ITAT Mumbai allows assessee appeal on transfer pricing interest adjustments for delayed receipts from associated enterprise

ITAT Mumbai ruled in favor of the assessee regarding transfer pricing adjustments on interest for delayed receipts from US AE. The TPO sought 2% interest adjustment for excess credit period beyond stipulated terms and questioned why 10% interest charged to German AE shouldn't apply to delayed US receipts. Despite coordinate bench precedent supporting interest adjustment on delayed receipts and revenue's cross-appeal on rate determination, the tribunal allowed the assessee's appeal, leaving the arm's length price determination issue resolved in assessee's favor.

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Issues Involved:
1. Confirmation of addition towards interest on delayed receipts from US Associated Enterprise (AE).
2. Determination of Arm's Length Price (ALP) for the extended credit period granted to AE.

Summary:

1. Confirmation of Addition Towards Interest on Delayed Receipts from US AE:
The primary issue was whether the CIT(A) erred in confirming the addition of Rs. 37,50,475 towards interest at a rate of 2% on delayed receipts from the US AE. The Tribunal had previously remanded the issue to the Assessing Officer/TPO to verify the credit period and interest rates available in the open market. The assessee argued that no interest should be charged as they did not charge interest on similar extended credit periods to third parties (non-AE). The Tribunal, referencing jurisdictional High Court decisions (CIT vs Indo American Jewellery Ltd and CIT vs M/s Living Stones), held that no adjustment is required for notional interest on delayed receipts from US AE, as the assessee uniformly did not charge interest to both AE and non-AE.

2. Determination of ALP for Extended Credit Period Granted to AE:
The TPO had initially computed a TP adjustment of Rs. 1,87,52,378/- based on a 10% interest rate, equating the extended credit period to a loan. The CIT(A) reduced this adjustment to Rs. 37,50,475/- by applying a 2% interest rate, considering the USD LIBOR rate plus a markup. The CIT(A) acknowledged the differences between trade credit and loans, noting that the AE in the USA was incurring losses and the extended credit period was to help manage liquidity. The Tribunal, however, found that since the assessee did not charge interest on extended credit to non-AE, no interest should be charged to AE, aligning with previous High Court rulings. Consequently, the Tribunal concluded that no ALP adjustment is required for the extended credit period.

Conclusion:
The Tribunal allowed the appeal in favor of the assessee, ruling that no interest should be charged on the delayed receipts from the US AE, and no ALP adjustment is required for the extended credit period. The decision was based on the consistent practice of the assessee not charging interest on similar transactions with non-AE and supported by relevant High Court judgments.

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