2018 (4) TMI 926 - AT - Income Tax

Transfer Pricing Adjustment - re-characterizing of the outstanding receivables from overseas AEs as loan facility - imputing interest at the rate equal to annual average yield of 5 year BB rated bond by considering all the receivables to be outstanding for over 365 days - account of receivables due to the assessee from its assessee for the services rendered - Held that - It is seen that in the case of unrelated party transaction, there are huge delays and in some cases it has gone up more than 1700 days. The period of outstanding receivables is ranging between 38 days to 1718 days and in most of the invoices, average delay is more that 300 days. If there are similar nature of transaction with comparable uncontrolled transactions and also with related parties, then there is an internal CUP to bench mark the controlled transaction with comparable uncontrolled transaction. Under CUP price charged or paid for the services provided in a comparable uncontrolled transaction is taken into consideration and it is the adjusted price paid for availing services which constitutes the benchmark for comparison with the price paid for availing of any services in an international transaction. If there are similar transactions of services with related parties as well as unrelated parties and the price charged or paid are comparable, then it is taken to be at arm s length price. Thus, if under both the scenarios, no interest has been charged on similar nature of receivables, then it has to be reckoned that the transaction with the related party meets the arm s length requirement vis- -vis, the transactions with the unrelated third parties. Accordingly, we hold that no interest can be imputed on receivables with the AE and accordingly, the addition made by the TPO is directed to be deleted. - Decided in favour of assessee.

Summary

Issues:
Transfer Pricing Adjustment on outstanding receivables re-characterized as loan facility.

Analysis:
The appeal was filed against the order passed by the Assessing Officer pursuant to directions from the Dispute Resolution Panel regarding Transfer Pricing Adjustment of ?79,89,255 on outstanding receivables from overseas AEs re-characterized as a loan facility. The appellant, a subsidiary of a Mauritius-based company, provides risk consulting and advisory services in various industries. The Transfer Pricing Officer (TPO) re-characterized the delayed payments as unsecured loans and proposed an interest rate based on a 'BB' rated bond for five years. The appellant argued that no interest was charged from non-AEs for similar delayed payments, providing a comparison table to support the claim. The TPO and the Dispute Resolution Panel upheld the adjustment.

The appellant contended that since no interest was charged from non-AEs for similar transactions, no adjustment should be made. Detailed invoice-wise information was provided to show significant delays in payments from non-AEs as well. The appellant suggested applying the LIBOR rate instead of the 'BB' bond yield rate. The Senior DR argued that interest should be charged based on the average delay in payments from both AEs and non-AEs, suggesting the application of the LIBOR rate.

The Tribunal analyzed the transactions with both related and unrelated parties, noting significant delays in payments from non-AEs without any interest charged. The principle of Comparable Uncontrolled Price (CUP) was applied to determine the arm's length price. Since no interest was charged on delayed payments from non-AEs and the transactions with AEs were comparable, the Tribunal held that no interest could be imputed on receivables from AEs. Consequently, the adjustment made by the TPO was directed to be deleted.

In conclusion, the Tribunal ruled in favor of the appellant, highlighting the importance of internal CUP and comparable transactions in determining the arm's length price, ultimately leading to the deletion of the Transfer Pricing Adjustment on outstanding receivables re-characterized as a loan facility.