TaxTMI 
TaxTMI 
2026 (8) TMI 279
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....erroneous and bad in law and in facts. 2) Ground No. 2: The Ld. AO, the Ld. TPO and the Hon. DRP have erred on facts and in law in computing an upward Transfer Pricing (TP) adjustment of INR 1,40,24,907 with regard to the Arms Length Price of the international transactions undertaken by the Appellant by disregarding the methodology adopted by the Appellant in its Transfer Pricing documentation maintained in accordance with section 92D of the Act read with Rule 10D of the Income tax Rules, 1962 (the Rules) and the detailed arguments/elaborate submissions made by the Appellant during the course of the assessment proceedings before the Ld. TPO and the Hon. DRP. 3) Ground No. 3: The Ld. AO erred in recharacterising trade receivables as unsecured loans, and the Hon. DRP erred in confirming such recharacterisation, in absence of any material demonstrating an intention to advance funds OR confer a financing benefit to the associated enterprise. 4) Ground No. 4: The Ld. AO erred in making an adjustment towards notional interest on outstanding trade receivables, and the Hon. DRP erred in upholding the same, by treating such receivables as a separate international ....
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.... of Rs.7,58,65,280/- in respect of IT / SDS segment and adjustment of Rs.2,30,94,740/- on account of interest on trade receivables from AEs. Based on the order of the Ld. TPO, the Ld. AO passed a draft assessment order under section 144C(1) of the Act on 23.01.2025 incorporating the aforesaid transfer pricing adjustments. 4. Aggrieved by the draft assessment order, the assessee filed objections before the Ld. DRP. The Ld. DRP, vide directions issued under section 144C(5) of the Act dated 30.10.2025, granted partial relief to the assessee. Pursuant to the directions of the Ld. DRP, the Ld. TPO passed an order giving effect thereto on 06.11.2025. While giving effect to the directions of the Ld. DRP, the transfer pricing adjustment in respect of IT/SDS segment was deleted and the adjustment on account of interest on trade receivables was recomputed at Rs.1,40,24,907/-. Thereafter, the Ld. AO passed the final assessment order under section 143(3) read with sections 144C(13) and 144B of the Act dated 14.11.2025 making an addition of Rs.1,40,24,907/- on account of interest on trade receivables and assessed the total income of the assessee at Rs.22,15,74,507/-. 5. Aggrieved by the f....
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....tion requiring independent benchmarking. He submitted that the assessee had allowed its AEs an extended credit period beyond the permissible period and thereby extended a financing benefit to its AEs. Therefore, the Ld. TPO was justified in determining the arm's length compensation for such financing transaction. It was further submitted that the acceptance of the IT/SDS transaction at arm's length does not automatically establish that the delayed receivables transaction is also at arm's length. Accordingly, the Ld. DR prayed for upholding the adjustment sustained by the Ld. DRP. 7. We have heard the rival submissions and perused the material available on record. The solitary issue arising for our consideration is whether the Ld. TPO / Ld. AO was justified in making a transfer pricing adjustment of Rs.1,40,24,907/- on account of interest on outstanding trade receivables from the AEs of the assessee. The contention of the assessee is that it is a 100% captive service provider operating on a cost-plus model and while determining the consideration charged to its AEs, it had already factored the finance cost in its cost base. It is further contended that even after considering the f....
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....nce upon its PLI being within the arm's length range is misplaced. The acceptance of the operating margin merely establishes that the international transaction relating to provision of IT/SDS satisfies the arm's length standard. It does not establish that the separate international transaction of delayed receivables is also at arm's length. In the present case, the Ld. TPO accepted the IT/SDS transaction at arm's length and consequently did not propose any primary adjustment in that segment. However, upon noticing delays in realization of trade receivables from AEs, the Ld. TPO independently benchmarked such receivables and determined the arm's length compensation thereon. The assessee has not produced any evidence before us to demonstrate that independent parties under comparable circumstances would permit similar delays without charging any compensation. Further, the assessee has not challenged either the existence of delayed receivables or the computation mechanism adopted by the Ld. TPO pursuant to the directions of the Ld. DRP. The challenge is confined only to the proposition that no separate adjustment can be made once the service transaction has been accepted at arm's lengt....
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....Chennai Bench of the Tribunal in the case of Temenos India Pvt. Ltd. Vs. DCIT (supra), which is to the following effect: 13. Before concluding it is to be mentioned that DRP had relied on the Delhi Bench of the ITAT order in the case of Bechtel India Pvt. Ltd., in ITA No.6530/Del/2016, dated 16.05.2017, (Assessment Year 2012-13). This order of the Delhi Bench of the Tribunal in the case of Bechtel India Pvt. Ltd., for AY 2012-13, had distinguished the Delhi Bench order in the same assessee's case concerning assessment year 2010-11. The Delhi Bench order in the case of Bechtel India Pvt. Ltd., for assessment year 2010-11 in ITA No.1478/Del/2015 (order dated 21.12.2015) had deleted the interest on delayed receivables citing that assessee was a debt free company and no interest was paid even on delayed payables. The above order of the Tribunal for assessment year 2010-11 concerning Bechtel India Pvt. Ltd., was confirmed by the Hon'ble Delhi High Court in ITA No.379/2016 (judgment dated 21.07.2016). The Delhi High Court judgment was confirmed by the Hon'ble Supreme Court in CC No. 4956/2017 (judgment dated 21.07.2017). The Supreme Court dismissed the Revenue's ....
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....ed 21/07/2016 upheld the order of the Tribunal holding that the assessee is a debt free company and the question of receiving any interest on receivable did not arise. The Learned DRP thereafter noted that the Tribunal in assessment year 2012-13 in order dated 16/05/2017 relying on the decision of the Tribunal in the case of 'Ameriprise India P Ltd.', 2015-TII-347-ITAT-Del-TP held that when the export proceeds are realized within the year, but beyond the stipulated period of the agreement, then same will not come within the working capital adjustment and rejected the contention of the assessee that interest on delayed payment of receivable get subsumed in the working capital adjustment allowed to the assessee. The Tribunal in AY 2012-13 held that interest on delayed realization of receivables is a separate international transaction and therefore require benchmarking. The Tribunal applying interest rate of six months LIBOR +400 basis point on receivables, upheld the transfer pricing adjustment of interest on receivables accordingly. In view of the finding of the Tribunal in assessment year 2012-13, the Learned DRP in the year under consideration directed the Learned TPO to compute t....
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....u of the discussions and the ratio laid down in the case of Kusum Healthcare Pvt. Ltd., we direct that no separate adjustment for interest on receivables are warranted in the hands of the assessee. Grounds no. 3 of the assessee's appeal is there by allowed." 11.5 On appeal by the Revenue, against the above order of the Tribunal, the Hon'ble Delhi High Court (ITA No. 379/2016) in order dated 21/07/2016 dismissed the appeal observing as under: "4. As far as question (B) concerning the adjustment for interst no receivables, the Court finds that the ITAT has returned a detailed finding of fact that the Assessee is a debt free company and the question of receiving any interest on receivables did not arise. Consequently, no substantial question of law arises for consideration as far as this issue is concerned." 11.6 The assessee brought the decision of the Hon'ble High Court in assessment year 2010-11, before the Tribunal in assessment year 2012- 13 by way of raising ground No. 1.5 of the appeal, however, the Tribunal after considering the amendment brought into Act by way of Finance Act, 2012 and other decisions held that interest on delayed realization of rec....
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....cing adjustment on account of the delayed realization of invoices from AEs has been upheld. The ld. DR contended that the order in the case of Kusum Healthcare Pvt. Ltd. (supra), has been passed without considering the amendment to section 92B carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002, which has been duly taken into account by the Tribunal in its later order in Techbooks International Pvt. Ltd. (supra). 21. After considering the rival submissions and perusing the relevant material on record, it is noticed as highlighted above, that the assessee argued before the TPO that interest on receivables is not an international transaction. At this stage, it would be apposite to note that the Finance Act, 2012 has inserted Explanation to section 92B with retrospective effect from 1.4.2002. Clause (i) of this Explanation, which is otherwise also for removal of doubts, gives meaning to the expression 'international transaction' in an inclusive manner. Sub-clause (c) of clause (i) of this Explanation, which is relevant for our purpose, provides as under:- Explanation.--For the removal of doubts, it is hereby clarified that- (....
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.... is legally not tenable. In light of the above, we delete the transfer pricing adjustment imputing interest income on the outstanding trade receivables. In the result, the Ground No.2 (f) is allowed. Since we have deleted the TP adjustment of Rs. 3,14,15,287/-, Ground No. 2 and its other sub-grounds are not adjudicated. It is ordered accordingly. 11. On perusal of the above, we find that the Chennai Bench, after considering the decision of the Delhi Bench of the Tribunal in the case of Bechtel India Pvt. Ltd., which in turn was based upon the principles laid down by the Hon'ble Delhi High Court and affirmed by the Hon'ble Supreme Court, held that where an assessee is a debt-free company and is not incurring any borrowing cost, no separate benchmarking adjustment on account of interest on outstanding trade receivables is warranted. The rationale behind the aforesaid view is that where an assessee is not utilizing borrowed funds and is not incurring any interest cost, the delayed realization of receivables does not result in any additional financing burden upon the assessee. In such circumstances, imputing a notional interest adjustment on trade receivables may not reflect the rea....
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....d come up for consideration before this Tribunal in the case of HARSCO India Private Ltd. v/s DCIT in ITA No. 1041/Hyd/2024 dated 06/03/2025, wherein at para nos. 6 to 10 of the order this Tribunal has held as under : "6. It is pertinent to note that, not following the decisions of the Tribunal in assessee's own case amounts to judicial indiscipline on the part of the DRP. However, since the issue has now come up before the Tribunal, therefore, we will discuss the merits of this issue. The basic question before us is, whether for benchmarking the outstanding receivables from AEs, the comparable interest rate should be PLR rate/SBI short term rate or LIBOR rate/LIBOR+ mark up. This issue was considered by the Chennai Special Bench of this Tribunal in case of Shiva Industries & Holdings Ltd. v. Assistant Commissioner of Income-tax reported in 46 SOT 112/11 Taxmann.com 404 (SB) and held in para 11 as under: "11. We have considered the rival submissions. A perusal of the order of the TPO clearly shows that the assessee had raised the funds by way of issuance of 0 per cent optional convertible preferential shares. Thus, it is noticed that the funds raised by the assess....
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....i.e. 2003 have not been examined and are not the basis on which the TPO made the adjustment and compute the interest rate for the transaction under consideration. It claimed that the LIBOR rates in the year 2002 varied between 1.447 % to 3.006 % and in the year 2003 between 1.201% to 1.487%. Rates in the year 2004 were again marginal, with the highest at 3.100% and the lowest at 1.340%. The LIBOR rate of 5.224% quoted in the TPO's order, it is pointed out, was the rate received on the investment made during the assessment year in question by the assessed. Thus, it was argued that the present case is of a long-term loan granted to the AE and the rate of interest charged was much higher than the then prevailing LIBOR interest rate. There is no finding of the TPO, the DRP or the Assessing Officer questioning the long-term transaction as such. 36. Under sub-rule (4) to Rule 10B, the data used for comparability of the uncontrolled transaction should be the data relating to the financial year in which the international transaction has been entered into. The proviso permits consideration of data, not more than two years prior to the financial year, if such data reveals facts ....
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....nd pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:- "The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt-at least within the framework of free capital market....
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.... the borrowing company might not have completely refrained from making investment for which it borrowed the money." 40. The aforesaid methodology recommended by Klaus Vogel appeals to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply." 8. The Hon'ble High Court has answered the question whether the inter....
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....VVF Ltd. (supra) and Tech Mahindra Ltd. (supra). 8. In view of the above we see no reason to entertain the present appeal as in similar matters the Revenue has accepted the view of the Tribunal which has been relied upon by the impugned order. Accordingly, we see no reason to entertain the proposed questions of law." 9. We further note that, the Pune Benche of the Tribunal in the case of DCIT vs. iGATE Global Solutions Ltd reported in (2019) 109 Taxmann.com 48 (Pune) has again discussed this issue elaborately in Para 4 to 10 as under: "4. We have heard both the sides and gone through the relevant material on record. It is observed from the order passed by the TPO that the assessee advanced loans to its two AEs, one in the USA and the other in Germany. Insofar as loan to Symphoni Interactive LLC, an Associated Enterprise in the USA is concerned, the assessee charged interest @ 6%. The ld. CIT(A) has recorded that the assessee also paid interest to another AE in the USA, namely, iGATE Corporation, USA at 5.9% on its External Commercial Borrowings (ECB). He further recorded in para 57 of the impugned order that the TPO accepted this transaction and made no t....
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....n 401 has also held that the currency in which the loan is to be repaid normally determines the rate of return on the money lent, i.e. rate of interest. The Hon'ble Bombay High Court in CIT v. The Great Eastern Shipping Co. Ltd. [2018] 301 CTR 642 has reiterated that the arm's length rate of interest is to be considered with reference to the country in which the loan is received and not from where it is paid. In view of these precedents, it is palpable that the viewpoint of the AO in considering the rate of interest prevalent in India, being, the lender country, as determinative of the ALP of rate of interest charged by the assessee, is not correct. To this extent, we uphold, in principle, the view canvassed by the ld. CIT(A) that the rate of interest prevalent in Germany, being, the country in which the loan was consumed, is determinative of the arm's length rate of interest charged by the assessee-lender. 7. Now we espouse the second facet of the dispute relating to the determination of the arm's length rate of interest. It is seen that the ld. CIT(A) has held that average EURIBOR for the A.Y. 2007- 08 should be considered as a benchmark. In determining t....
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....ot be substantiated from any material on record. In the given circumstances, we set aside the impugned order and remit the matter to the file of the AO for considering EURIBOR +2% as arm's length rate of interest to be applied on loan advanced by the assessee to Mascot Systems GmbH, Germany. In case EURIBOR +2% turns out to be lower than 4.42% as directed to be applied by the ld. CIT(A) on the understanding of the same being EURIBOR simplicitor, then the addition should be restricted with reference to 4.42% rate of interest, as the assessee is not in appeal on this issue. In the otherwise scenario, the relief allowed by the ld. CIT(A) will be restricted pro tanto." 10. Therefore, we find force in the assessee's case to adopt LIBOR rate for benchmarking the transactions of outstanding receivables from the AEs. Accordingly, the Assessing Officer/TPO is directed to adopt the LIBOR + 200 basis as comparable rate for benchmarking the transaction of outstanding receivables from AEs after allowing a credit period of 60 days as a normal credit period without any interest." 15. On perusal of above, we found that this Tribunal has adopted LIBOR rate for benchmarking the trans....