2017 (5) TMI 965 - AT - Income Tax

Determination of ALP of the international transaction of interest on receivables from AEs - working capital adjustment - Held that - Interest for credit period allowed as per the agreement is given in the price charged for rendering of services. Whereas the non-realisation of invoice value beyond the stipulated period is a separate international transaction whose ALP is required to be determined. Granting of working capital adjustment is confined to the international transaction of rendering of services, whose ALP is separately determinable. On the other hand, the international transaction of interest receivable from its AEs for late realization of invoices beyond such stipulated period is a separate international transaction. Allowing working capital adjustment in the international transaction of rendering of services can have no impact on the determination of ALP of the international transaction of interest on receivables from AEs beyond the stipulated period allowed as per agreement. Also if an invoice is raised during the year and the proceeds are realized within the year, but, beyond the stipulated period of agreement, then, the same will not come within the working capital adjustment because working capital adjustment is made with reference to the opening and closing balances as on 1st April and 31st March. Therefore, respectfully following the decision of Ameriprise India Pvt. Ltd. (2015 (8) TMI 652 - ITAT DELHI) and, again, in the case of Mckinsey Knwledge Centre Pvt. Ltd. 2017 (5) TMI 830 - ITAT DELHI we reject the assessee s contention that the interest on delayed payment of receivables get subsumed in the working capital adjustment allowed to the assessee. Also argument that since it was debt free fund company, which finding is not disputed, therefore, no interest could be attributable on the late realization of receivables is to be rejected at the threshold because, as noted earlier, interest on delayed realization of receivables is a separate international transaction and, therefore, requires separate benchmarking. It has nothing to do with the operations of the assessee company being with the debt free funds only. Selecting of ad hoc interest rate of LIBOR 400 bps while computing the addition - Held that - We find that the ld. DRP has directed to compute the adjustment using the rates of six months LIBOR 400 bps on receivables which are to be paid to the assessee in US in accordance with the decision in Cotton Naturals (2015 (3) TMI 1031 - DELHI HIGH COURT) wherein it has been held that it is the current year in which the loan is to be repaid which determines the rate of interest and, hence, the prime lending rate should not be considered for determining the interest rate. We, therefore, do not find any reason to take a different view on this issue.

Summary

Issues Involved:
1. Re-characterization of receivables as unsecured loans.
2. Subsuming of receivables in working capital adjustment.
3. Selection of interest rate for computing addition.
4. Judicial discipline and precedence.

Issue-wise Detailed Analysis:

1. Re-characterization of Receivables as Unsecured Loans:
The Tribunal examined the TPO's approach of treating delayed receivables as unsecured loans advanced to the AEs and charging interest accordingly. The TPO justified this by referring to the amendment to Section 92B of the Income-tax Act, 1961, which includes "any other debt arising during the course of business" as an international transaction. The TPO concluded that the delayed payments were effectively interest-free loans to the AE, necessitating an adjustment based on the prevailing SBI base rate plus 300 basis points. The Tribunal upheld this re-characterization, noting that the amendment to Section 92B explicitly covers such debts, and any delay in realization of receivables constitutes a separate international transaction requiring benchmarking.

2. Subsuming of Receivables in Working Capital Adjustment:
The assessee contended that since a working capital adjustment had been made, no separate adjustment for receivables was warranted. The Tribunal rejected this argument, emphasizing that working capital adjustment pertains to the international transaction of rendering services, while the delayed realization of receivables is a separate transaction. The Tribunal cited the decision in Ameriprise India Pvt. Ltd., which clarified that working capital adjustment does not account for the day-wise analysis required for interest on delayed receivables. The Tribunal reiterated that working capital adjustment considers only opening and closing balances, whereas interest on receivables is calculated based on the period of delay.

3. Selection of Interest Rate for Computing Addition:
The assessee argued against the use of an ad hoc interest rate of LIBOR plus 400 basis points. The Tribunal noted that the DRP had directed the computation of adjustment using the rates of six months LIBOR plus 400 basis points in accordance with the decision in Cotton Naturals, which mandates using the rate of interest applicable in the current year for repayment. The Tribunal found no reason to deviate from this approach, affirming the DRP's decision.

4. Judicial Discipline and Precedence:
The assessee cited previous Tribunal orders in its own case for earlier assessment years, arguing that the same principles should apply. However, the Tribunal distinguished these cases, noting that the decisions in Ameriprise India Pvt. Ltd. and Mckinsey Knowledge Centre Pvt. Ltd. had considered the retrospective amendment to Section 92B and clarified that delayed receivables constitute a separate international transaction. The Tribunal emphasized that judicial discipline requires adherence to these later decisions, which provide a comprehensive analysis of the issue in light of the legislative amendments.

Conclusion:
The Tribunal dismissed the appeal, upholding the TPO's re-characterization of receivables as unsecured loans, rejecting the argument that working capital adjustment subsumes the interest on receivables, and affirming the use of LIBOR plus 400 basis points for computing the adjustment. The Tribunal emphasized the need to follow judicial discipline and precedence set by later decisions that considered the relevant legislative amendments.