2018 (7) TMI 490 - HC - Income Tax

Transfer pricing - cost of funds appraoch- No interest charged by the respondent for delayed payments universally i.e. from AEs and non AEs - Held that - In cases where any business enterprise is required to pay interest on delayed payment, it would examine the cost of interest and if the same is higher then the amount of interest payable on funds obtained locally, it would take a loan from local sources and pay the amounts payable for exports and expenses within time. Therefore, extending of credit beyond the normal period of 60 days is in substance a granting of loan to an AE so as to enjoy the funds, which the AE would othewise have to repay within the perod of 60 days. The aforesaid finding of ours also finds support from the question of law at Sr. No.2 as proposed by the Revenue. Thus, in these circumstances, in the facts of this case order of the Tribunal computing interest at LIBOR rates as the rate prevailing in country where the loan is received / consumed by the AE cannot in these facts be faulted as it is in line with the decision of this Court in Tata Autocomp Systems Ltd. (2015 (4) TMI 681 - BOMBAY HIGH COURT).

Summary

Issues:
1. Application of SBI PLR rate vs. LIBOR for charging interest on receivables.
2. Consideration of local rates vs. international lending rates for loans related to export receivables.

Analysis:
1. The appeal challenges the Tribunal's order regarding the application of interest rates on delayed recovery of export receivables and expenses. The respondent, engaged in providing EPC services to its Associated Enterprises (AEs), argued for benchmarking interest at LIBOR, while the TPO applied SBI PLR rate. The Tribunal, in its impugned order, found that no interest was charged by the respondent to AEs or non-AEs for delayed payments, and the operating margin with AEs was higher. The Tribunal determined the ALP of notional interest at LIBOR rates, citing a previous court decision. The Court upheld this finding, stating that the normal price in competitive conditions between non-AEs is the key consideration in determining ALP.

2. The second issue revolves around the consideration of local rates vs. international lending rates for loans related to export receivables. The DRP rejected the respondent's plea to benchmark the ALP at LIBOR rates, leading to a final assessment order by the Assessing Officer. The Tribunal, in its order, emphasized that extending credit beyond the normal period is akin to granting a loan to AEs. The Court agreed with the Tribunal's decision to compute interest at LIBOR rates, aligning with the principles established in a previous court ruling. The Court dismissed the appeal, stating that the proposed questions of law did not raise substantial issues.

In conclusion, the Court upheld the Tribunal's decision to compute notional interest at LIBOR rates for delayed recovery of export receivables and expenses, emphasizing the importance of competitive pricing and local vs. international lending rates in transfer pricing assessments.