2016 (6) TMI 1275 - AT - Income Tax

TPA - determination of ALP - allowing a credit period on receivable from AE - independent international transaction - Held that - Kusum Healthcare Pvt. Ltd. Vs. ACIT 2015 (4) TMI 180 - ITAT DELHI has taken this view that allowing the credit period over and above normal credit period prevailing in the industry is certainly relevant and part of the main international transaction of sale or purchase between the assessee and the AE. However, it was held that it cannot be treated as an independent international transaction de horse the main international transaction between the parties We set aside this issue to the record of the A.O./TPO with the direction to redo the exercise of determination of ALP by considering the proper working capital adjustment in the comparable prices in respect of transaction of software development services provider to the AE - If after giving the necessary adjustment the international transaction of the assessee is found at arm s length then there is no question of any separate adjustment on account of allowing the credit period on the receivable from AE - the normal credit period allowed for the receivable from the AE shall be the credit period prevailing in the industry and therefore we are of the view that two months credit period should be taken as a normal business practice in the industry. Also consider the benchmark interest rate as LIBOR/PLR in the light of various precedents on this issue.

Issues Involved:
1. Transfer Pricing Adjustment on Interest on Outstanding Receivables
2. Treatment of Receivables from AE as a Separate International Transaction
3. Treatment of Outstanding Receivable from AE as Loan
4. Benchmarking of Notional Transaction
5. Arm's Length Pricing of Business Transaction
6. Consideration of Higher Margin Earned by Assessee
7. Credit Period Allowed by TPO/AO
8. Benchmark Interest Rate for Receivables

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment on Interest on Outstanding Receivables:
The assessee contested the adjustment made by the TPO/AO on account of interest on outstanding receivables amounting to ?60,20,331. The TPO adopted the Comparable Uncontrolled Price (CUP) method and used the bank Prime Lending Rate (PLR) as the Arm's Length Price (ALP). The assessee argued that the credit period allowed to the AE was not an independent international transaction and should not attract a separate adjustment.

2. Treatment of Receivables from AE as a Separate International Transaction:
The TPO and AO treated the receivables from the AE as a separate international transaction and made an upward adjustment by computing notional interest. The assessee argued that the receivables were part of the main international transaction of providing software development services, which had already been accepted at arm's length.

3. Treatment of Outstanding Receivable from AE as Loan:
The TPO and AO treated the outstanding receivable from the AE as a loan and computed notional interest. The assessee contended that the receivables were not loans but amounts due for services provided, and since the main transaction was at arm's length, no separate adjustment for notional interest was warranted.

4. Benchmarking of Notional Transaction:
The TPO and AO benchmarked the notional interest using the PLR of SBI plus 150 basis points. The assessee argued that the correct benchmark should be the LIBOR rate, as the receivables were in USD, and this was the recommended approach for foreign currency loans.

5. Arm's Length Pricing of Business Transaction:
The assessee argued that the business transaction of selling software development services to the AE was conducted at arm's length, and the consequential outstanding receivable was covered in the arm's length pricing. Therefore, no additional charge for notional interest should be made.

6. Consideration of Higher Margin Earned by Assessee:
The assessee highlighted that it had earned a higher margin than comparable companies, implying that any notional interest on the extended credit period was already factored into the pricing. Thus, no additional interest should be charged.

7. Credit Period Allowed by TPO/AO:
The TPO and AO granted a credit period of only one month, whereas the assessee argued that the normal business practice allowed for a credit period of up to six months. The Tribunal noted that the normal credit period prevailing in the industry should be considered, and a two-month credit period was deemed reasonable.

8. Benchmark Interest Rate for Receivables:
The assessee argued that the benchmark interest rate should be the LIBOR rate instead of the PLR, given the USD transactions. The Tribunal directed the TPO/AO to consider the benchmark interest rate as LIBOR/PLR in light of various precedents.

Conclusion:
The Tribunal set aside the issue to the record of the A.O./TPO with the direction to redo the exercise of determining the ALP by considering the proper working capital adjustment in the comparable prices. If, after necessary adjustments, the international transaction is found at arm's length, no separate adjustment for the credit period on receivables from AE is required. The Tribunal also clarified that a two-month credit period should be considered normal business practice in the industry, and the benchmark interest rate should be LIBOR/PLR.

Order:
The appeal of the assessee was allowed for statistical purposes, and the order was pronounced in the open court on 17th June 2016.

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