2021 (5) TMI 1011 - AT - Income Tax

TP Adjustment - ALP adjustments pertaining to interest on receivables qua its international transactions with the overseas Associated Enterprise (AE ) - CIT-DR s vehement contention is that the TPO as well as the DRP have rightly taken the foregoing SBI rate s benchmark involving the short term deposits - HELD THAT - We find no merit in the instant argument as such a short term deposit cannot be taken at par with an international transaction u/s.92B of the Act since the latter involves foreign currency and overseas market conditions. In addition to this, learned lower authorities have also not adopted any uncontrolled party/comparable in the very segment as well so as to come to the conclusion that the assessee s receivables in case of overseas AEs involved more than the market practice of reasonable time period. We keep in mind all these clinching aspects and direct the TPO to delete the impugned ALP adjustment in issue. The assessee s former substantive ground stands accepted in the above terms. Such interest on receivables ought not to have been treated as an international transaction covered under Explanation(c) to Section 92B of the Act, inserted in the Act vide Finance Act, 2012 w.e.f.01-04- 2001 is rejected as per the hon'ble Madras high court s decision in Redington India Pvt. Ltd., Vs. DCIT, in Tax Appeal No.590 and 591 of 2019 dt.10-12-2020 holding that a corporate guarantee indeed forms an international transaction and covered by the explanation to section 92B with retrospective effect. There is hardly any issue that the departmental authorities have applied the foregoing Explanation with retrospective effect qua issue of a corporate guarantee which also included the impugned interest on receivables. The assessee s legal argument is declined therefore.

Summary

Issues:
1. Arm's Length Price (ALP) adjustments on interest receivables in international transactions.
2. Treatment of interest on receivables as an international transaction under Explanation(c) to Section 92B of the Income Tax Act.

Analysis:
1. The appellant contested the ALP adjustments of &8377; 7,32,48,576 on interest receivables in international transactions. The Tribunal noted that the adjustments were made based on State Bank of India's prime lending rate, not the LIBOR rate applicable to international loans. It was observed that short term deposit rates cannot be equated with international transactions due to foreign currency involvement and overseas market conditions. The Tribunal directed the Transfer Pricing Officer (TPO) to delete the ALP adjustment, citing lack of comparables and market practice analysis. The appellant's contention was upheld, and the adjustment was deemed unsustainable.

2. The appellant argued that interest on receivables should not be considered an international transaction under Explanation(c) to Section 92B of the Act. Citing a Madras High Court decision, the appellant contended that the retrospective application of the Explanation was incorrect. However, the Tribunal noted that the department had applied the Explanation with retrospective effect, including interest on receivables. Consequently, the appellant's legal argument was rejected, and compliance with the law was mandated. The appeal was partly allowed based on the above findings.

This detailed analysis of the judgment highlights the issues raised by the appellant, the Tribunal's reasoning, and the final decision rendered on each issue, ensuring a comprehensive understanding of the legal aspects involved.