2013 (12) TMI 1535 - AT - Income Tax

Transfer pricing adjustment on account of notional interest on delayed payment from the A.E. - Held that - Some kind of adjustment is required to be made on such transaction with the A.E. Looking to the fact that in the case of non-A.E., there has been maximum delay of 200 days, we are of the opinion that for bench marking the same, upto the delay of 200 days in the case of A.E. also, no interest should be chargeable. In case of delay beyond the period of 200 days, the transfer pricing adjustment is required to be made on account of charging of some interest. The learned Counsel for the assessee was required to furnish the working of period of delay which are beyond 200 days and to calculate interest at the LIBOR rate prevalent for the financial year 2007-08 plus 150 points i.e., 1.5%. The learned Counsel for the assessee has submitted this working before us. As per the said working the learned Counsel informed that LIBOR rate during the financial year 2007-08 was around 4.7% and if 1.5% is added, then interest rate would work out to 6.21%. Accordingly, we direct the Assessing Officer / TPO to verify the working and apply interest rate of LIBOR 1.5% and workout the adjustment on account of interest for the period beyond 200 days. The assessee will furnish this working before the TPO for verification. Thus, the grounds raised by the assessee are treated as partly allowed.

Summary

Issues:
Transfer pricing adjustment on account of notional interest on delayed payment from the Associated Enterprises (AEs).

Analysis:
The appeal was against the final assessment order passed pursuant to the directions of the Dispute Resolution Panel-I under section 144C(5) of the Income Tax Act, 1961 for the assessment year 2008-09. The only issue raised in the appeal was regarding the transfer pricing adjustment on account of notional interest on delayed payment from the AEs. The Transfer Pricing Officer (TPO) had noted considerable delays in receiving payments from AEs and proposed to charge an arm's length interest rate based on prevailing rates in independent transactions. The TPO calculated interest on delayed payments at 15.68% and made an adjustment of Rs. 2,26,98,395. However, the Dispute Resolution Panel reduced the interest rate to 7% per annum, deeming it reasonable. The appellant argued that considering the average cost of borrowings with weightage to interest-free funds, the interest rate should be 3.07%. The appellant contended that since no interest was charged on delayed payments from non-AEs, no adjustment should be made. The Departmental Representative argued that the delays in payments to AEs far exceeded those to non-AEs, justifying the adjustment.

The Tribunal observed that while the appellant did not charge interest on delayed payments from non-AEs, the delays in payments to AEs were significantly longer, with some exceeding 700 days. Given the substantial differences in credit periods and delays between transactions with AEs and non-AEs, direct comparability was not feasible. The Tribunal directed that no interest should be charged for delays up to 200 days, but for delays beyond 200 days, a transfer pricing adjustment was necessary. The appellant was instructed to provide calculations based on the LIBOR rate plus 1.5% for delays exceeding 200 days. The Tribunal partially allowed the appellant's grounds, directing the Assessing Officer/TPO to verify the calculations and apply the specified interest rate for adjustments on delayed payments beyond 200 days.

Therefore, the appeal was partly allowed, with the Tribunal directing the recalibration of interest adjustments for delayed payments from AEs based on the LIBOR rate plus 1.5% for delays exceeding 200 days, while no interest was to be charged for delays up to 200 days.