2017 (3) TMI 479 - AT - Income Tax

Transfer Pricing (T.P) adjustments - notional interest on receivables from Associated Enterprises (A.E) - TPO jurisdiction - Held that - In the present case, the assessee parked a huge amount of funds for a longer period with its AE. It was only because the pricing of international taxation has been accepted for ALP test, it is not possible to hold that the TPO should not go into this question of parking of huge funds with its AE. If the funds are repatriated to India, the assessee would have been in a position to earn better profit from appropriate investment of those repatriated funds. This potential loss is definitely a factor to be considered while evaluating the financial impact of the international taxation concluded by the assessee with its AE. Therefore, in our opinion, it is required to keep the TP adjustments towards notional interest on receivables. The purpose of TP adjustments is in the larger context of anti-evasion measures. The outstanding balance of the receivables from the AE did not generate out of domestic transactions. Those receivables did generate from international transactions carried on by the assessee with its AE outside India. Therefore, there is no basis for argument that no adjustment could be made towards notional interest or receivables from AE. The outstanding receivables from AE is financial result of international transactions concluded by the assessee and therefore, the income effect arising, if any, to that outstanding receivables is very much relevant aspect of ALP. Therefore, the TPO is having the jurisdiction to examine the issue of outstanding receivables or non-charging interest thereon. As in the present case, the credit period extend by the assessee to its AE is very longer period, sometime it is more than one year the contention of assessee that there can be no separate transfer pricing adjustments towards notional interest on outstanding receivables rejected.- Decided against assessee

Summary

Issues:
1. Transfer Pricing adjustments on notional interest on receivables from Associated Enterprises.
2. Re-characterizing outstanding receivables as a loan advanced to Associated Enterprises.
3. Levy of interest under sections 234B & 234C of the Act.

Transfer Pricing Adjustments on Notional Interest on Receivables from Associated Enterprises:
The appellant's appeal contested Transfer Pricing (T.P) adjustments concerning notional interest on receivables from Associated Enterprises (A.E). The Transfer Pricing Officer (TPO) observed that the average credit period provided by the appellant to AEs was longer compared to comparable companies, resulting in T.P adjustments. The appellant, a zero debt company, argued against the adjustments, emphasizing working capital relevance and citing precedents. The dispute resolution panel directed notional interest computation at 12.75% per annum. However, the tribunal upheld the adjustments, reasoning that the outstanding receivables were part of international transactions, impacting the arm's length price (ALP) and necessitating T.P scrutiny.

Re-characterizing Outstanding Receivables as a Loan Advanced to Associated Enterprises:
The tribunal deemed the re-characterization issue unnecessary for adjudication, given the preceding discussion on T.P adjustments. The grounds related to this issue were dismissed accordingly, as the core concern of notional interest adjustments on receivables had been addressed comprehensively.

Levy of Interest under Sections 234B & 234C of the Act:
Regarding the levy of interest under sections 234B & 234C of the Act, the tribunal affirmed that such interest was consequential and mandatory, thus upholding its applicability. The tribunal's decision on the appeal encompassed the dismissal of the Stay Petition, rendering it moot. Consequently, both the appeal and the Stay Petition were dismissed, with the order pronounced on February 9, 2017, in Chennai.

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