2016 (11) TMI 975 - AT - Income Tax

Addition on account of notional interest chargeable on the outstanding debtors (associated enterprises) balances - Held that - Without going into the controversy as to whether the overdue receivables from associated enterprises constitute an international transaction within the meaning of Sec. 92B of the Act or not, the assessee deserves to succeed on its alternate plea. The aforesaid discussion clearly shows that after factoring in the notional interest calculated with respect to the overdue receivables from associated enterprises, the reduced margin of assessee is more than the average margin of the comparables selected thereby showing that no further adjustment is required to be made to the stated transactions. It is also quite clear that allowing of extended credit period to the associated enterprises is otherwise closely linked to the determination of sale price, which in-turn is the basis to arrive at the margins of the assessee. Thus, on the aforesaid limited aspect, we hold that the addition of ₹ 15,82,891/- on account of notional interest chargeable on the outstanding debtors (associated enterprises) balances is not tenable and is directed to be deleted

Issues:
Dispute over addition of notional interest on outstanding debit balances with associated enterprises treated as international transaction under Sec. 92B of the Income Tax Act, 1961.

Detailed Analysis:

1. The dispute in this case revolves around an addition of ?15,82,891 made by the Assessing Officer concerning notional interest on outstanding debit balances with associated enterprises, treated as an international transaction under Sec. 92B of the Act. The assessee challenged this addition, arguing that the outstanding debtor balances should not be considered as an international transaction, and therefore, no adjustment for notional interest is warranted.

2. The assessee, a software development services company, had a significant portion of its revenue coming from associated enterprises. The assessee benchmarked its transactions using the Transactional Net Margin Method (TNMM) and claimed that the margins were favorable compared to comparable entities. However, the Assessing Officer proposed the addition of notional interest on continuing debit balances of associated enterprises, citing a lack of interest charged on these balances.

3. The CIT(A) disagreed with the assessee's arguments but reduced the addition made by the Assessing Officer. The CIT(A) directed the adjustment to be calculated using LIBOR + 200 basis points instead of the 7% rate used by the Assessing Officer. The Revenue challenged this decision, advocating for the 7% rate.

4. The substantive issue in the assessee's appeal was whether the outstanding debit balances with associated enterprises constitute an international transaction under Sec. 92B. The assessee contended that since it did not charge interest on overdue payments from non-associated enterprises, no adjustment for notional interest on outstanding receivables from associated enterprises should be made.

5. The assessee also argued that even if the outstanding receivables were considered an international transaction, after factoring in the notional interest from the margin, the resultant margin still compared favorably with the average margin of comparables, indicating that no further adjustment was necessary under Sec. 92C(3) of the Act.

6. The Tribunal considered the alternate plea of the assessee and concluded that after adjusting the notional interest from the margin, the assessee's margin remained higher than that of comparable entities. Therefore, the addition of ?15,82,891 on account of notional interest on outstanding debtors was deemed not tenable and was directed to be deleted. Consequently, the appeal of the assessee was partly allowed, while the appeal of the Revenue was dismissed.

This detailed analysis outlines the key arguments, decisions, and reasoning presented in the judgment regarding the dispute over the addition of notional interest on outstanding debit balances with associated enterprises treated as an international transaction under the Income Tax Act.

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