAT Delhi ruled in favor of the assessee, overturning the AO's adjustment of interest receivable on sales/services transactions using the prime lending rate. The decision was grounded in the working capital-adjusted margin and the absence of interest charges on overdue debts. The issue of applying the LIBOR rate was deemed insignificant to the final outcome.

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Issues:
1. Adjustment of interest receivable on transactions of sales/services by adopting prime lending rate.
2. Application of LIBOR rate for interest computation.

Issue 1: Adjustment of interest receivable on transactions of sales/services by adopting prime lending rate

The appeal was against the order of the Commissioner of Income Tax regarding the Assessment Year 2011-12. The case involved international transactions with associated enterprises, leading to a proposed adjustment of Rs. 39,55,013 on the arm's length price. The Assessing Officer (AO) passed a draft assessment order assessing the total income at Rs. 32,06,55,710. The CIT(A) granted partial relief, but the assessee appealed, challenging the addition of Rs. 17,97,481 for bench marking receivables on sales/services transactions by adopting the prime lending rate of SBI plus a markup of 300 basis points. The TPO had proposed this adjustment based on the SBI Base Rate of 11.69%. The CIT(A) directed the AO to consider the average PLR of SBI at 8.69% plus 150 basis points for interest on receivables, emphasizing the need to compute interest by adjusting for interest payable to AEs. The assessee contended that the margin already factored in the delay in receivables and cited precedents to support the argument. The ITAT Delhi, after considering the contentions and precedents, held in favor of the assessee, emphasizing that no further adjustment on outstanding receivables was warranted based on the working capital-adjusted margin and the absence of interest charges on overdue debts or to creditors. The ITAT relied on the decision in the assessee's own case for AY 2010-11, where a similar issue was decided in favor of the assessee, and no distinguishing features were pointed out by the Revenue.

Issue 2: Application of LIBOR rate for interest computation

The assessee also contended that the CIT(A) erred in not applying the LIBOR rate for interest computation, citing a judgment of the jurisdictional High Court. However, this issue was not extensively discussed in the judgment, and the primary focus was on the adjustment of interest receivable based on the prime lending rate. The ITAT's decision in favor of the assessee on the primary issue made the discussion on the LIBOR rate application less significant in the overall outcome of the case.

In conclusion, the ITAT Delhi allowed the appeal of the assessee, setting aside the AO's action regarding the adjustment of interest receivable on transactions of sales/services by adopting the prime lending rate. The ITAT's decision was based on the working capital-adjusted margin, absence of interest charges on overdue debts, and precedents supporting the assessee's position. The issue of applying the LIBOR rate for interest computation, although raised by the assessee, did not significantly impact the final decision.

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