2023 (4) TMI 521 - AT - Income Tax

TP Adjustment - Addition towards interest on receivables - argument of the assessee that the assessee is a debt free company and therefore, no borrowed fund was used for making supplies to it s A.E. and therefore, is not liable to be compensated for the delay in receiving the receivable is concerned - HELD THAT - There is a delay in receiving the outstanding in respect of 519 invoices as mentioned hereinabove and there is no explanation given by the assessee for such a delay in receiving the amount. The very purpose of benchmarking the transaction is to ascertain whether assessee, who is similarly situated, would render the same kind of services at the same or similar price to a third party or not. If we examine the issue in the above-said context, it would be clear that the assessee would charge bank interest or any other interest with a view to compensate itself on account of delay in making the payment. Hence, we do not find any error in the same. In the present case, though the assessee was required to maintain the T.P. Study and file the same before the TPO to show that the assessee s transactions with it s A.E. were at Arms Length however, nothing has been brought to our notice that the assessee has brought any comparable instance. In these circumstances, the TPO had applied the banking rate as applicable to short term loans - the same is required to be corrected and instead thereof, ALP is to be computed by adding notional interest @ 6% on the receivable. Accordingly, the appeal of the assessee is dismissed.

Issues Involved:
1. Addition of Rs.10,62,036/- towards interest on receivables.
2. Credit period for export realization.
3. Charging of notional interest on delayed realization of receivables.
4. Benchmarking of transactions with Associate Enterprises (AEs).
5. Adoption of SBI interest rate on short-term deposit rate.
6. Comparison with similar transactions.

Detailed Analysis:

1. Addition of Rs.10,62,036/- towards interest on receivables:
The assessee contested the addition of Rs.10,62,036/- made by the Assessing Officer (AO) towards interest on receivables, arguing that the decision was made without considering judicial precedents and the jurisdictional tribunal decision. The assessee emphasized that no excess credit period was allowed to the AE, and delays were due to technical reasons or clarifications sought by the AE.

2. Credit period for export realization:
The AO upheld an ad-hoc credit period of 60 days for export realization, despite the Reserve Bank of India allowing a period of one year. The assessee argued that the RBI norms should be considered, but the DRP rejected this plea, stating that RBI regulations do not contemplate the determination of arm's length price.

3. Charging of notional interest on delayed realization of receivables:
The assessee argued that it is a debt-free company and has not incurred interest expenses, thus there is no justification for charging notional interest. The DRP, however, held that any delay in receivables beyond the agreed credit period constitutes a separate international transaction and is liable for TP adjustment on account of interest income short charged or uncharged.

4. Benchmarking of transactions with Associate Enterprises (AEs):
The assessee contended that no separate benchmarking is required for export dues realized beyond 60 days as receivables are ingrained in the sale. The DRP rejected this, noting that the absence of a specific credit period in the intercompany agreement justified a reasonable credit period of 60 days. The TPO's approach of computing delay invoice-wise was deemed reasonable.

5. Adoption of SBI interest rate on short-term deposit rate:
The TPO proposed to charge interest for the delayed period by adopting the SBI short-term deposit rate. The assessee did not substantiate why this adoption was incorrect. The DRP upheld this approach, considering it appropriate to measure interest compensation based on Indian market conditions.

6. Comparison with similar transactions:
The AO was criticized for not comparing the transaction with similar comparable transactions. The assessee argued that sales result in profit, whereas lending money gives interest income, and thus interest income is associated only with lending or borrowing of money, not with sales. The DRP and Tribunal, however, upheld the adjustment, emphasizing the need for proper benchmarking to ensure no profit shifting to the AE.

Conclusion:
The Tribunal dismissed the appeal of the assessee, upholding the addition of Rs.10,62,036/- towards interest on receivables. The Tribunal agreed with the lower authorities that the delay in receivables constitutes an international transaction requiring benchmarking. The adoption of the SBI short-term deposit rate for calculating notional interest was deemed appropriate. The Tribunal emphasized the necessity of proper inquiry and benchmarking to ensure arm's length pricing in transactions with AEs.

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