2022 (4) TMI 716 - AT - Income Tax

TP adjustment - MAM selection - addition made towards overdue receivables from Associated Enterprises - HELD 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 Enterpriseswe direct the Assessing Officer to delete upward adjustment made towards overdue receivables from Associated Enterprises.

Issues Involved:
1. Enhancement of income by INR 79,265,132 on account of interest on receivables from Associated Enterprise (AE) without granting working capital adjustment.
2. Treating receivables from AE as a separate international transaction.
3. Re-characterization of overdue receivables as an unsecured interest-free loan.
4. Application of Comparable Uncontrolled Price (CUP) method for determining arm's length interest on overdue receivables.
5. Denial of appropriate foreign currency denominated interest rate (LIBOR).

Detailed Analysis:

Issue 1: Enhancement of Income on Account of Interest on Receivables
The assessee argued that the authorities erred in enhancing the income by INR 79,265,132 due to interest at 21% on receivables from its AE without granting a working capital adjustment. The assessee contended that the parties never agreed to interest compensation for delayed realization of receivables, as evidenced by the intercompany agreement. The authorities failed to consider the arm's length practice within the assessee group regarding overdue receivables from third parties. The Tribunal concluded that when the Transactional Net Margin Method (TNMM) is applied as the most appropriate method, it already accounts for notional interest costs. Hence, no separate upward adjustment on receivables for delayed payment is required.

Issue 2: Treating Receivables from AE as a Separate International Transaction
The authorities treated receivables due from the AE as a separate international transaction. The assessee argued that the cost considered for pricing the international transactions subsumed the credit period extended to the AE. The Tribunal referred to multiple case laws, including Firestone Diamond Pvt. Ltd. and Albany Molecular Research Hyderabad Research Center Private Limited, which held that deferred receivables cannot be construed as a separate international transaction. Therefore, the Tribunal directed the deletion of the upward adjustment made towards overdue receivables from AEs.

Issue 3: Re-characterization of Overdue Receivables as an Unsecured Interest-Free Loan
The authorities re-characterized the overdue amount on receivables from the AE as an unsecured interest-free loan. The assessee argued that the intercompany agreement did not stipulate interest compensation for delayed payments. The Tribunal, following the consistent view in similar cases, held that when TNMM is applied, it takes care of all notional interest costs, and no separate adjustment for overdue receivables is necessary. Hence, the re-characterization was deemed inappropriate.

Issue 4: Application of CUP Method for Determining Arm's Length Interest
The authorities applied the CUP method to determine the arm's length interest on overdue receivables from AEs. The assessee contended that the authorities did not place on record any comparable uncontrolled transaction and relied on the appellant's own invoice to its AE, which is a controlled arrangement. The Tribunal found that the authorities failed to appreciate that the receipts were denominated in foreign currency, necessitating the use of an appropriate foreign currency denominated interest rate. The Tribunal held that the TNMM method already accounts for notional interest costs, making separate adjustments unnecessary.

Issue 5: Denial of Appropriate Foreign Currency Denominated Interest Rate (LIBOR)
The assessee argued that the authorities failed to consider that the receipts were denominated in foreign currency and should be treated as a foreign currency loan, requiring the use of LIBOR. The Tribunal referred to the decision in M/s Progress Software Development Private Limited, which emphasized the need to ascertain LIBOR rates for the relevant period. The Tribunal concluded that when TNMM is applied, it accounts for all notional interest costs, thus no separate adjustment using LIBOR is required.

Conclusion:
The Tribunal, following consistent views from various case laws and the coordinate bench, concluded that when TNMM is applied as the most appropriate method, it accounts for all notional interest costs. Therefore, no separate upward adjustment on receivables for delayed payments is required. The appeal filed by the assessee was allowed, and the AO was directed to delete the addition made on this ground.

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