Business transfer deemed colourable device but purchaser's transaction upheld; remand on notional interest rate: SBI vs LIBOR

ITAT HYDERABAD found the Business Transfer Agreement to be a colourable device but noted that where the seller was assessed and its capital gains accepted, the purchaser's transaction could not be impugned solely on that basis. On notional interest for overdue receivables, the Tribunal held that applicability of SBI rate versus LIBOR+ basis points is a factual question dependent on credit circumstances and evidence; because the assessee did not justify use of LIBOR, the Tribunal remanded the issue to the AO to determine whether SBI 6% or an appropriate LIBOR+ margin (now to be evidenced despite LIBOR discontinuation) applies.

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ISSUES PRESENTED AND CONSIDERED

1. Whether depreciation on goodwill arising from a group business transfer agreement (BTA) can be disallowed as a colourable device where the seller has offered consideration to tax and coordinate Tribunal decisions have accepted the transaction.

2. Whether overdue receivables arising from international transactions (non-charging/under-charging of interest) constitute a separate international transaction under Explanation to section 92B and therefore invite a transfer-pricing adjustment by imputing notional interest.

3. If deferred receivables are an international transaction, whether: (a) the effect of delayed realisation is subsumed in an entity-level TNMM/working-capital adjustment (aggregation approach) or requires separate benchmarking; (b) interest imputation must be computed invoice-wise or using average collection period; and (c) the appropriate ALP interest rate is the SBI short-term deposit rate (Indian index) or LIBOR + spread (foreign market rate).

4. Validity of directions issued by the Dispute Resolution Panel (DRP) lacking a Documentation Identification Number (DIN) as per CBDT Circular (raised but later not pressed).

5. Ancillary factual/quantitative issues: correctness of disallowance of education cess as business expenditure and levy of penalty under section 270A (raised but not decided substantively in this order).

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Depreciation on Goodwill: entitlement and colourable device argument

Legal framework: The Income-tax Act permits depreciation on intangible assets forming part of a block of assets; once an asset is admitted into the block and depreciation is allowed, the opening WDV in subsequent years is to be accepted unless the asset is legitimately disregarded.

Precedent treatment: The Tribunal followed a coordinate-bench decision in the assessee's AY 2017-18 which held that the BTA was not a colourable device where the seller had offered capital gains to tax and that depreciation on goodwill should be allowed. The Tribunal cited multiple authorities endorsing that once depreciation is allowed in year of entry, succeeding years must accept WDV as sacrosanct (e.g., decisions from High Courts and ITAT benches relied upon by the appellant).

Interpretation and reasoning: The Court examined the coordinate bench reasoning (paras 13-14 of that order) that (i) the seller was assessed and capital gains accepted; (ii) there was no material to treat the BTA as a colourable device; and (iii) therefore the goodwill recorded in the preceding year stood validly in the block of intangible assets. On that basis, the impugned disallowance in the current year was consequential to the earlier disallowance which had since been reversed.

Ratio vs. Obiter: Ratio - once the acquisition and taxation of consideration in the hands of the seller is accepted, purchaser's claiming of goodwill and consequent depreciation cannot be treated as colourable without substantive contrary material; opening WDV must be accepted. Obiter - reliance on a catalogue of other decisions for principle of following coordinate bench where favourable.

Conclusion: Grounds challenging disallowance of depreciation on goodwill (grounds 9-11) were allowed; depreciation to be admitted as per the coordinate bench decision for the preceding year.

Issue 2 - Whether deferred receivables / non-charging of interest constitute an independent international transaction

Legal framework: Explanation to section 92B (Finance Act, 2012, retrospective to 01.04.2002) includes within "international transaction" capital financing, advances, deferred payments, receivables or "any other debt arising during the course of business"; transfer-pricing provisions require determination of ALP for such transactions.

Precedent treatment: The Tribunal relied on extensive case law (High Courts and Tribunals) - e.g., Bechtel, Patni, Logix, BT e-serve, Mckinsey - holding that deferred receivables or extended credit beyond agreed/normal period amount to separate international transaction and can be benchmarked for interest. Several High Courts and Tribunals have endorsed that non-charging or under-charging of interest on excess credit period is an international transaction.

Interpretation and reasoning: The Tribunal observed that the Explanation to s.92B expressly includes receivables and other trading debt; therefore interest on delayed receivables falls within ALP analysis. The Tribunal rejected the "real income" or commercial-expediency arguments that would avoid imputing notional interest under TP rules, noting TP provisions are anti-abuse and operate differently from general taxation principles.

Ratio vs. Obiter: Ratio - deferred receivables beyond agreed reasonable credit period constitute an international transaction and are amenable to separate ALP determination; imputing notional interest is permissible under transfer-pricing regime. Obiter - policy observations on anti-abuse character of TP provisions.

Conclusion: The Tribunal upheld the view that deferred receivables are a separate international transaction and are susceptible to notional interest imputation under TP rules.

Issue 3(a) - Whether interest on delayed receivables is subsumed in working-capital/aggregation (TNMM) or requires separate benchmarking

Legal framework: Rule 10B permits reasonably accurate adjustments (e.g., working capital) to eliminate material effects of differences between tested and comparable parties; but separate international transactions may require independent benchmarking.

Precedent treatment: The Tribunal relied on Bechtel, Ameriprise, Mckinsey and other authorities which held that working-capital adjustments relate to the primary transaction (price of goods/services) within agreed credit terms; delays beyond stipulated period are separate and require independent analysis.

Interpretation and reasoning: The Court accepted the DRP/TPO reasoning that working-capital adjustments are based on year-end payables/receivables and cannot reliably capture extra credit periods or their material effect unless quantitatively demonstrated. The Tribunal found the assessee failed to demonstrate material effect or provide reliable data to subsume excess credit impact within TNMM; accordingly working-capital adjustment cannot replace separate benchmarking of deferred receivables.

Ratio vs. Obiter: Ratio - interest on excess credit period is not automatically subsumed in entity-level TNMM/working-capital adjustment and must be separately benchmarked unless reliable demonstration is provided. Obiter - discussion on practical limits of year-end balance sheet data for working-capital adjustments.

Conclusion: The Tribunal rejected the aggregation claim; separate benchmarking of deferred receivables is required absent reliable evidence to the contrary.

Issue 3(b) - Methodology: invoice-wise imputation vs. average collection period and choice of benchmarking method (CUP/other)

Legal framework: ALP determination may use CUP where reliable internal/external comparables exist; period of delay for interest imputation may be measured by appropriate collection metric (invoice-wise or average collection period) depending on facts and data availability.

Precedent treatment: The assessee argued for average collection period and CUP using non-AE internal transactions (no interest charged to non-AEs) to justify NIL rate; authorities cited by Revenue and DRP support invoice-level analysis where appropriate and rejected arguments that interest cannot be imputed notwithstanding absence of contractual interest.

Interpretation and reasoning: The Tribunal noted the assessee's submissions (average collection days = 41; non-AE dealings) but accepted the DRP/TPO position that selective invoice-wise delay analysis may be required and that the TPO should give opportunity to obtain invoice-level details. The DRP had directed TPO to compute interest using SBI short-term deposit rate after giving opportunity to assessee to furnish details.

Ratio vs. Obiter: Ratio - appropriate measurement of excess period (invoice-wise or average) depends on records and the ability to demonstrate that overall collections (including advances) neutralise delayed invoices; reliable invoice-level data is required for TPO to compute accurate adjustment. Obiter - acceptance that CUP internal comparables can be relevant if established.

Conclusion: Methodological issues remitted to TPO/AO to compute on facts after giving assessee opportunity; CUP/internal comparables may be considered if properly demonstrated.

Issue 3(c) - Appropriate ALP interest rate: SBI short-term deposit rate v. LIBOR + spread

Legal framework: ALP rate for imputed interest should reflect opportunity cost to the tested party and be determined in light of market conditions where funds are utilized; jurisprudence offers both approaches depending on facts - Indian deposit rates (SBI) or foreign interbank rates (LIBOR) plus an arm's-length spread for unsecured loans.

Precedent treatment: DRP/TPO adopted SBI short-term deposit rate (domestic index) as appropriate; numerous coordinate decisions favour LIBOR + 200 bps for unsecured AE financing in cases where funds are consumed abroad. Tribunal acknowledged conflicting coordinate decisions and the discontinuance of LIBOR post-2021, and noted that applicability of LIBOR+X is fact-specific.

Interpretation and reasoning: The Tribunal concluded that choice between SBI index and LIBOR+spread is a question of fact dependent on credit characteristics of assessee and AE and where funds are consumed; because the assessee had not sufficiently established applicability of LIBOR+200 bps, the Tribunal remanded the issue to the Assessing Officer/TPO to examine on facts whether LIBOR+200/300 or SBI rate should apply and directed fresh computation after affording opportunity to furnish evidence.

Ratio vs. Obiter: Ratio - selection of ALP interest rate (SBI v. LIBOR+spread) is fact-driven and remittable; neither rate is a universal rule. Obiter - commentary on LIBOR discontinuation and lack of thumb-rule for spread.

Conclusion: The Tribunal remitted the rate determination to the AO/TPO for fresh consideration and computation with directions to give the assessee opportunity to furnish record; no definitive adoption of LIBOR or SBI was made by the Tribunal in this order.

Issue 4 - DIN (Documentation Identification Number) challenge

Legal framework & reasoning: The assessee sought to challenge DRP directions for lack of DIN per CBDT Circular. However, at hearing the assessee did not press the ground; Revenue had no objection.

Conclusion: Ground relating to DIN was dismissed as not pressed.

Disposition and consequential result

The Tribunal allowed grounds relating to depreciation on goodwill (consequential to coordinate-bench decision) and remitted the deferred-receivable / notional-interest issues to the Assessing Officer/TPO for fresh examination and computation (including determination of appropriate interest rate) after affording opportunity to the assessee to produce necessary invoice-level and other data; remaining grounds not pressed or dismissed. Appeal allowed for statistical purposes.

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