2024 (10) TMI 1641 - AT - Income Tax

Tribunal Orders Reassessment of TPO Adjustment on Delayed Trade Receivables; Apply LIBOR + 200 Basis Points If Overdue

M/s IHS Global Private Limited. Versus The Asst. Commissioner of Income, Circle – 3 (1) (1), Bengaluru.

The Tribunal set aside the TPO's adjustment of Rs. 31,89,289/- related to delayed trade receivables from associated enterprises, directing a fresh ... TP upward adjustment - delayed recovery of the trade receivables from the associated enterprises - TPO during the proceedings found that there was a delay in the recovery of trade receivable form the associated enterprises, which represents the international transaction and accordingly he made the upward adjustment - TPO, while bench marking the impugned international transaction had adopted the SBN/short term deposit interest rate. HELD THAT:- The issue on hand needs to be revisited at the level of the TPO so as to find out whether the trade receivables are outstanding more than 90 days if yes, only such trade receivables will be made subject to the adjustment on account of interest up to the end of the financial year in dispute. TPO is also directed to bench mark such transactions at Libor and 200 base points as held by the ITAT in the case of Hewlett Packard India Software Operations Pvt. Ltd. [2022 (11) TMI 1017 - ITAT BANGALORE] Ground of appeal of the assessee is hereby partly allowed for statistical purposes. ISSUES PRESENTED and CONSIDEREDThe core legal issue considered was whether the upward adjustment of Rs. 31,89,289/- made by the Transfer Pricing Officer (TPO) on account of delayed recovery of trade receivables from associated enterprises (AEs) was justified. The specific questions included:Whether the TPO's benchmarking of the impugned international transaction using the SBN/short-term deposit interest rate was appropriate.Whether the credit period of 90 days, as per the agreement between the assessee and the AE, should have been considered in assessing the adjustment.Whether the adjustment should be benchmarked at LIBOR plus 200 basis points if the credit period exceeded 90 days.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe legal framework involves the assessment of international transactions under transfer pricing regulations, where the arm's length principle is applied. The Tribunal referenced the case of DCIT vs. Hewlett Packard India Software Operations Pvt. Ltd., which established that international transactions should consider commercial principles and apply the London Inter-Bank Offer Rate (LIBOR) plus a margin for benchmarking.Court's Interpretation and ReasoningThe Tribunal noted that the TPO had initially benchmarked the transaction using the SBN/short-term deposit interest rate without considering the agreed credit period of 90 days between the assessee and the AE. The Tribunal found merit in the assessee's argument that the credit period should be considered, and if exceeded, the appropriate benchmark should be LIBOR plus 200 basis points.Key Evidence and FindingsThe Tribunal acknowledged the assessee's submission that the credit period of 90 days was not raised before the Dispute Resolution Panel (DRP). However, it considered the fact that the TPO had allowed the 90-day credit period in the subsequent assessment year, indicating a precedent for such consideration.Application of Law to FactsThe Tribunal applied the principles from the Hewlett Packard case, determining that if the trade receivables were outstanding beyond 90 days, they should be subject to adjustment based on LIBOR plus 200 basis points. The Tribunal emphasized the need for the TPO to verify the duration for which the trade receivables remained outstanding.Treatment of Competing ArgumentsThe Tribunal considered the arguments from both parties. While the Revenue contended that the issue of the 90-day credit period was not raised before the DRP, the Tribunal found it necessary to address this oversight by allowing the TPO to reassess the situation with the correct benchmarks.ConclusionsThe Tribunal concluded that the issue required a fresh examination by the TPO to determine whether the trade receivables were outstanding beyond 90 days and, if so, to apply the LIBOR plus 200 basis points benchmark for any necessary adjustments.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal ReasoningThe Tribunal stated: 'Once we have held that the transaction between the assessee and AE was in foreign currency with regard to receivables and transaction was international transaction, then transaction would have to be looked upon by applying the commercial principles with regard to international transactions and accordingly proceeded to take into account interest rate in terms of London Inter Bank Offer Rate [LIBOR] and it would be appropriate to take the LIBOR rate + 2%.'Core Principles EstablishedThe Tribunal reinforced the principle that international transactions should be evaluated using appropriate commercial benchmarks, such as LIBOR, when determining arm's length pricing for delayed payments.Final Determinations on Each IssueThe Tribunal set aside the issue to the TPO for fresh adjudication, instructing the TPO to verify the period for which the trade receivables were outstanding and apply the LIBOR plus 200 basis points benchmark if the credit period exceeded 90 days. The appeal was partly allowed for statistical purposes, indicating a need for further examination and adjustment based on the Tribunal's guidance.