2021 (3) TMI 828 - AT - Income Tax

Tribunal remits Transfer Pricing Adjustment on Delayed Trade Receivables for fresh study

The Tribunal remitted the issue of Transfer Pricing (TP) Adjustment on Notional Interest on Delayed Trade Receivables back to the AO/TPO for a fresh ... TP Adjustment - notional interest on outstanding receivables - HELD THAT:- AR fairly conceded that outstanding amount on account of sales/services billed to AE akin to loan advanced by assessee is an international transaction. As held in the case of Avenue Asia Business Advisors (P.) Ltd. v. DCIT [2017 (9) TMI 1295 - DELHI HIGH COURT], there should be TP adjustment on this count after making proper TP study by the TPO after considering the period of credit enjoyed by the comparables and also applicable LIBOR rate in the place of AEs for benchmarking the rate of interest to arrive at the ALP. With these observations, we remit the issue in dispute to the file of AO/TPO to benchmark the interest rate in the light of the decisions cited by ld. DR. Further, we make it clear that the TPO should compute the interest only for the relevant assessment year after going through the relevant agreements entered by the assessee with AEs while computing the ALP. Assessee’s appeal is partly allowed for statistical purposes. Issues Involved:1. Transfer Pricing (TP) Adjustment on Notional Interest on Delayed Trade Receivables.2. Levy of Interest under Section 234B of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Transfer Pricing Adjustment on Notional Interest on Delayed Trade Receivables:- The assessee challenged the computation of a TP adjustment on notional interest on outstanding receivables amounting to Rs. 5,73,74,225/-. The lower authorities re-characterized the outstanding trade receivables as a loan transaction, which the assessee contested, arguing that the outstanding trade receivable from the AE is not an international transaction within the meaning of section 92B of the Act.- The assessee further contended that even if the receivable is considered an international transaction, it should not be tested separately while computing the arm's length price since it arises from the provision of IT-enabled services to AE.- The assessee argued that no separate adjustment for notional interest on receivables is warranted when the operating margins are at arm's length after working capital adjustment.- The TPO initially computed the TP adjustment using a 6-month LIBOR plus 400 basis points at 4.3836%, resulting in a TP adjustment of Rs. 3,27,21,491/-. However, the DRP directed the TPO to adopt the prevailing short-term deposit interest rate of SBI, enhancing the TP adjustment to Rs. 5,73,74,255/-.- The assessee, being a debt-free company, argued that it does not bear any working capital risk and thus no adjustment should be made for notional interest on receivables. The assessee cited several judicial decisions to support this contention.- Without prejudice, the assessee submitted that LIBOR should be adopted for benchmarking, arguing that the receivables are denominated in US dollars and thus the USD-LIBOR rate should be considered. The assessee also contended that interest should be computed only for the relevant assessment year and not for periods beyond or before the current year.- The Tribunal acknowledged that outstanding amounts on account of sales/services billed to AE are akin to a loan advanced by the assessee, thus constituting an international transaction. The Tribunal directed the AO/TPO to benchmark the interest rate considering the period of credit enjoyed by comparables and the applicable LIBOR rate in the place of AEs. The Tribunal also instructed that interest should be computed only for the relevant assessment year.2. Levy of Interest under Section 234B:- The assessee contested the levy of interest under section 234B amounting to Rs. 1,17,51,297/-, arguing that it was excessive and denying its liability to pay such interest.- The Tribunal did not provide a detailed discussion on this issue in the judgment, focusing primarily on the TP adjustment matter.Conclusion:The Tribunal remitted the issue of TP adjustment on notional interest on receivables back to the AO/TPO for a fresh benchmarking study, considering the period of credit enjoyed by comparables and the applicable LIBOR rate. The Tribunal also clarified that interest should be computed only for the relevant assessment year. The assessee's appeal was partly allowed for statistical purposes.