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2010 (10) TMI 902 - AT - Income TaxTP Adjustment - additional income determined by Transfer Pricing Officer ( TPO') in proceedings concluded u/s.92CA - outstanding receivables - TPO jurisdiction to examine the issue of outstanding receivables and non-charging of interest thereon - TPO found that by parking this huge amount at the disposal of Homestar USA, the AE, the assessee is depriving the funds otherwise available in its hands and aversely affecting the profitability of the assessee - assessee s explanation before the TPO was that the delay in collecting the receivables was due to the difference in the billing patterns followed by Logix India and Homestar USA - Revenue is aggrieved on the direction of the Commissioner of Income-tax(A) that LIBOR/US FED rate should be taken as the interest-rate. HELD THAT - When a file is referred to TPO for the purpose of examining the matter relating to ALP, the assessing authority is referring the entire gamut of international transactions for the consideration of the TPO. The purpose of an ALP analysis itself is in the larger context of anti-evasion measures. In the present case, the outstanding balance of receivables did not generate out of domestic transactions. Those receivables did generate from international transactions carried out by the assessee with its AE in USA. Therefore, there is no basis in arguing that the receivables are strange to the international transactions and, therefore, those receivables would not come under the purview of the jurisdiction of the TPO. The outstanding receivables is the financial result of the international transactions concluded by the assessee company with AE in USA and, therefore, the income effect arising, if any, to that outstanding receivables is very much a relevant aspect of ALP. Therefore, as a legal proposition we hold that the TPO is having the jurisdiction to examine the issue of outstanding receivables and non-charging of interest thereon. Additional income to be added in the present case as part of ALP analysis - What is made in an analysis of ALP is the evaluation of the said financial impact. On one side the pricing adopted by the assessee for all its international transactions with its AE is comparable and the ALP test is satisfied. To that extent in the present case, the TPO has accepted the position reported by the assessee company. But in spite of the fact that on one aspect of the transaction, the assessee has complied with the ALP parameters, on another side the assessee has parked huge amount of funds for long period with its AE in USA. Only for the reason that the pricing of international transactions has been accepted for ALP test, it is not possible to hold that the TPO should not go into this question of parking of funds with its AE in USA. If the funds are repatriated into India on ordinary within the normal period, the assessee would have been in a position to pay all its working capital loan or other loans, if any, and/or earning some income from an appropriate investment of those repatriated funds. This potential loss is definitely a factor to be considered while evaluating the financial impact of the international transactions concluded by the assessee with its AE in USA. Therefore, we agree with the arguments of the Revenue and uphold the finding of the TPO that an additional income is to be added in the present case as part of ALP analysis. Reasonable period may be provided as interest-free period and no interest be calculated for such interest-free period - Interest is to be calculated for the period overflowing the interest-free period. This direction is just and proper. Upheld. ALP interest may be calculated after providing appropriate mark-up for the nature of loan, term of loan, credit standing of the AE- Homestar USA, security of loan etc - The funds parked with Homestar USA is not in the nature of a loan with all the legal features of a loan transaction. This is in fact parking of funds with the AE by not collecting the receivables within the normal period. Therefore, the direction given by the Commissioner of Income-tax(A) which are applicable to formal loans cannot be made applicable to the present case. As far as the present case is concerned, those directions of the Commissioner of Income-tax(A) are more academic in nature. Therefore, all those directions are vacated. Adopt LIBOR/US-FED rate for calculating the interest - As per CIT(A) ALP factor of interest is to be computed with reference to the benefit that would have been earned by the AE in USA. On the other hand, in calculating the cost factors of the assessee in India, it is more appropriate to consider the potential loss suffered by the assessee in India by not bringing the receivables within the normal period. In fact, the said potential loss of the assessee in India is the ALP factor which contributes to the additional income attributable to the assessee. Therefore, instead of the US rate, the TPO is justified in adopting the Indian rate. Adopting the Indian rate - As it is not proper to rely on PLR of the State Bank of India. This is because if the funds were brought in time and those funds were properly deployed, the assessee company may earn an income at the maximum rate applicable to deposits and not at the rate applicable to loans. Therefore, we vacate the direction of the TPO to adopt the PLR rate of 10.25%. Instead we find it appropriate to adopt a reasonable rate that would be available to the assessee on short-term deposits. ALP interest rate determination - As held that the period chargeable to interest has to be recomputed and a reasonable deposit rate has to be applied for calculating the interest. Taking into consideration all aspects of the case like interest-free period and piece-meal remittance of the receivables, we fix the ALP interest rate at 5% and direct the AO to compute the additional income at the rate of 5% on Rs. 5,52,24,261 as against 10.25% adopted by the AO.
Issues Involved:
1. Determination of additional income by the Transfer Pricing Officer (TPO). 2. Jurisdiction of the TPO regarding outstanding receivables and interest calculation. 3. Reasonableness of the directions issued by the Commissioner of Income-tax (Appeals). Detailed Analysis: 1. Determination of Additional Income by the TPO: The primary issue in the appeal was the additional income of Rs. 56,60,486 determined by the TPO under section 92CA of the IT Act, 1961, as an Arm's Length Price (ALP) adjustment. The assessee, a company engaged in software development, had reported a loss of Rs. 1,31,53,534 for the assessment year 2004-05. The TPO, after analyzing the international transactions using the Transactional Net Margin Method, accepted the pricing of transactions but found that a significant amount of Rs. 7,73,23,619 was shown as debts receivable from its AE, Homestar USA, out of which Rs. 5,52,25,261 was outstanding for more than six months. The TPO concluded that this parking of funds adversely affected the profitability of the assessee and calculated an interest income of Rs. 56,60,486 at the rate of 10.25%, which was deducted from the reported loss. 2. Jurisdiction of the TPO Regarding Outstanding Receivables and Interest Calculation: The assessee challenged the jurisdiction of the TPO, arguing that the reference made by the Assessing Officer did not cover the aspect of delay in collecting receivables. However, the Tribunal rejected this argument, stating that the reference to the TPO is for an overall examination of international transactions, including the financial impact of outstanding receivables. The Tribunal held that the TPO had jurisdiction to examine the issue of outstanding receivables and non-charging of interest thereon, as these receivables were a financial result of international transactions with the AE. 3. Reasonableness of the Directions Issued by the Commissioner of Income-tax (Appeals): The Commissioner of Income-tax (Appeals) agreed with the TPO that the outstanding receivables were akin to an interest-free loan to the AE, thereby justifying the interest income calculation. However, the Commissioner did not approve the use of the Prime Lending Rate (PLR) of the State Bank of India, suggesting instead the use of the LIBOR/US-FED rate, considering the transactions were in USD. The Commissioner also directed allowing a reasonable period for the collection of receivables and calculating interest only for the period exceeding this reasonable time. The Tribunal upheld the direction to provide a reasonable interest-free period but vacated the directions regarding the nature of the loan and the use of the LIBOR/US-FED rate. The Tribunal reasoned that the ALP factor should be based on the potential loss suffered by the assessee in India, not the benefit to the AE in the USA. Consequently, the Tribunal found it appropriate to adopt a reasonable rate applicable to short-term deposits instead of the PLR rate. The Tribunal fixed the ALP interest rate at 5% and directed the Assessing Officer to compute the additional income at this rate on the outstanding amount. Conclusion: The Tribunal dismissed the assessee's contentions regarding the jurisdiction of the TPO and the merit of the case but modified the quantum of additional income by adjusting the interest rate to 5%. The appeal by the assessee was partly allowed, and the appeal by the Revenue was allowed, with the Tribunal providing a balanced resolution to the issues raised.
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