2024 (12) TMI 485 - AT - Income Tax

Assessment held valid after merger; transfer-pricing adjustments on receivables upheld, LIBOR+200bps and ALP netting directed under Section 92

ITAT HYDERABAD held the assessment valid despite a merger because the amalgamated entity continued for litigation and PAN purposes, so the assessment was ... Validity of assessment against company non existent due to merger - HELD THAT:- The facts of the present case clearly present a picture, where the amalgamated as well as the amalgamating company to be in existence, despite the fact of amalgamation, because for the purpose of concluding the litigations and exhausting the demands against the amalgamating company, the continuance of the said entity with its PAN was necessary. This situation created nuanced picture as to the existence or to the continuance of the entity, M/s Microsemi India Pvt. Ltd. for the purpose of litigation, demands etc. Having clarified that such a continuance is essential for the purpose of concluding the litigations and exhausting the demands against M/s Microsemi India Private Limited for the purpose of litigation, demands etc., resulting in non surrender of the PAN, it is not open for the assessee to say that the assessment order was passed against a non- existing company. Existence or non-existence do not lie on any continuum. If a company exists for the purpose of some litigation, it exists for the purpose of tax litigation also. This was the dicta of the Hon'ble Apex court in the case of Mahagun Realtors Pvt Ltd. There is no merit in the argument of the learned AR that assessment itself is bad, because the order was passed on the name of M/s Microsemi India Private Ltd. TP Adjustment - transaction of outstanding receivables with the Associated Enterprise of the assessee is in the regular course of their business and cannot be benchmarked as a separate international transaction - In the case of the DCIT vs. McKensey knowledge Centre India Pvt. Ltd [2018 (8) TMI 592 - DELHI HIGH COURT] and in the case of Bharti Airtel services Ltd .[2020 (10) TMI 294 - ITAT DELHI] it was held that with the introduction of the explanation to section 92B of the Act by Finance Act, it is determinable that if there is any delay in the realization of credit arising from the sale of goods or services rendered in the course of carrying on the business, it is liable to be visited with the transfer pricing adjustment on account of interest income short charged/uncharged. It is, therefore, not open for the assessee to agitate this question as to whether the interest on outstanding receivables in an international transaction is requiring separate benchmarking time and again. Rate of interest - In this case, the loan attributable to the AE, is deemed to have been consumed in a country outside India and, therefore, the interest at LIBOR rates as the rate prevailing in country where the loan is received/consumed by the AE cannot be said to be incorrect and such a view is in line with the decision of Tecnimont (P.) Ltd [2018 (7) TMI 490 - BOMBAY HIGH COURT] Reasons for not bringing the decisions of the Hon’ble Bombay High Court and Delhi High Court to the notice of the Bench when the matter for the assessment year 2018-19 was heard, are not known. Now the assessee brings to our notice the decision of Tecnimont (P.) Ltd. [2018 (7) TMI 490 - BOMBAY HIGH COURT] and the decision of Cotton Naturals (I) (P.) Ltd [2015 (3) TMI 1031 - DELHI HIGH COURT] and such decisions are no doubt binding precedents and should be preferred to the decisions of the Co-ordinate Benches of the Tribunal. We, therefore, do not wish to enter into a fresh debate on that aspect and respectfully follow the directions of the higher fora. We are of the considered opinion that the ends of justice would be met by accepting the interest rate on similar foreign currency receivables/advances as LIBOR+200 points. We direct the learned AO / TPO to adopt the same. Set off of the trade receivables and payables and the deemed interest - We find it reasonable because, when the assessee has both trade receivables and trade payables, it would be unreasonable to calculate interest only on trade receivables for the purpose of determining the ALP of the transaction. It would be in the interest of justice to direct the AO/learned TPO to consider both trade payables and trade receivables for the purpose of notional interest to be charged for determining the ALP value of the transaction. We hold and direct so. Issues Involved:1. Legality of the assessment order passed on a non-existent entity due to merger.2. Arm's Length Price (ALP) adjustment concerning interest on trade receivables.3. Determination of the appropriate interest rate for ALP assessment.4. Consideration of trade payables in determining ALP.Detailed Analysis:1. Legality of the Assessment Order:The primary issue raised by the assessee was the legality of the assessment order, which was passed on a non-existent entity, Microsemi India Private Ltd. (MIPL), following its merger with Microchip Technology (India) Private Limited (MTIPL). The assessee argued that the order was non-est, as it was issued on a company that had ceased to exist due to the merger. However, the Revenue contended that both entities continued to exist in the Income Tax records due to pending litigation and unresolved demands against MIPL, which necessitated the retention of its PAN. The Tribunal, referencing the Supreme Court's decision in Mahagun Realtors (P.) Ltd., concluded that the assessment order was valid since the amalgamating company continued to exist for legal purposes, including tax litigation. The Tribunal held that the existence of a company for litigation purposes implies its existence for tax purposes as well.2. ALP Adjustment on Interest for Trade Receivables:The assessee challenged the ALP adjustment on interest for trade receivables, arguing that it should not be treated as a separate international transaction since it was part of regular business operations. The Revenue, relying on precedents such as DCIT vs. McKensey Knowledge Centre India Pvt. Ltd., maintained that delays in the realization of credit from sales are subject to transfer pricing adjustments. The Tribunal upheld the Revenue's stance, emphasizing that the taxpayer must benchmark the ALP for interest on overdue receivables separately, as mandated by the explanation to section 92B of the Income Tax Act.3. Determination of Interest Rate for ALP:The dispute over the appropriate interest rate for ALP assessment was significant. The Revenue argued for a 6% interest rate based on previous Tribunal decisions. In contrast, the assessee advocated for the LIBOR rate, citing decisions from the Bombay and Delhi High Courts, which supported using the LIBOR rate for international transactions. The Tribunal, acknowledging the binding nature of the higher courts' decisions, directed the use of LIBOR plus 200 basis points as the interest rate for determining the ALP, thereby aligning with the decisions in Tecnimont (P.) Ltd. and Cotton Naturals (I) (P.) Ltd.4. Consideration of Trade Payables in ALP Determination:The assessee argued for the consideration of both trade receivables and payables when calculating the notional interest for ALP determination. The Tribunal found this approach reasonable, noting that excluding trade payables would be unjust. Consequently, it directed the Assessing Officer/Transfer Pricing Officer to account for both trade receivables and payables in determining the ALP value of the transaction, thereby ensuring a balanced assessment.Conclusion:The appeal was partly allowed, with the Tribunal affirming the legality of the assessment order, endorsing the separate benchmarking of interest on overdue receivables, adopting the LIBOR-based interest rate for ALP, and directing the consideration of both trade receivables and payables for ALP determination.