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2015 (7) TMI 602 - AT - Income TaxTransfer pricing adjustment - adjustment by charging notional interest for delayed recovery of export receivables and delayed recovery of expenses from AE s till the date of transfer pricing order - Held that - The addition on account of interest should be computed only till the end of financial year (i.e. till 31 march 2009 and not till the date of passing of transfer pricing order (i.e. 28 January 2013). It is trite law that income tax has to be computed with reference to previous year and as per Section 5 of the Act explains the scope of total income to be considered earned by any person during the previous year. In the present case, the TPO has made addition of notional interest till the date of passing of order (i.e. 28 January 2013) which is incorrect and against the basic principle of taxation as laid down by Income Tax Act. Hence, interest adjustment on delayed accounts receivables, if any, should be computed only upto 31 March 2009. We also found that during the year under consideration, the assessee has received advances from AE s for the purpose of export, therefore computation of interest, if any, on delayed recovery of export receivables should be after reducing the advances received from AE s for the purpose of export. From the record, we found that so called delay repatriation from foreign AE s, TPO/ AO, while working out deemed notional interest has considered interest rate of 12.25% p.a. (SBI PLR). As per our considered view the notional interest has to be worked out for so called amount receivable from AE, by applying LIBOR interest rate for the purpose of computation of transfer pricing adjustment, if any. Thus computation of interest is restored back to the file of AO for recomputing the interest on delayed payment of receivables, keeping in view our above observation. In respect of the expenditure incurred on behalf of the AEs and which was reimbursed by the AE, the AO also levied interest thereon. We found that the recovery of expenses was beyond the normal period of 60 days. Recovery of expenses beyond the normal period was in the nature of deemed loan in the hands of AEs and require transfer pricing adjustment. Accordingly, we do not find any infirmity in the transfer pricing adjustment made. However, we direct the AO to charge interest by applying LIBOR rate. - Decided partly in favour of assesse statistical purposes.
Issues Involved:
1. Adjustment for notional interest on delayed recovery of export receivables and expenses from AEs. 2. Applicability of transfer pricing regulations to transactions between Indian entities. 3. Computation of interest on delayed receivables. 4. Consideration of advances from AEs while computing interest on delayed receivables. 5. Use of appropriate interest rate for computing notional interest. 6. Levy of interest under Sections 234B and 234C. Issue-wise Detailed Analysis: 1. Adjustment for Notional Interest on Delayed Recovery of Export Receivables and Expenses from AEs: The TPO made an adjustment of Rs. 10,36,49,646/- by charging notional interest for delayed recovery of export receivables and expenses from AEs. The assessee contended that such delays do not fall within the purview of "international transaction" under section 92B of the Act and that the transfer pricing regulations do not apply. It was argued that the delay was due to the financial difficulties faced by AEs and that interest cannot be charged for such delays. The Tribunal noted that the assessee did not charge interest on similar transactions with non-AEs and directed the AO to recompute the interest, considering the advances from AEs and limiting the interest computation to the end of the financial year. 2. Applicability of Transfer Pricing Regulations to Transactions Between Indian Entities: The assessee argued that transactions between TICB and Tecnimont SpA India Project Office (TIPO), both resident entities, do not come under the purview of Indian transfer pricing regulations. The Tribunal referred to the Hyderabad Tribunal's decision in IJM (India) Infrastructure Ltd., which held that transactions between an Indian enterprise and the PE of a foreign company in India are treated as transactions between two residents, and therefore, transfer pricing provisions do not apply. 3. Computation of Interest on Delayed Receivables: The Tribunal directed the AO to recompute the interest on delayed receivables only up to the end of the financial year, as per Section 92(1) of the Act, which specifies that income from international transactions should be computed with regard to the arm's length price for the year under consideration. The Tribunal also noted that the sale price fixed by the assessee already considered the delay in recovery, and this should be taken into account while computing the interest chargeable. 4. Consideration of Advances from AEs While Computing Interest on Delayed Receivables: The Tribunal observed that the assessee received advances from AEs for export purposes and directed the AO to reduce the proportionate advance relating to the transaction under consideration while computing the interest on delayed receivables. 5. Use of Appropriate Interest Rate for Computing Notional Interest: The Tribunal held that the notional interest should be computed using the LIBOR rate instead of the SBI PLR rate of 12.25% used by the TPO. The Tribunal cited several decisions where the use of LIBOR for benchmarking loan/advance given to foreign AEs was upheld. 6. Levy of Interest Under Sections 234B and 234C: The Tribunal noted that the levy of interest under Sections 234B and 234C is consequential in nature and directed the AO to recompute the same after giving effect to the Tribunal's order. Conclusion: The appeal was allowed in part for statistical purposes. The Tribunal directed the AO to recompute the interest on delayed receivables, considering advances from AEs, limiting the computation to the end of the financial year, and using the LIBOR rate. The Tribunal also held that transactions between Indian entities do not come under the purview of transfer pricing regulations.
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