2018 (11) TMI 1946 - AT - Income Tax

TP Adjustment - treating trade receivables as outstanding from the Associated Enterprises ( AE ) as an international transaction and recharacterizing the same as loan - AO / DRP / TPO arbitrarily adopting 13.46% as the rate of interest - HELD THAT - It has to be worked out as to how much amount was received beyond the agreed credit period by the assessee from its AE and the same should be considered as a separate international transactions and appropriate interest on that account should be brought to tax in the present case as TP adjustment. The working given by the ld. AR of assessee in this regard is placed on record but this working is only in respect of debtors as on 31.03.2011 but if the debts are already liquidated during the year but the receipt was after expiry of agreed credit period then the amount of such realization during the present year beyond the agreed credit period should also be considered for this purpose. Hence on this issue we restore the matter back to the file of AO/TPO for fresh decision by examining the agreement between the assessee and its AE in respect of agreed credit period because as per the agreement dated 01.10.2010 only those receivables are covered which are arising after this date but in respect of those receivables which has arisen before 01.10.2010 if any there must be some other agreement which may contain different credit period terms and therefore such agreement should also be examined and those receivables are also be examined which are already liquidated in the present year because even if payments were already received from the AE in the present year itself it has to be seen as to whether such payment received from the AE in the present year are received within agreed credit period or beyond it and the total delayed payment received or not received up to 31.03.2011 should be worked out for the purpose of this TP adjustment. Rate of interest to be adopted for working out interest on such delayed payment from AE - We find that in Assessment Year 2014-15 as per its order dated 30.10.2017 the TPO himself has adopted the interest rate using LIBOR- 6 months 400 basis points and the same was worked out at 4.3836% for Financial Year 2013-14. In our considered opinion the same basis of LIBOR 6 months 400 basis points as applicable for Financial Year 2010-11 should be considered in the present case also. We hold accordingly. The AO/TPO is directed to work out the TP adjustment on this account at the rate of 6 months LIBOR 400 basis points for the relevant Financial Year i.e. Financial Year 2010-11 on the total amount received or receivable by the assessee from its AE beyond the agreed credit period considering the actual delay in number of days. These two grounds are decided accordingly. These two grounds are partly allowed for statistical purposes.

Summary

Issues involved:
1. Recharacterization of trade receivables as a loan.
2. Adoption of an excessive and unreasonable interest rate.

Issue 1: Recharacterization of trade receivables as a loan

The Tribunal recalled the earlier order to decide on grounds 5 and 6 of the appeal, focusing on the treatment of trade receivables as an international transaction. The appellant argued that the prices charged were based on the credit period allowed to the associated enterprise (AE). Reference was made to a Tribunal order stating that no separate adjustment for interest on receivables was warranted. However, the bench sought clarification on the actual credit period allowed. The revenue contended that all invoices for the year should be considered, referencing another Tribunal order supporting TP adjustment for high outstanding receivables. The Tribunal noted that the issue was whether the prices charged were proper considering the extra credit period allowed to the AE beyond the agreed period.

Issue 2: Adoption of an excessive interest rate

The Tribunal examined the applicability of a Tribunal order cited by the revenue, which upheld a TP adjustment due to high outstanding receivables from the AE. It was decided that the amount received beyond the agreed credit period should be treated as a separate international transaction, with appropriate interest brought to tax as a TP adjustment. The matter was remanded back to the AO/TPO for fresh decision based on the agreement terms regarding the credit period and realization beyond the agreed period. The Tribunal directed the adoption of a specific interest rate methodology, similar to that applied in a previous year, for working out the TP adjustment on delayed payments from the AE.

The Tribunal partially allowed the two grounds for statistical purposes, directing the AO/TPO to calculate the TP adjustment using a specific interest rate methodology. The appeal filed by the assessee was partly allowed based on the detailed analysis and considerations of the recharacterization of trade receivables and the adoption of an interest rate for TP adjustments.