2024 (3) TMI 657 - AT - Income Tax

TP Adjustment - notional interest on outstanding receivables due from Associated Enterprises (AES) - assessee not charging any interest from its AEs - Treatment of outstanding receivables as a separate international transaction - Common policy of not charging interest on delayed payments from AEs and third parties - HELD THAT - As per explanation (i)(c) of Section 92B of the Income Tax Act as amended by Finance Act, 2012 w.r.e.f. 01.04.2002, the interest receivables is an international transaction. Section 92B(i)(c) reads capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business. In CIT Vs. EKL Appliances ( 2012 (4) TMI 346 - DELHI HIGH COURT it was held that the delay in receipt of the amounts has to be investigated on case to case basis and examination has to be conducted by the TPO/AO by analyzing the statistics over a period of time and to find out a pattern intended to benefit its AE In the case of Apache Footwear India Pvt. Ltd 2023 (4) TMI 521 - ITAT HYDERABAD Tribunal concluded that interest on outstanding receivables from the AE is required to be separately benchmarked and interest should be charged on the delayed period @ 6% on the receivables. We also make it clear that interest cannot be charged on each and every receivable and has to be examined on case to case basis and the TPO has to enquire and analyze the statistics over a period of time to discern a pattern to come to a conclusion that the arrangement reflects an international transaction. The AO has to examine the transactions of similar in nature with non-AEs to come to a conclusion to charge interest and also to determine the basis of interest to be charged. We have also examined the order in the case of Orange Business Services India Solutions (P.) Ltd. 2022 (12) TMI 1070 - ITAT DELHI and also the order of the Tribunal for the earlier years. Each year has to be looked into separately based on the facts of the each case. In this case, the inter company services agreement provides for charging of interest on delay of receivables after 60 days. Hence, we direct that the adjustment on account of receivables be computed after following the directions of the ld. DRP. The AO has considered each and every transaction and arrived at right conclusion to determine the adjustment. While computing so, it is directed that the AO shall set off the receivables cleared by the AEs in less than 30 days or received in advance as ordered by the ld. DRP. These directions are applicable to the year in question as the chargeability on interest receivables varies from year to year. The LIBOR is an internationally recognized rate which is appropriate to benchmark and to determine ALP on receivables. The mark-up decided by the ld. DRP is held to be reasonable. In the result, the appeal of the assessee on this ground is partly allowed.

Issues Involved:
1. Validity of assessment proceedings under section 143(3) read with section 144B.
2. Transfer Pricing adjustment due to notional interest on outstanding receivables.
3. Treatment of receivables as a separate international transaction.
4. Re-characterization of trade receivables as unsecured loans.
5. Common policy of not charging interest on delayed payments.
6. Set-off for receivables cleared in less than 30 days.
7. Determination of arm's length price using the Comparable Uncontrolled Price (CUP) method.
8. Ad-hoc determination of 60 days as the arm's length credit period.

Summary:

1. Validity of Assessment Proceedings:
The assessee challenged the validity of the assessment proceedings under section 143(3) read with section 144B, arguing that statutory procedures and principles of natural justice were violated. The Tribunal did not find merit in this argument and upheld the assessment proceedings.

2. Transfer Pricing Adjustment:
The assessee contested the Transfer Pricing adjustment of Rs. 5,36,99,972 for notional interest on outstanding receivables from Associated Enterprises (AEs). The Tribunal noted that the AO treated interest on outstanding receivables as a separate international transaction and upheld the adjustment, following the directions of the Dispute Resolution Panel (DRP).

3. Treatment of Receivables as a Separate International Transaction:
The assessee argued that outstanding receivables should not be treated as a separate international transaction. The Tribunal referred to the Delhi High Court's decision in Pr. CIT vs. Kusum Health Care Pvt. Ltd., which held that receivables factored into working capital adjustments do not require separate adjustment. However, the Tribunal distinguished this case and upheld the treatment of receivables as a separate transaction.

4. Re-characterization of Trade Receivables:
The assessee objected to the re-characterization of trade receivables as unsecured loans. The Tribunal upheld the DRP's decision, noting that the re-characterization was justified based on the facts and circumstances of the case.

5. Common Policy of Not Charging Interest:
The assessee maintained a policy of not charging interest on delayed payments from both AEs and third parties. The Tribunal acknowledged this policy but emphasized that the arm's length principle must be applied, and interest on receivables must be benchmarked separately.

6. Set-off for Receivables Cleared in Less than 30 Days:
The Tribunal directed that while computing the adjustment, the AO should set off receivables cleared by AEs in less than 30 days or received in advance, as ordered by the DRP.

7. Determination of Arm's Length Price:
The assessee argued against the use of the Comparable Uncontrolled Price (CUP) method for determining the arm's length price. The Tribunal upheld the use of the CUP method, noting that the LIBOR rate plus a reasonable mark-up was appropriate for benchmarking interest on receivables.

8. Ad-hoc Determination of 60 Days Credit Period:
The Tribunal found the DRP's determination of a 60-day credit period to be reasonable, despite the assessee's argument that it was ad-hoc and lacked comparability analysis. The Tribunal directed the AO to follow the DRP's directions while computing the adjustment.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to compute the adjustment on receivables after considering the set-off for receivables cleared in less than 30 days or received in advance, and upheld the use of LIBOR plus a reasonable mark-up for determining the arm's length price on receivables. The appeal was partly allowed.

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