2023 (10) TMI 457 - AT - Income Tax

TP Adjustment - Interest on trade receivables - trade receivables outstanding by the assessee from it s Associated Enterprise - as contented that assessee has a trade outstanding payable to its AE which is higher than the trade outstanding receivables from it s AE and lower authorities have applied SBI short term deposit rate for short term fixed deposits interest to bench mark and compensate the interest to the assessee for the outstanding due - whether the Libor 200 basic points are required to be applied? - HELD THAT - The assessee has supplied the services to it s AE and the AE is due to make the payment for the services / goods received by it to the assessee. Assuming, the assessee gives the same kind of services to the third party, then the assessee would charge interest from the third party. Moreover, if the advances were given by a person, then the prices of the product would be less as the assessee would have availability of funds at disposal for the purpose of carrying out its activities. Because of withholding of funds in case of outstanding receivables, there would be deficit of funds and would be required to borrow the funds to carry out day-to-day activities, albeit those funds would be available to the assessee at the prevailing rate of interest in India. Hence, the SBI short term rate would be the appropriate rate for the purpose of determining the ALP on the outstanding amount. Now, in light of the above, we do not find any reason to take a contrary view as we have taken in the case of Apachi Footware India Private Limited ( 2023 (4) TMI 521 - ITAT HYDERABAD ). As submitted that the AO has not been given any grace period for making the payment - We notice that in AO s order, it is mentioned that the assessee has failed to provide any service agreement / invoice to the Assessing Officer. Therefore, in the absence of any such contemporaneous evidence showing the grace period, the Assessing Officer has granted 30 days. In our view, the normal trend to be followed is 30 days. However, in the case of Apache Apache Footware India Private Limited (supra), based on the agreement, we have accepted it to 60 days. In the present case, there was no agreement provided by the assessee to show that there was an agreement between the assessee and its AE wherein the time for making the payment was provided as 30 days. In our view, the Assessing Officer is right for granting 30 days as a grace period and beyond that the Assessing Officer / lower authorities have held that the assessee is liable to pay the interest as outstanding amount for the said period. In the light of the above, we do not find any reasons to interfere with the order of TPO. Thus, the appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Legality of the assessment order dated 29 July 2022.
2. Transfer pricing adjustment regarding interest on delayed receivables.
3. Classification of outstanding receivables as international transactions under Section 92B of the Act.
4. Comparison of outstanding payables and receivables with Associated Enterprises (AE).
5. Treatment of receivables as integral to business operations.
6. Benchmarking of outstanding receivables under Transactional Net Margin Method (TNMM).
7. Consistency in charging interest on delayed receivables.
8. Consistent practice of not charging interest on belated trade receipts.
9. Appropriateness of TNMM and internal CUP method.
10. Denial of working capital adjustment benefit.
11. Notional interest on receivables as hypothetical income.
12. Appropriateness of CUP method for benchmarking interest on delayed receivables.
13. Incorrect application of CUP method.
14. Ad-hoc basis computation of interest on receivables using SBI short-term deposit rates.
15. Adoption of LIBOR-based rate for determining arm's length price of interest.
16. Consideration of industry average credit period.

Summary:

Legality of the Assessment Order:
The assessee challenged the assessment order dated 29 July 2022, passed under Section 143(3) read with Section 144C(3) and Section 144B of the Income Tax Act, as "bad in law."

Transfer Pricing Adjustment:
The Transfer Pricing Officer (TPO) proposed an adjustment of Rs. 38,74,591 for interest on delayed receivables. The assessee argued that the TPO erred in making this adjustment without appreciating the facts of the case.

Classification of Receivables as International Transactions:
The TPO treated the outstanding receivables as international transactions under Section 92B of the Act. The assessee contended that this classification was erroneous.

Comparison with Associated Enterprises:
The assessee argued that the balance of outstanding payables with AE was more compared to the outstanding receivables, and thus no adjustment should be made.

Integral Part of Business Operations:
The assessee contended that receivables were a result of business transactions and could not be segregated from the integral part of its operations.

Benchmarking Under TNMM:
The assessee argued that having accepted the primary transactions to be at arm's length under TNMM, the TPO should not have separately benchmarked outstanding receivables.

Consistency in Charging Interest:
The assessee highlighted that neither the AE charges interest on delayed payables nor does the assessee charge interest on delayed receivables.

Consistent Practice:
The assessee maintained a consistent practice of not charging interest on belated trade receipts from both AE and Non-AE transactions.

Appropriateness of TNMM and CUP Method:
The assessee argued that TNMM was the most appropriate method and, without prejudice, internal CUP method was the second most appropriate method.

Denial of Working Capital Adjustment:
The assessee contended that the TPO erred in not granting the benefit of working capital adjustment as prescribed under Rule 1013(1)(e) of the Income-tax Rules, 1962.

Notional Interest as Hypothetical Income:
The assessee argued that charging notional interest on receivables was equivalent to hypothetical income and not real income.

Appropriateness of CUP Method:
The assessee contended that the TPO erred in considering CUP as the Most Appropriate Method for benchmarking interest on delayed receivables.

Incorrect Application of CUP Method:
The assessee argued that the TPO incorrectly applied the CUP method.

Ad-hoc Basis Computation:
The assessee contended that the TPO made the adjustment on an ad-hoc basis by applying short-term deposit rates of State Bank of India.

Adoption of LIBOR-based Rate:
The assessee argued that the TPO erred in not adopting the LIBOR-based rate while determining the arm's length price of interest on delayed receivables.

Industry Average Credit Period:
The assessee contended that the TPO erred in considering a very low credit period of just 30 days instead of the industry average credit period.

Tribunal's Findings:
The Tribunal upheld the TPO's decision to treat outstanding receivables as international transactions and benchmark them using SBI short-term deposit rates. It rejected the assessee's arguments regarding the comparison of payables and receivables, consistent practice of not charging interest, and the adoption of LIBOR-based rates. The Tribunal also dismissed the appeal, affirming the TPO's application of the SBI short-term deposit rate as appropriate for determining the arm's length price of interest on delayed receivables.