TaxTMI 
TaxTMI 
2025 (7) TMI 2068
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....f INR 1,18,60,159 to the Appellant's income and thereby, determining a total income of INR 184,73,99,248 and the said addition being wholly unjustified is liable to be deleted. 2. On the facts and in the circumstances of the case and contrary to law, the Ld. AO / TPO erred and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. AO / TPO, in rejecting the transfer pricing analysis / study prepared by the Appellant and conducting fresh benchmarking, without appreciating that none of the conditions mentioned in clauses (a) to (d) of Section 92C(3) of the Act were satisfied. 3. That the final assessment order passed by the Ld. AO under Section 143(3) read with Section 144C(13) read with Section 144B of the Act is barred by limitation as the same is passed beyond the time limit prescribed under Section 153 of the Act and hence, the order is liable to be quashed. INTEREST ON RECEIVABLES 4. On the facts and in the circumstances of the case and contrary to law, the Ld. AO / Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. AO / Ld. TPO in benchmarking outstanding recei....
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....be any presumption about charging of notional interest on such delayed payment. 9. On the facts and circumstances of the case and in contrary to law, the Ld. AO / TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in not considering the fact that the Appellant did not charge any interest on any delayed payment to Non-AEs / third parties as well and had followed parity in treatment between AEs and Non-AEs / third parties, which is in line with the Company's policy adopted for the delayed payment from AEs. Further, such instance of not charging interest to Non AEs / third parties is a reliable comparable transaction in accordance with the provisions of section 92C(2) of the Income-tax Act, 1961 and Rule 10B of Income-tax Rules, 1962, and should have been considered by the Ld. AO / Ld. TPO while undertaking benchmarking analysis. 10. Without prejudice to the other grounds, on the facts and circumstances of the case and contrary to law, the Ld. AO / TPO erred in and the Hon'ble DRP further erred in upholding /confirming the action of the Ld. AO / TPO in not considering the fact that the weighted average credi....
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....n view of the international transactions involved during the year under consideration, for determination of Arm's Length Price ("ALP"), the case was referred to Learned Transfer Pricing Officer ("TPO"). The Ld. TPO vide his order dated 31.10.2023 suggested upward adjustment of Rs.1,18,60,159/- on account of interest on trade receivables. Accordingly, the Ld. AO passed the draft assessment order on 12.12.2023. 4. Aggrieved with the draft assessment order passed by the Ld. AO, the assessee preferred objection before the Ld. DRP. In pursuance to the directions of Ld. DRP dated 05.09.2024, the Ld. AO finalized the assessment on 31.10.2024 at total income of Rs.184,73,99,248/- by making addition of Rs.1,18,60,159/- on account of interest on trade receivables. 5. Aggrieved with the final assessment order of Ld. AO, the assessee is in appeal before us. At the outset, the Learned Authorised Representative ("Ld. AR") submitted that, the sole issue arising out of the grounds of appeal pertains to the adjustment of Rs.1,18,60,159/- made by the Ld. AO on account of interest on outstanding trade receivables from it's AEs. The submissions of the Ld. AR were manifold, and can be sum....
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.... payables of Rs.13,48,54,513/- due to its AEs. However, the AEs does not charge any interest on such trade payables. Accordingly, the Ld. AR prayed before the bench for setoff of interest free trade payable of AEs from trade receivable of AEs for the purpose of benchmarking of interest on outstanding trade receivable from AEs. 5.4 The next argument of the assessee was with regards to the application of rate of interest. In this regards, the Ld. AR submitted that, the Ld. TPO erred in applying the interest rate charged by SBI on short term deposits for benchmarking the interest on outstanding trade receivables from AEs. The Ld. AR further submitted that, this Tribunal in many cases has held that the interest on trade receivables should be benchmarked at LIBOR +200 basis points. Accordingly, the Ld. AR prayed before the bench to direct the Ld. TPO to apply the LIBOR + 200 basis points on trade receivables. 5.5 In their last argument, the Ld. AR submitted that the assessee had undertaken various international transactions relating to sale of traded goods, sale of manufactured goods and provision of marketing support services ("primary transactions") with its AEs. All such primar....
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....he issue of credit period is concerned, we note that the learned TPO allowed a credit period of 60 days. Considering the facts and circumstances of the case, we find no infirmity in the action of the Ld. TPO in adopting a credit period of 60 days for benchmarking purposes. Accordingly, this contention of the assessee stands dismissed. 7.2 As far as the setoff of outstanding trade payables from the outstanding trade receivables is concerned, we found that the similar issue have been decided by this Tribunal in the case of Microchip Technology (India) Private Ltd. in ITA No. 509/Hyd/2022, wherein this Tribunal at para no. 20 of the order held as under : "20. In so far as the prayer of the assessee in respect of set off of the trade receivables and payables and the deemed interest thereon, is concerned, learned AR placed reliance on the decision of the coordinate Bench in the case of Coim India Pvt. Ltd Vs. DCIT in ITA No.495/Del/2021. 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 i....
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....The assessee is also receiving interest from the Associated Enterprises in Indian rupees. Once the transaction between the assessee and the Associated Enterprises is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, we are of the view that it LIBOR rate which has to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the Associated Enterprises. As it is noticed that the average of the LIBOR rate for 1-4-2005 to 31-3-2006 is 4.42 per cent and the assessee has charged interest at 6 per cent which is higher than the LIBOR rate, we are of the view that no addition on this count is liable to be made in the hands of the assessee. In the circumstances, the addition as made by the Assessing Officer on this count is deleted." 7. Thus, a transaction of loan to the AEs in foreign currency is considere....
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....onal transaction but would have reference to the year in which the loan was granted in case of a long term loan. However, in such situations, question may arise whether the case would fall under the second exception mentioned in the case of E.K.L. Appliances (supra), when an AE has the right to recall and ask for repayment of loan. These aspects have not been considered and applied by the TPO, DRP and the Assessing Officer. Neither has this ground been argued before us on behalf the Revenue. We, therefore, would not proceed to examine the said aspect and leave the question open. Similarly, we have not expressed any opinion on the issue or question of "thin capitalization" which does not arise for consideration in the present case. 37. We observe that whatever the Revenue argues and submits in the case of outbound loans or for that matter what we have observed would be equally applicable to inbound loans given to Indian subsidiaries of foreign AEs. The parameters cannot be different for outbound and inbound loans. A similar reasoning applies to both inbound and outbound loans. Revenue has erroneously argued that different parameters would apply for inbound and outbound loan....
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.... or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt- claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no 'special relationshi....
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....n which the loan has to be repaid. The interest rate should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of resident of either party. Once the loan or credit is given in foreign currency and also to be repaid in same currency, the interest applicable to loan granted and to be returned in Indian rupee would not be the relevant comparable. The Hon'ble High Court has held that the PLR rate would not be applicable and should not be applied for determining the interest rate in such cases where loan to be repaid in foreign currency. This issue was again considered by the Hon'ble Bombay High Court in the case of CIT vs. Tata Autocomp Systems Ltd reported in (2015) 56 Taxmann.com 206 (Bom.) and the Hon'ble Bombay High Court has upheld the decision of the Tribunal directing the Assessing Officer to benchmark the interest at the prevailing EURIBOR rate instead of rupee loan rate to be computed at Arms' Length on the loan advanced to the AE. The relevant findings of the Hon'ble High Court in para 7 & 8 are as under: "7. We find that the impugned order of the Tribunal inter alia has followed the decisi....
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....th of its AEs, including Symphoni Interactive LLC, USA. Be that as it may, it is seen that the ld. CIT(A) also impliedly accepted the interest earned by the assessee from Symphoni Interactive LLC, USA, at 6% as at ALP, against which the Department has no grudge as the assail is only to the application of EURIBOR of 4.42%, which relates to the loan advanced by the assessee to Mascot GmbH, Germany. As such, we are confining ourselves only to international transaction of receipt of interest from Mascot GmbH, Germany. As against the assessee charging interest at the rate of 1.50% from Mascot GmbH, Germany, the TPO determined the arm's length rate of interest at 14%, which the ld. CIT(A) reduced to 4.42% by treating it as the average EURIBOR rate for the year under consideration. 5. There are two facets of the dispute raised by the Revenue on this issue. The first is that the rate of interest should be considered with reference to the prime lending rate prevalent in India and the second is that the reduction in rate to 4.42% by the ld. CIT(A) is not justified. 6. As against the TPO's point of view that since the assessee in India advanced loan to its AE in Germ....
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.... 8. At this juncture, we consider it expedient to clarify that EURIBOR (Euro Inter-bank Offered Rate) is not a rate of interest, in itself, at which loans are advanced by banks in Euros to borrowers. EURIBOR is a reference rate which is calculated from the average interest rate at which Euro Zone Banks offer lending on inter-bank market. While calculating EURIBOR, 15% of the lowest and 15% of the highest interest rates collected by a panel of European banks are eliminated and the remaining 70% form the basis for its calculation. In such circumstances, EURIBOR, being, not an average rate at which the loans are advanced by European banks to borrowers, cannot per se be characterized as a comparable uncontrolled rate of interest at which loans are advanced in Germany. 9. On lines of EURIBOR, there is LIBOR (London Inter-bank Offered Rate), another rate which is applied on behalf of British Bankers Association. Similar to EURIBOR, LIBOR is also a rate at which major global banks lend to one another in the international inter-bank market on short-term basis. In calculation of LIBOR, 25% of lowest and 25% of the highest values are eliminated and the remaining 50% are considered....
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....Tribunal in the case of HARSCO India Private Ltd. v/s DCIT (supra) has given it's findings relying on the decisions Hon'ble Bombay high court. In our considered opinion the decision of hon'ble high court always prevails over the decision of Tribunal. Therefore, respectfully following the decision of this Tribunal in the case of HARSCO India Private Ltd. v/s DCIT (supra), we hold that, the justice will be served by applying LIBOR + 200 basis points on trade receivables in the case of the assessee. Therefore, we direct the Ld. AO/TPO to apply LIBOR + 200 basis points for benchmarking of interest on trade receivables. 7.4 As far as the last argument of the assessee is concerned, it is undisputed that the Ld. AO/TPO has accepted all primary international transactions to be at ALP. We have gone through the para nos. 11 to 13 of ACIT Vs. Information Systems Resource Centre Pvt. Ltd. (supra), which is to the following effect : 11. We have considered the rival submissions as well as the relevant material on record. In the present case, the sale transaction of the assessee with its A.E. have been accepted by the Transfer Pricing Officer / Assessing Officer at arm'....
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.... extended by the assessee to the AE cannot be examined independently but has to be considered along with the main international transaction being sale to the AE. As per Rule 10A(d) if a number of transactions are closely linked or continuous in nature and arising from a continuous transactions of supply of amenity or services the transactions is treated as closely linked transactions for the purpose of transfer pricing and, therefore, the aggregate and clubbing of closely linked transaction are permitted under said rule. This concept of aggregation of the transaction which is closely linked is also supported by OECD transfer pricing guidelines. In order to examine whether the number of transactions are closely linked or continuous so as to aggregate for the purpose of evaluation what is to be considered is that one transaction is follow-on of the earlier transaction and then the subsequent transaction is carried out and dependent wholly or substantially on the earlier transaction. In other words, if two transactions are so closely linked that determination of price of one transaction is dependent on the other transaction then for the purpose of determining the ALP, the closely link....
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.... is not a transaction of loan or advance to the AE but it is only an excess period allowed for realization of sales proceeds from the AE. Therefore, the arm's length interest in any case would be the average cost of the total fund available to the assessee and not the rate at which a loan is available. Accordingly, we direct the Assessing Officer/TPO to re-do the exercise of determination of ALP in terms of above observation." 12. Thus, it is clear that the Tribunal has taken a view that the transaction of allowing the credit period to the A.E. on realisation of sale proceeds has to be considered along with the main international transaction in respect of sale to A.E. A similar view has been taken by the Tribunal, Delhi Bench, in Kusum Healthcare Pvt. Ltd. (supra), wherein the Tribunal, vide Para-7 to 10, held as under :- "7. We have heard rival submissions and perused the material on record. An uncontrolled entity will expect to earn a market rate of return on its working capital investment independent of the functions it performs or products it provides. However, the amount of capital required to support these functions varies greatly, because the level of i....