2021 (1) TMI 124 - AT - Income Tax

TP Adjustment - delay in realization of receivables from AE beyond credit period - indirect funding to AE which constitutes separate international transactions - appropriate rate for benchmarking international transactions for delay in realization of AE receivables - HELD THAT - Once delay in realization of AE receivables constitute an international transaction, whether or not, assessee charges interest on receivables from AE or not, has no relevance because any understanding or arrangement between the assessee and its AE which is detrimental to Revenue and against the principles of scheme of Chapter X of the Act, cannot come to the rescue of the assessee. We further note that merely because there is no provision to chargeability of interest in the agreement between the assessee and its AE for delayed realization and merely because assessee does not pay any interest to the AE on the security deposit, the Revenue cannot be deprived on its legitimate share in accordance with the scheme of Chapter X of the Act and the purpose behind the Chapter X. Therefore, we are of the considered view that there is no error in the finding recorded by the AO as well as the TPO and the CIT(A) to come to the conclusion that delay in realization of receivables from AE beyond credit period tantamount to indirect funding to AE which constitutes separate international transactions. Impute interest on receivables - It would be most appropriate if the LIBOR rate is applied as most appropriate rate of interest for imputing interest on delay in receivables from AE. In this case, the AO has imputed notional interest by adopting PLR as the base rate whereas the ld.CIT(A) has directed the AO to adopt LIBOR rate as the base rate for imputing the interest with an appropriate spread befitting the credit standing of the AE. LIBOR 200 basis point rate is most appropriate rate and hence, direct the AO/TPO to adopt LIBOR 200 basis point for imputing interest on overdue receivable. As regards, the argument of ld.AR for assessee that the TPO has not given any credit period, we find that in any trade there is a credit period for payment to services or goods. Therefore the AO is directed to allow normal credit period allowed by the assessee, if any agreed credit period between assessee and AE. If there is no agreed credit period, then the AO is directed to allow standard credit period that the industry is allowing in this line of business. Disallowance of expenditure for earning exempt income u/s.14A - AO disallowed interest expenditure under Rule 8D2(ii) and other expenditure under Rule 8D2(iii) of the IT Rules, 1962 - HELD THAT - There is no dispute with regard to the fact that the assessee has not earned any exempt income from investments for the year under consideration. It is a well settled principle of law from various decisions of High Court and Supreme Court that when there is no exempt income for the impugned assessment year then there cannot be any disallowance of expenditure in relation to said exempt income u/s.14A. CIT(A) after considering the fact that the assessee has not earned any exempt income for the year under consideration, by following the decision of the jurisdictional High Court of Madras in the case of Redington (India) Ltd 2017 (1) TMI 318 - MADRAS HIGH COURT has deleted the addition made by the AO towards disallowance of expenditure u/s.14A of the Act. The Revenue has failed to bring on record any contrary judgment which is in favour of the Revenue to counter the findings of facts recorded by the CIT(A) in the light of binding decision of jurisdictional High Court of Madras. Therefore, we are of the considered view that there is no error in the findings recorded by the CIT(A) .

Issues Involved:

1. Imputation of notional interest on outstanding receivables from associated enterprises (AEs) as a transfer pricing (TP) adjustment.
2. Determination of whether delay in realization of receivables from AEs constitutes an international transaction.
3. Appropriate rate for benchmarking notional interest on receivables.
4. Disallowance of expenditure for earning exempt income under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Imputation of Notional Interest on Outstanding Receivables from AEs:

The assessee contended that the delay in receivables should not be treated as an international transaction and thus should not attract TP adjustments. The Transfer Pricing Officer (TPO) imputed interest on receivables using the Prime Lending Rate (PLR) as the base rate, leading to a TP adjustment of ?2,31,73,569/-. The CIT(A) upheld the TPO's decision but directed the use of LIBOR rates with an appropriate spread instead of PLR for computing notional interest.

2. Delay in Realization of Receivables as an International Transaction:

The assessee argued that the delay in receivables is not an international transaction under Section 92B of the Income Tax Act. However, the TPO and CIT(A) held that the delay constitutes an international transaction, referencing the amendment to Section 92B by the Finance Act, 2012, which includes capital financing and receivables as international transactions. The Tribunal agreed with this interpretation, stating that delay in realization of AE receivables beyond the credit period amounts to indirect funding to AE and thus constitutes a separate international transaction.

3. Appropriate Rate for Benchmarking Notional Interest on Receivables:

The Tribunal examined the appropriate rate for imputing interest on delayed receivables. The CIT(A) had directed the use of LIBOR rates with an appropriate spread, considering the AE's non-resident status. The Tribunal upheld this decision, directing the AO/TPO to adopt LIBOR + 200 basis points for imputing interest on overdue receivables. The Tribunal also instructed the AO to allow a standard credit period if no specific credit period was agreed upon between the assessee and AE.

4. Disallowance of Expenditure for Earning Exempt Income under Section 14A:

The AO had disallowed expenditure under Section 14A, applying Rule 8D of the Income Tax Rules, despite the assessee not earning any exempt income for the assessment year. The CIT(A) deleted the disallowance, relying on the jurisdictional High Court's decision in Redington (India) Ltd vs. ACIT, which held that no disallowance can be made under Section 14A in the absence of exempt income. The Tribunal upheld the CIT(A)'s decision, citing similar rulings from the Supreme Court and other High Courts.

Conclusion:

The Tribunal partly allowed the assessee's appeal by directing the use of LIBOR + 200 basis points for imputing interest on delayed receivables and allowing a standard credit period. The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s deletion of disallowance under Section 14A due to the absence of exempt income. The judgment emphasizes the importance of appropriate benchmarking in TP adjustments and adherence to judicial precedents in disallowance cases under Section 14A.

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