2016 (11) TMI 962 - AT - Income Tax

Addition of notional interest on the outstanding debtor balances with associated enterprises - Held that - At the time of hearing, it is pointed out that if the notional interest calculated @ LIBOR 200 basis points is reduced from the margin earned by the assessee, the entity level margin will reduce from 21.29% to 21.17% and if the notional interest calculated @ 6.19%, as taken by the Assessing Officer, is reduced from the margin of assessee, the entity level margin would reduce from 21.29% to 19.65%. It is pointed out that in both the situations, the reduced margin of assessee is much higher than the margin of the comparable concerns accepted by the TPO, i.e., 8% and, therefore, the transactions with the associated enterprises can be accepted to be at an arm s length and no separate adjustment is required to be made. The aforesaid factual matrix is similar to that considered by the Tribunal in Assessment Year 2009-10 (supra) and, therefore, following the precedent, in the instant year also, it has to be held that the addition of ₹ 12,83,550/- made on account of notional interest chargeable on the outstanding debtor (i.e. associated enterprises) balances is not tenable and is directed to be deleted. - Decided in favour of assessee

Summary

Issues:
Appeal against order of CIT(A) regarding addition of notional interest on outstanding debtor balances treated as international transaction under section 92B of the Income Tax Act, 1961 for Assessment Year 2010-11.

Analysis:
The appellant raised multiple grounds of appeal challenging the addition of notional interest on outstanding debtor balances with associated enterprises. The primary contention was that the outstanding debtors balance should not be considered an international transaction under section 92B of the Act. The appellant argued that since they do not charge interest on overdue payments from third parties, there was no requirement to charge the same from associated enterprises. Additionally, the appellant claimed that even if the outstanding receivables constituted an international transaction, after adjusting notional interest to the ratio of Operating Profit to Operating Expenses, no further addition was warranted.

The Tribunal noted that similar additions were made in previous assessment years but were deleted based on the appellant's alternate plea. The Tribunal referred to a previous decision where the appellant's margin, after reducing notional interest, compared favorably with the average margin of comparables. The Tribunal acknowledged the appellant's working showing that after adjusting notional interest from the margin, the resultant margin was higher than that of comparable concerns. The Tribunal held that no further adjustment was necessary in such circumstances.

In the current assessment year, the appellant continued to provide a credit period of 45 days to associated enterprises. The Assessing Officer made an adjustment on account of notional interest, which was challenged by the appellant. The appellant demonstrated that even after reducing notional interest from the margin, the resulting margin was significantly higher than that of comparable concerns. Citing similarities with the previous year's case, the Tribunal concluded that the addition of notional interest on outstanding debtor balances was not justified and directed its deletion.

Ultimately, the Tribunal allowed the appeal of the assessee, emphasizing that the addition of notional interest on outstanding debtor balances was not tenable based on the presented facts and calculations. The Tribunal's decision was based on the appellant's successful demonstration that the adjusted margin remained higher than that of comparable concerns, indicating arm's length transactions with associated enterprises.