2022 (6) TMI 1361 - AT - Income Tax

TP Adjustment - calculation of interest on delayed receivables - separate international transaction - TPO has held that the outstanding receivables from the AE is in the nature of loans and calculated the interest on receivables from AE by following CUP method - TPO added 100 basis points towards currency risk and arrived at the applicable rate of LIBOR 400 points which worked to 4.836% - Whether interest on receivables is separate international transaction and requires benchmarking separately? - credit period considered by the DRP at 30 days - HELD THAT - As relying on case of Applied Materials India Pvt. Ltd. v. ITO 2022 (6) TMI 1357 - ITAT BANGALORE interest on receivable is a separate international transaction which has been rightly considered by the TPO/DRP. Determination of ALP in respect of interest on receivables - We notice that the coordinate Bench of the Tribunal in the case of Barracuda Networks India Pvt. Ltd. 2022 (5) TMI 322 - ITAT BANGALORE the issue with regard to determination of ALP in respect of the international transaction of giving extended credit period for receivables should be directed to be examined afresh by the AO/TPO on the guidelines laid down in the decision referred to in the earlier paragraph after affording Assessee opportunity of being heard. As held in the aforesaid decision the prime lending rate should not be considered and this reasoning will apply to adopting short term deposit interest rate offered by State Bank of India (SBI) also. The rate of interest would be on the basis of the currency in which the loan is to be repaid. Thus we are of the view that the issue has to be restored back to the AO/TPO for determination of ALP afresh with appropriate benchmarking. Assessee has entered into a service agreement with its AE with regard to providing ITeS on 1.10.2009 and later entered into amendment agreement on 26.12.2003 whereby clause 2.3 of the original agreement was amended to increase the credit period to 90 days. This fact has not been taken into consideration by the DRP - Thus direct the TPO to consider the credit period of 90 days while determining the ALP afresh after providing reasonable opportunity of being heard to the assessee. The assessee is directed to provide the relevant details for fresh benchmarking of the ALP with regard to interest on receivables. With these observations we set aside the order of the DRP on this issue and remit it back to the AO/TPO for fresh decision. Appeal by the assessee is partly allowed.

Summary

Issues Involved:
1. Calculation of interest on delayed receivables.
2. Whether interest on receivables is a separate international transaction requiring benchmarking.
3. Correctness of the credit period considered by the DRP.

Issue-wise Detailed Analysis:

1. Calculation of Interest on Delayed Receivables:
The primary issue raised by the assessee pertains to the calculation of interest on delayed receivables. The assessee, engaged in providing IT-enabled services to its Associate Enterprises (AEs), adopted the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) with the Operating Profit to Operating Cost ratio as the Profit Level Indicator (PLI). During the Transfer Pricing (TP) proceedings, the Transfer Pricing Officer (TPO) rejected the assessee's comparables and made a TP adjustment of Rs.17,28,28,717, also calculating interest on outstanding receivables at Rs.7,62,860. The Dispute Resolution Panel (DRP) later upheld the adjustment but reduced the credit period from 90 days to 30 days, enhancing the interest to Rs.1,00,78,319.

2. Whether Interest on Receivables is a Separate International Transaction Requiring Benchmarking:
The Tribunal considered whether interest on receivables constitutes a separate international transaction. The TPO treated the outstanding receivables as loans and calculated interest using the Comparable Uncontrolled Price (CUP) method, referencing the RBI Master Circular on External Commercial Borrowing (ECB). The Tribunal referred to the decision in the case of Applied Materials India Pvt. Ltd. and Swiss Re Global Business Solutions India Pvt. Ltd., which held that deferred receivables are an independent international transaction that must be benchmarked separately. The Tribunal affirmed that interest on receivables is rightly considered a separate international transaction by the TPO and DRP.

3. Correctness of the Credit Period Considered by the DRP:
The Tribunal addressed the correctness of the 30-day credit period considered by the DRP. It was noted that the assessee had an original agreement with its AE providing a 90-day credit period, which was not considered by the DRP. The Tribunal cited the case of Barracuda Networks India Pvt. Ltd., emphasizing the need for proper benchmarking and consideration of the actual credit period agreed upon between the assessee and its AE. The Tribunal directed the TPO to reconsider the 90-day credit period while determining the Arm's Length Price (ALP) afresh, after providing the assessee a reasonable opportunity to present relevant details.

Conclusion:
The Tribunal set aside the DRP's order on the issue of interest on receivables and remitted the matter back to the AO/TPO for a fresh decision, considering the 90-day credit period and appropriate benchmarking. The appeal by the assessee was partly allowed. The judgment underscores the importance of accurate benchmarking and consideration of contractual terms in determining the ALP for international transactions involving interest on receivables.