2022 (5) TMI 1517 - AT - Income Tax

TP Adjustment - notional interest adjustment with respect to outstanding receivables of the assessee computed at 6 months LIBOR 450 basis points i.e., effective rate of 5.875% by the revenue authorities - assessee is a subsidiary of Maxim Integrated Products Sales Ltd. Dublin, Ireland as primarily engaged in marketing of integrated circuits for semi-conductors and software in the domain to cater to the needs of its AE under which the company will provide marketing services on commission basis - HELD THAT - In our opinion, the impugned issue is covered by the decision of the coordinate Bench of the Tribunal in the case of Swiss Re Global Business Solutions India Pvt. Ltd. 2022 (1) TMI 1275 - ITAT BANGALORE and the judgment of the Hon ble High Court of Karnataka in the case of AMD (India) Pvt. Ltd 2018 (8) TMI 2094 - KARNATAKA HIGH COURT we hold that the treatment of interest on deferred receivables is rightly considered as an independent international transaction and benchmarked separately by the revenue authorities. However, we direct that the interest rate to be adopted is LIBOR rate 2%, taking a consistent view as held in the aforesaid order of the Tribunal, following the judgment of the Bombay High Court in the case of CIT v. Aurionpro Solutions Ltd 2017 (6) TMI 1087 - BOMBAY HIGH COURT Ordered accordingly. Correct calculation of number of days of delay - TPO himself in his order has mentioned that the number of days of delay in realizing the receivables shall be limited to the year under consideration i.e., upto 31.3.2017. It is noticed that from the chart showing the details of the column under the head Delay in number of days upto FY16-17 furnished by the assessee, the TPO has taken into consideration the delay upto the actual date of realization, and not upto 31.3.2017. We therefore direct the TPO to consider the period of delay upto 31.3.2017 while recomputing the interest in accordance with the directions given in this order. It is ordered accordingly.

Summary

Issues Involved:
1. Notional interest adjustment on outstanding receivables.
2. Treatment of receivables as a separate international transaction.
3. Benchmarking of interest rate for delayed receivables.
4. Arithmetical error in the computation of interest by the TPO.

Detailed Analysis:

1. Notional Interest Adjustment on Outstanding Receivables:
The primary issue in this case revolves around the notional interest adjustment concerning the outstanding receivables of the assessee. The revenue authorities computed this interest at 6 months LIBOR + 450 basis points, resulting in an effective rate of 5.875%. The assessee, a subsidiary of Maxim Integrated Products Sales Ltd., engaged in marketing integrated circuits and software, rendered several international transactions during the year under consideration, including marketing and sales support services, reimbursement of expenses paid, and recovery of expenses.

2. Treatment of Receivables as a Separate International Transaction:
The TPO treated the receivables as a separate international transaction to be benchmarked independently. The TPO relied on various judicial pronouncements to justify this treatment, arguing that aggregation of transactions is permissible only when the underlying international transactions are continuously and closely inter-linked. The TPO chose the Comparable Uncontrolled Price (CUP) method as the Most Appropriate Method (MAM) for computing the Arm's Length Price (ALP) and computed the interest based on the standard credit period of 120 days as per the intercompany agreement between the assessee and its Associated Enterprise (AE).

3. Benchmarking of Interest Rate for Delayed Receivables:
The Tribunal referenced the decision in the case of Swiss Re Global Business Solutions India Pvt. Ltd., where it was held that deferred receivables constitute an independent international transaction and must be benchmarked separately. The Tribunal agreed with this view and held that the interest rate to be adopted should be LIBOR rate + 2%, following the judgment of the Bombay High Court in CIT v. Aurionpro Solutions Ltd. The Tribunal emphasized that the transaction between the assessee and AE, involving receivables, should be evaluated using commercial principles applicable to international transactions.

4. Arithmetical Error in the Computation of Interest by the TPO:
During the hearing, the assessee pointed out an arithmetical error in the TPO's computation of interest on delayed receivables. The TPO had incorrectly calculated the number of days of delay beyond 31.3.2017. The Tribunal acknowledged this error and directed the TPO to limit the calculation of the delay period to the year under consideration, i.e., up to 31.3.2017, as initially mentioned in the TPO's order. The Tribunal instructed the TPO to recompute the interest accordingly.

Conclusion:
The Tribunal upheld the treatment of interest on deferred receivables as an independent international transaction and directed that the interest rate should be LIBOR + 2%. Additionally, the Tribunal addressed the arithmetical error in the computation of interest and directed the TPO to correct it by limiting the delay period to the year under consideration. The appeal by the assessee was partly allowed.