2022 (4) TMI 1058 - AT - Income Tax

TP Adjustment - Interest on extended credit to AE - assessee granted extended credit periods to non-AEs without charging any interest on delayed payments - Legality of not charging interest while extending credit to its USA-Associated Enterprise for payment of sale consideration by the AE - HELD THAT - TPO has equated normal trade credit with the loan. The loan invariably and compulsorily will carry interest amount while there was no compulsion in charging trade credit. As per the submissions of the assessee and the observation of the CIT(A), since the AE was having net loss, there was no business consideration to shift profit as there cannot be any tax liability on account of such loss. Before the CIT(A) the assessee demonstrated that it has extended credit profit to non-AE without charging any interest for delayed payment proving that it has been even handed and consistent in this area. There was no adjustment on this issue in the TPO s order for A.Y. 2002-03 2003-04 implying thereby that transaction was held to be at ALT. There is no change whatsoever in the nature of transactions or time thereof. CIT(A) has rightly pointed out that Transfer Pricing regime normally judges the transfer pricing of the tax payer based on the results rather than on the intent to shift income from one side to another. In the normal ALP an element of implied interest would always have been there so as to compensate for the opportunity cost and notional financial cost associated with account receivable/ adjustments so called for. Thus, USD LIBOR rate at that point of time was 1.22% with markup of 80 basis point would be appropriate for determining ALP interest for trade credit which was be charged to the AE. Thus, the CIT(A) granted the partial relief thereby making adjustment at the rate of ₹ 37,50,475/-. But this observation appears to be vague as no period was quantified or verified by the Assessing Officer as well as by the CIT(A) while giving this partial relief. This needs to be verified. Therefore, we are remanding back this issue to the file of the Assessing Officer/Transfer Pricing Officer to verify the period as well as the interest rate which is available at that particular point of time in the open market and as per the practice on. Thus, ground no.1 2 of the assessee s appeal is partly allowed for statistical purpose. Claim of deduction under Section 10A - AO Reduced the consideration in respect of export by expenditure incurred in foreign currency on telecommunications charges - HELD THAT - The assessee pointed out that the assessee claimed the said amount in the return of income by adjusting both export turnover and total turnover. The assessee relied upon the decision of the Special Bench in the case of ITO vs. Sak Soft Ltd. 2009 (3) TMI 243 - ITAT MADRAS-D . The ld. A.R. relied upon the decision of the Tribunal in assessee s own case for A.Y. 2002-03 - The Hon ble Bombay High Court has also granted relief in A.Y. 2004-05 - Thus, in the light of the decision of the Hon ble Bombay High Court in assessee s own case for A.Y. 2004-05, we follow the same as the factual aspects are identical in this A.Y. i.e. 2005-06 and, therefore, the ground raised in Revenue s appeal is dismissed.

Summary

Issues Involved:
1. Addition of interest towards extended credit to Associated Enterprises (AE).
2. Computation of deduction under Section 10A of the Income Tax Act.
3. Adjustment to Arm’s Length Price (ALP) by the Transfer Pricing Officer (TPO).

Detailed Analysis:

1. Addition of Interest Towards Extended Credit to AE:
The primary issue revolves around the addition of ?37,50,475/- for the Assessment Year (AY) 2004-05 and ?89,04,156/- for AY 2005-06 towards interest on extended credit to the assessee’s USA-Associated Enterprise (AE). The assessee argued that the CIT(A) erred in confirming this partial addition, asserting that the AE was incurring losses and would have struggled to raise funds at competitive rates. The assessee extended credit to support AE’s liquidity without charging interest, which was consistent with their treatment of non-AE transactions. The CIT(A) partially accepted this argument, reducing the addition but not eliminating it. The Tribunal noted that the TPO equated trade credit with a loan, which inherently carries interest, unlike trade credit. The Tribunal remanded the issue back to the Assessing Officer (AO)/TPO for verification of the interest rate and period, emphasizing the need for consistency and fairness in the treatment of AE and non-AE transactions.

2. Computation of Deduction Under Section 10A:
For AY 2005-06, the assessee contested the adjustment to export turnover and total turnover concerning expenditure incurred in foreign currency on telecommunications and technical services outside India. The AO included these expenditures in the total turnover but excluded them from the export turnover, reducing the deduction under Section 10A. The assessee referenced the Special Bench decision in ITO vs. Sak Soft Ltd. and the Tribunal's decision in the assessee’s own case for AY 2002-03, which supported their stance. The Tribunal followed the Bombay High Court’s decision in the assessee’s favor for AY 2004-05, ruling that the AO’s exclusion was incorrect and dismissing the Revenue’s appeal on this ground.

3. Adjustment to Arm’s Length Price (ALP) by the TPO:
The TPO had made adjustments to the ALP for international transactions with AE, which the assessee challenged. For AY 2004-05, the TPO’s adjustment was ?1,87,52,378/-, which the CIT(A) reduced to ?37,50,475/-. For AY 2005-06, the TPO’s adjustment was ?1,35,68,237/-, reduced by the CIT(A) to ?89,04,156/-. The Tribunal noted that the TPO’s comparison of trade credit with a loan was flawed. The Tribunal remanded the issue back to the AO/TPO for proper adjudication, emphasizing the need for a fair and consistent approach in determining the ALP for trade credit.

Conclusion:
- The appeals filed by the assessee for AY 2004-05 and 2005-06 were partly allowed for statistical purposes, with the issues remanded back to the AO/TPO for verification and proper adjudication.
- The Revenue’s appeal for AY 2005-06 was dismissed, upholding the assessee’s method of computing the deduction under Section 10A.

Order:
The consolidated order was pronounced in the open court on March 23, 2022, with the appeals by the assessee partly allowed for statistical purposes and the Revenue’s appeal dismissed.