ITAT rules no notional interest on AE loans without actual interest; 1% commission on corporate guarantees applies

The ITAT Delhi allowed the assessee's appeal against TP adjustments involving notional interest on loans to AEs and outstanding receivables. The tribunal held that since no interest was charged on receivables from non-AEs, no notional interest could be attributed to AEs. Both the TPO and CIT(A) were found unjustified in sustaining such additions. Additionally, the ITAT directed the AO to apply a 1% commission rate on corporate guarantees, following precedent. The appeal was allowed for all three years under consideration.

---

---

ISSUES:

Whether notional interest on loans advanced to Associated Enterprises (AEs) should be computed using LIBOR rate or LIBOR plus additional basis points.Whether notional interest on outstanding receivables from AEs constitutes an international transaction subject to transfer pricing adjustments for Assessment Year (AY) 2012-13 and subsequent years.Whether notional commission on corporate guarantees provided by the assessee to AEs is justifiable and at what rate such commission should be computed.Whether the absence of interest charged on delayed payments from Non-Associated Enterprises (Non-AEs) affects the applicability of notional interest adjustments on receivables from AEs.

RULINGS / HOLDINGS:

Notional interest on loans advanced to AEs for AY 2012-13 is to be computed at the LIBOR rate alone; the addition of 500 basis points by the Transfer Pricing Officer (TPO) was not upheld, and the appellate authority's direction to restrict to LIBOR rate is affirmed as there is "no infirmity in the order of Ld. CIT(A)."For AY 2012-13, notional interest on outstanding receivables does not constitute an international transaction under section 92B, as the provisions are prospective and applicable only from AY 2013-14 onwards; hence, no adjustment is warranted for AY 2012-13.For AYs 2014-15 and 2016-17, the notional interest on outstanding receivables from AEs is not sustainable because the assessee did not charge interest on delayed payments from Non-AEs, and it is a "settled position of law that if no interest has been charged from Non AEs then no adjustment qua outstanding receivables with AE can be made."The addition of notional commission on corporate guarantees is justified, and the appropriate rate for such commission is 1%; the matter is remanded to the Assessing Officer (AO) to compute the guarantee commission at 1%, following the precedent set by the Co-ordinate Bench.

RATIONALE:

The court applied the statutory framework under the Income Tax Act relating to transfer pricing, specifically section 92B and associated provisions governing international transactions and the arm's length principle.The prospective application of section 92B to notional interest on outstanding receivables was emphasized, relying on precedent that the provision applies from AY 2013-14 onwards, thereby excluding AY 2012-13 from its ambit.The principle of parity in treatment between Associated Enterprises and Non-Associated Enterprises was applied, holding that if no interest is charged to Non-AEs on delayed payments, the Department cannot attribute notional interest to AEs, consistent with established judicial precedents.The determination of corporate guarantee commission at 1% follows earlier decisions of the Co-ordinate Bench, reflecting a doctrinal consistency in quantifying guarantee fees in transfer pricing adjustments.

---