Interest on outstanding receivables requires separate benchmarking as international transaction, LIBOR+200 points rate directed for foreign currency receivables

The ITAT Hyderabad ruled that interest on outstanding receivables constitutes an international transaction requiring separate benchmarking, following the Bombay HC decision in CIT vs. Patni Computer Systems. The tribunal directed the AO to apply LIBOR+200 points as the interest rate for foreign currency receivables/advances, with a credit period of thirty days or as per agreement/invoice terms, whichever is longer. The DRP's earlier direction to use SBI short-term deposit rates was modified. The appeal was allowed in part with directions for re-computation of transfer pricing adjustments.

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Issues:
1. Transfer pricing adjustment on software development segment and interest on delayed payment.
2. Whether outstanding receivables constitute an international transaction.
3. Determination of Arm's Length Price (ALP) for interest on delayed receivables.
4. Applicability of interest rate benchmarks for international transactions with Associated Enterprises (AEs).

Analysis:
1. The appeal was filed by the assessee against the final assessment order concerning transfer pricing adjustments on software development segment and interest on delayed payment. The Dispute Resolution Panel (DRP) had granted partial relief, leading to the final assessment order reflecting reduced adjustments. The assessee later sought rectification, resulting in the deletion of the software development segment adjustment and a re-calculation of the interest on delayed receivables.

2. The question of whether outstanding receivables constitute an international transaction was addressed, with reference to a decision by the Bombay High Court. The court held that interest on outstanding receivables is considered an international transaction requiring separate benchmarking. The DRP directed the Assessing Officer to adopt the SBI short term deposit interest rate for determining the Arm's Length Price (ALP) of interest on delayed receivables.

3. The contention regarding the ALP interest rate for delayed receivables was extensively debated. The assessee argued for the adoption of LIBOR+200 basis points, citing relevant case laws. The Mumbai Bench of the Tribunal and the Bombay High Court had previously upheld the use of LIBOR for benchmarking interest rates, emphasizing the need to consider the prevailing market rates for such transactions.

4. In determining the appropriate interest rate benchmarks for international transactions with AEs, the Tribunal considered various precedents and principles. The Delhi High Court's decision highlighted the importance of applying market-determined interest rates applicable to the currency in which the loan is to be repaid. The Tribunal ultimately directed the Assessing Officer to re-compute the interest rate using LIBOR+200 points, aligning with the judicial opinions on similar foreign currency transactions.

5. The Tribunal allowed the appeal in part, emphasizing the need to adopt a pragmatic approach in determining interest rates for international transactions. The decision aimed to ensure fairness and compliance with established legal principles, providing clarity on the benchmarking process for future assessments.

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