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 not against a non-existent company. Transfer-pricing adjustments on outstanding receivables with an associated enterprise were upheld as part of international transactions, with interest benchmarking required. The tribunal directed adoption of LIBOR + 200 bps for similar foreign-currency receivables/advances and ordered the AO/TPO to apply that rate. It also directed that notional interest calculations for ALP must net trade receivables and trade payables rather than charge interest only on receivables.

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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.

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