ITAT allows 90-day credit period for software services receivables from associated enterprises before applying interest charges

The ITAT Bangalore partially allowed the assessee's appeal regarding TP adjustment on receivables from AE. The TPO had treated receivables as international transaction and applied 13.675% interest rate using CUP method. Following precedent in Xchanging Solutions Ltd., the Tribunal held that receivables from software services to AE should allow 90 days credit period, with interest at LIBOR plus 300 basis points applicable only on delayed realization beyond 90 days. The TPO was directed to recompute ALP accordingly after providing hearing opportunity to assessee.

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Issues Involved:
1. Whether the receivables from the Associate Enterprise (AE) constitute an international transaction.
2. Determination of the Arm's Length Price (ALP) for the interest on delayed receivables.
3. Appropriateness of the interest rate applied by the Transfer Pricing Officer (TPO).
4. Consideration of working capital adjustment in the computation of interest on receivables.

Issue-wise Detailed Analysis:

1. Whether the receivables from the Associate Enterprise (AE) constitute an international transaction:
The Tribunal addressed the issue of whether the receivables from the AE should be considered an international transaction. The assessee argued that the extended credit period does not give rise to income and thus should not be subject to Transfer Pricing (TP) adjustments. However, the DRP and the Tribunal referred to the Explanation to section 92B of the Income Tax Act, 1961, which includes "any other debt arising during the course of business" as an international transaction. The Tribunal upheld that the receivables from AE are indeed an international transaction requiring determination of ALP.

2. Determination of the Arm's Length Price (ALP) for the interest on delayed receivables:
The TPO observed that the assessee had not charged interest on the unrealized amounts from its AE and computed the arm's length interest rate at 13.675% based on the SBI short-term deposit interest rate. The assessee contended that the receivables should not be benchmarked separately from the main transaction of providing services. The Tribunal, referencing the case of Techbooks International Pvt Ltd., upheld that delayed receivables should be considered for TP adjustments as they constitute an international transaction. The Tribunal agreed that the receivables are linked to the main service transaction and should be considered along with it.

3. Appropriateness of the interest rate applied by the Transfer Pricing Officer (TPO):
The assessee argued that the interest rate applied by the TPO was incorrect and that the LIBOR rate should be used instead, as the receivables were denominated in USD. The Tribunal, referencing the case of Indegene Lifesystems (P.) Ltd., agreed that the LIBOR rate plus 300 basis points should be the benchmark rate for foreign currency transactions. The Tribunal directed the TPO to compute the ALP using this rate for receivables realized beyond the credit period.

4. Consideration of working capital adjustment in the computation of interest on receivables:
The Tribunal noted that the TPO had not considered whether the receivables were subsumed in the working capital adjustment. It was observed that the TPO did not grant any working capital adjustment to the assessee, which was not in accordance with transfer pricing principles. The Tribunal directed that the credit period should be considered along with the main transaction and allowed a credit period of 90 days. If the receivables fall within this period, no adjustment is needed. For receivables beyond this period, the interest rate should be LIBOR plus 300 basis points.

Conclusion:
The Tribunal partially allowed the appeal, directing the TPO to compute the ALP for the interest on delayed receivables using the LIBOR rate plus 300 basis points for receivables realized beyond the 90-day credit period. The TPO was also instructed to consider the working capital adjustment in the computation. The appeal of the assessee was thus allowed in part.

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