2021 (3) TMI 585 - AT - Income Tax

Transfer Pricing adjustments - arms length price - treatment of the outstanding receivables from AEs as a separate international transaction - It is contended that delay in realization of receivables from AE beyond credit period is not a separate international transaction - HELD THAT - we are of the considered view that there is no merit in the arguments taken by the assessee that delay in realization of AE receivables is not an international transaction. We further note that after the amendment to clause (c) of explanation to Section 92B of the Act, realization of receivables after abnormal delay beyond credit period would tantamount to indirect funding to AE and merely because the assessee is almost a debt free company or the margin of the assessee is higher than the comparables, no such funds of the assessee should be allowed to be utilized for indefinite period. We further note 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. 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. Appropriate rate for benchmarking international transactions for delay in realization of AE receivables - HELD THAT - If we go by the standards, the LIBOR rate is most appropriate rate of interest in the international market and which is accepted by most of the countries. Therefore, 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. Therefore, we are of the considered view the LIBOR 300 basis point rate is most appropriate rate and hence, direct the AO/TPO to adopt LIBOR 300 basis point for imputing interest on overdue receivable. Addition towards delayed deposit of employees contribution to PF ESI - HELD THAT - The issue of belated payment of employees contribution to PF ESI is allowable expenditure u/s.43B of the Act or not is no longer res integra. The Hon ble Supreme Court in the case of M/s.Vinay Cement Ltd. 2007 (3) TMI 346 - SC ORDER and also in the case of CIT V. Alom Extrusions Ltd. 2009 (11) TMI 27 - SUPREME COURT has considered identical issue and held that employees contribution to PF ESI is deductible, even if such payment is remitted beyond due date specified under respective Acts, but made on or before due date of furnishing return of income filed u/s.139(1) of the Act.

Summary

Issues Involved:
1. Interest imputation on AE receivables.
2. Disallowance of employees' contribution to PF & ESI.

Issue-wise Detailed Analysis:

1. Interest Imputation on AE Receivables:
The primary issue was whether the outstanding receivables from Associated Enterprises (AEs) should be considered a separate international transaction and if so, how the interest on these receivables should be imputed. The assessee argued that the outstanding receivables were not a separate international transaction under section 92B of the Act, especially when the principal transaction was at arm's length. They contended that if interest imputation was required, an international LIBOR-based rate should be applied rather than the domestic prime lending rate.

The tribunal noted the retrospective amendment to section 92B by the Finance Act, 2012, which included receivables as international transactions. It held that delay in realization of AE receivables beyond the credit period constitutes an international transaction. The tribunal emphasized that any understanding between the assessee and its AE that is detrimental to revenue cannot be accepted. It concluded that the LIBOR + 300 basis points rate is the appropriate benchmark for imputing interest on such receivables, directing the AO/TPO to apply this rate and allow a standard credit period if no specific period was agreed upon between the parties.

2. Disallowance of Employees' Contribution to PF & ESI:
The second issue concerned the disallowance of employees' contributions to Provident Fund (PF) and Employees' State Insurance (ESI) due to delayed remittance beyond the due date specified under respective Acts. The assessee argued that such contributions should be allowed as deductions if paid before the due date for filing the return of income under section 139(1) of the Act.

The tribunal referred to the Supreme Court's decisions in CIT Vs. Vinay Cements Ltd. and CIT Vs. Alom Extrusions Ltd., which held that employees' contributions to PF & ESI are deductible if remitted before the due date for filing the return of income. The tribunal also cited the Madras High Court's decision in CIT Vs. M/s. Industrial Security & Intelligence India Pvt. Ltd., which supported the same view. Consequently, the tribunal directed the AO to delete the disallowance of employees' contributions to PF & ESI.

Conclusion:
The appeal was partly allowed. The tribunal upheld the imputation of interest on AE receivables but directed the AO/TPO to apply the LIBOR + 300 basis points rate. It also directed the deletion of the disallowance of employees' contributions to PF & ESI, following the Supreme Court and High Court precedents.