2021 (2) TMI 411 - AT - Income Tax

TP Adjustment - adjustment made to international transactions on account of interest receivable from AE s - addition by bench marking the receivables on transactions of sales/ services of the assessee company by adopting the prime lending rate of SBI plus markup of 300 basis points - assessee s contention that assessee has margin of 23.3% on Software Development segment as compared to the margin of 11.42% of the comparable companies and the working capital adjustment margin has already been factored in the account and no separate adjudication is called for - HELD THAT - The above contention of the assessee has not been controverted by the Revenue. Further the contention of the assessee of not charging interest on overdue debts from the third parties and not paying any interest to the creditors has also not been controverted by the Revenue. We further find that identical issue arose in assessee s own case in A.Y. 2010-11 2019 (7) TMI 85 - ITAT DELHI wherein the Co-ordinate Bench of Tribunal has decided the issue in favour of the assessee . No material to show that the decision of the Co-ordinate bench of the Tribunal in assessee s own case for AY 2010-11 has been set aside/ stayed or over ruled by the higher judicial forum. We further find that the case law relied upon by the Learned DR is distinguishable on facts and are not applicable to the present facts of the case of the assessee. - Decided in favour of assessee.

Summary

Issues:
1. Adjustment of interest receivable on transactions of sales/services by adopting prime lending rate.
2. Application of LIBOR rate for interest computation.

Issue 1: Adjustment of interest receivable on transactions of sales/services by adopting prime lending rate

The appeal was against the order of the Commissioner of Income Tax regarding the Assessment Year 2011-12. The case involved international transactions with associated enterprises, leading to a proposed adjustment of ?39,55,013 on the arm's length price. The Assessing Officer (AO) passed a draft assessment order assessing the total income at ?32,06,55,710. The CIT(A) granted partial relief, but the assessee appealed, challenging the addition of ?17,97,481 for bench marking receivables on sales/services transactions by adopting the prime lending rate of SBI plus a markup of 300 basis points. The TPO had proposed this adjustment based on the SBI Base Rate of 11.69%. The CIT(A) directed the AO to consider the average PLR of SBI at 8.69% plus 150 basis points for interest on receivables, emphasizing the need to compute interest by adjusting for interest payable to AEs. The assessee contended that the margin already factored in the delay in receivables and cited precedents to support the argument. The ITAT Delhi, after considering the contentions and precedents, held in favor of the assessee, emphasizing that no further adjustment on outstanding receivables was warranted based on the working capital-adjusted margin and the absence of interest charges on overdue debts or to creditors. The ITAT relied on the decision in the assessee's own case for AY 2010-11, where a similar issue was decided in favor of the assessee, and no distinguishing features were pointed out by the Revenue.

Issue 2: Application of LIBOR rate for interest computation

The assessee also contended that the CIT(A) erred in not applying the LIBOR rate for interest computation, citing a judgment of the jurisdictional High Court. However, this issue was not extensively discussed in the judgment, and the primary focus was on the adjustment of interest receivable based on the prime lending rate. The ITAT's decision in favor of the assessee on the primary issue made the discussion on the LIBOR rate application less significant in the overall outcome of the case.

In conclusion, the ITAT Delhi allowed the appeal of the assessee, setting aside the AO's action regarding the adjustment of interest receivable on transactions of sales/services by adopting the prime lending rate. The ITAT's decision was based on the working capital-adjusted margin, absence of interest charges on overdue debts, and precedents supporting the assessee's position. The issue of applying the LIBOR rate for interest computation, although raised by the assessee, did not significantly impact the final decision.