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2025 (3) TMI 1158 - AT - Income TaxLevy of interest on the outstanding receivables from its AE treated by the TPO as international transactions - HELD THAT - In case it is proved that the assessee has transferred the benefit to its AE then certainly this transaction will fall in the International transaction. No such findings were brought on record by the tax authorities. Assessee was properly compensated by its AE this is also fact on record that the DRP has deleted the adjustment proposed by the TPO on the provision of services to its AE. It clearly shows that the assessee is being compensated properly. Now the issue before us is whether the assessee incurs financial cost in India and allows extended period of credit to its AE so that the AE enjoys the benefit out of funds borrowed in India. The revenue must bring on record how the benefit is exported without claiming any compensation for the same. In the given case the company is debt free and able to survive based on the compensation from its AE. We noticed that the assessee has actually incurred finance cost and majority of the finance cost consist of penal interest paid to revenue u/s 234B/C of the Act. Technically there is no finance cost of employment for any debt or borrowings. If that is the case the passing of benefit to its AE is ruled out. We cannot apply the provisions of the Act blindly without show casing how it is falling under the short term loan or financial transaction. Even though Ld DRP tried to distinguish the Bechtel India case however unless it is brought on record that this particular transaction falls within the framework of financial transaction you cannot invoke the provisions mechanically. The term of settlement is subjective and depends upon the mutual agreement and industry practice. We noticed that the average credit period of the assessee is 92 days against the average credit period in the case of comparable companies determined at 105 days. Since the assessee is debt free company and has recovered the remittances within the terms agreed between them and there is no red flag of excessive delay in remittance which gives the impression that the AE is enjoying the credit facility beyond reasonable period. Therefore revenue has failed to bring any material to suggest that the assessee has passed on the benefit to its AE by borrowing or extension of remittance beyond the industry average. In the regular business transactions even in the case of non AE the credit period extension within the industry average is accepted norms. In our view the findings of Bechtel India 2016 (9) TMI 196 - DELHI HIGH COURT is applicable in this particular case. Therefore we are inclined to allow the grounds raised by the assessee and direct the AO to delete the additions proposed by TPO. Appeal filed by the assessee is allowed.
ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this case revolve around the addition of INR 5,593,455 to the appellant's income concerning interest on outstanding receivables from its associated enterprise (AE). The issues include:
ISSUE-WISE DETAILED ANALYSIS 1. Interest on Receivables as an International Transaction The Income Tax Act requires international transactions to be benchmarked to ensure they are at arm's length. The court examined whether interest on receivables is a separate international transaction. The Tribunal noted that the Dispute Resolution Panel (DRP) and TPO treated the deferment of collection as a separate international transaction, relying on the precedent set by McKinsey Knowledge Centre India (P.) Ltd., which categorically found interest on delayed receivables to be a separate transaction. 2. Benchmarking of Outstanding Receivables The Tribunal analyzed whether the outstanding receivables should be benchmarked separately from the main service transactions. The DRP's decision to treat these as independent transactions was upheld, as the Tribunal found no basis for aggregation with the main service transactions. The Tribunal noted that the TPO's method of benchmarking was appropriate, rejecting the appellant's argument that the receivables were intrinsically linked to the main transactions. 3. Re-characterization as Loans The appellant argued against the re-characterization of receivables as loans. The Tribunal found that the DRP did not engage in re-characterization but treated the receivables as separate transactions requiring benchmarking. The Tribunal agreed with the DRP's view that delayed realization constitutes an international transaction on its own. 4. Debt-Free Status of the Appellant The appellant contended that as a debt-free company, it should not face notional interest adjustments. The Tribunal considered the appellant's reliance on the Bechtel India Pvt Ltd case, where the Delhi High Court ruled that a debt-free company should not be subject to such adjustments. The Tribunal found that the appellant's debt-free status and lack of financial costs supported its position, as there was no evidence of benefit transfer to the AE. 5. Credit Period and Interest Rate The Tribunal examined the appropriateness of the 60-day credit period and the interest rate of LIBOR plus 425 basis points. The appellant argued that its average credit period was 92 days, which was less than the industry average of 105 days. The Tribunal found that the appellant's credit period was within industry norms and that the revenue failed to demonstrate any benefit transfer to the AE. 6. Working Capital Adjustments The appellant argued that once working capital adjustments are made, no further adjustments on receivables are necessary. The Tribunal agreed, noting that the DRP had concurred in principle with allowing working capital adjustments. The Tribunal found that the appellant had provided sufficient data for these adjustments, and once allowed, they subsume any differences in receivables. SIGNIFICANT HOLDINGS The Tribunal's significant holdings include:
Core Principles Established The Tribunal reinforced the principle that a debt-free company should not be subject to notional interest adjustments unless there is clear evidence of benefit transfer to the AE. It also emphasized the importance of industry norms in determining credit periods and the need for revenue authorities to substantiate claims of benefit transfer.
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