2021 (1) TMI 86 - AT - Income Tax

TP Adjustment - upward adjustment made towards overdue receivables from Associated Enterprises - adjustments on export receivables for belated realization of export billsnotional interest on receivable from AE for belated realization of export bills - TNMM method application - HELD THAT - Receivables is included under the definition of international transactions by amending section 92B by the Finance Act, 2012 w.e.f. 01.04.2002. Therefore, we are of the considered view that there is no merit in the arguments advanced by the assessee that receivables is not international transactions. As regards benchmarking international transactions, once the assessee has adopted TNMM as most appropriate method , whether separate adjustment is required to be made in respect of receivables or not has been the subject matter of deliberations by the co-ordinate Bench of the Tribunal in assessee s own case for the assessment year 2014-15 2019 (4) TMI 1934 - ITAT CHENNAI where the Tribunal after considering relevant facts has held that once TNMM method is considered as the most appropriate method, the net margin worked out thereunder could take care of all such notional interest cost, wherever it could be imputed and there could be no arm s length price adjustment for any overdue receivables. The Bench has also observed that once there is complete uniformity in not charging any interest from any party, whether Associated Enterprises or non- Associated Enterprises, there could not be any selective imputing of notional interest on receivable from AE for belated realization of export bills. We are of the considered view that when TNMM method has been applied as most appropriate method it could take care of all notional interest costs wherever it could be applied and there could be no separate upward adjustments on export receivables for belated realization of export bills. Hence, we direct the Assessing Officer to delete upward adjustment made towards overdue receivables from Associated Enterprises. Appeal filed by the assessee is allowed.

Issues:
1. Final assessment order passed under section 143(3) r.w.s 92C(3) r.w.s 144C(13) of the Income Tax Act, 1961.
2. Determination and quantifying downward adjustment to the value of international transactions with associated enterprises.
3. Imputing interest on overdue receivables.
4. Outstanding receivables considered as an international transaction.
5. Transfer pricing adjustment based on real income.
6. Imputing interest on delayed receivables despite arms-length primary transaction.
7. Consideration of interest-free security deposit.
8. Credit period and RBI guidelines.
9. Reckoning LIBOR rate for foreign currency transactions.
10. Netting off foreign exchange gain against notional interest.
11. Adoption of prescribed methods for imputing interest.
12. Discrepancy in SBI interest rates.
13. Enhancement of adjustment without opportunity to appellant.
14. Levy of high and arbitrary interest.

Detailed Analysis:
1. The appeal challenges the final assessment order under the Income Tax Act for the assessment year 2015-16. The dispute arises from directions of the Dispute Resolution Panel (DRP) regarding downward adjustment in international transactions with associated enterprises.

2. The key issue raised is the imputation of interest on overdue receivables by the Transfer Pricing Officer (TPO) and sustained by the DRP. The appellant contests this adjustment, arguing that outstanding receivables should not be considered international transactions under capital financing as per Section 92B of the Act.

3. The TPO's adjustment of interest on delayed receivables is questioned, especially when the primary transaction was deemed arms-length. The appellant also highlights the receipt of interest-free security deposits from associated enterprises as a basis for not charging interest on belated trade receivables.

4. The appellant further challenges the basis for imputing interest, including the consideration of credit periods, RBI guidelines, and the use of LIBOR rates for foreign currency transactions. The appellant argues for netting off foreign exchange gains against notional interest and questions the TPO's failure to adopt prescribed methods for imputing interest.

5. The appellant also contests the discrepancy in SBI interest rates used for calculations and criticizes the DRP for enhancing the adjustment without providing an opportunity for the appellant to respond. Additionally, the appellant argues against the levy of high and arbitrary interest.

6. The Tribunal's decision favored the appellant, referencing a previous case where the Tribunal ruled that under the TNMM method, notional interest costs should be covered in the net margin, negating the need for separate adjustments on overdue receivables. The Tribunal directed the Assessing Officer to delete the upward adjustment on overdue receivables from associated enterprises.

7. In conclusion, the Tribunal allowed the appeal, emphasizing that the TNMM method adequately accounts for notional interest costs, leading to the deletion of the upward adjustment on overdue receivables.

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