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2025 (4) TMI 388 - AT - Income TaxTP adjustment - notional interest on outstanding receivables - TPO has made adjustment by imputing the notional interest on the outstanding receivables from AEs by considering the SBI short term deposits as Arms Length Price - whether for benchmarking the outstanding receivables from AEs the comparable interest rate should be PLR rate/SBI short term rate or LIBOR rate/LIBOR mark up? - HELD THAT - This issue was considered in case of Shiva Industries Holdings Ltd 2011 (5) TMI 451 - ITAT CHENNAI held LIBOR rate which has to be considered while determining the arm s length interest rate in respect of the transaction between the assessee and the Associated Enterprises. As it is noticed that the average of the LIBOR rate for 1-4-2005 to 31-3-2006 is 4.42 per cent and the assessee has charged interest at 6 per cent which is higher than the LIBOR rate we are of the view that no addition on this count is liable to be made in the hands of the assessee. Thus a transaction of loan to the AEs in foreign currency is considered as international transaction between the assessee and its AEs then the transaction would have to be looked upon by applying the commercial principles in regard to the international transactions. Therefore the domestic prime lending rate or domestic deposit rate would have no applicability on international transaction but the international rate being London Interbank Offered Rate (LIBOR) or similar rate i.e. Euro Interbank Offered Rate (EURIBOR) would govern the international transactions of lending by the assessee to the AEs. This issue was again considered in the case of CIT vs. Tata Autocomp Systems Ltd 2015 (4) TMI 681 - BOMBAY HIGH COURT as upheld the decision of the Tribunal directing the Assessing Officer to benchmark the interest at the prevailing EURIBOR rate instead of rupee loan rate to be computed at Arms Length on the loan advanced to the AE.
ISSUES PRESENTED and CONSIDERED
The primary issues considered in this appeal were:
ISSUE-WISE DETAILED ANALYSIS 1. Imputation of Notional Interest on Outstanding Receivables The Tribunal considered whether the imputation of notional interest on outstanding receivables was justified under arm's length standards. The relevant legal framework involves the determination of arm's length price (ALP) for international transactions under the Income Tax Act, 1961. The Tribunal noted that the Dispute Resolution Panel (DRP) upheld the Transfer Pricing Officer's (TPO) decision to use the SBI short-term deposit rate as the ALP. However, the Tribunal referred to its previous decisions and other judicial precedents, emphasizing that the interest rate should be determined based on the currency in which the transaction is conducted, typically using the LIBOR rate for foreign currency transactions. 2. Classification of Receivables as International Transactions The Tribunal examined whether outstanding receivables should be classified as international transactions under section 92B. The Tribunal reiterated that the characterization of receivables as loans with notional interest imputed was inappropriate. The Tribunal emphasized that outstanding receivables should not be treated as separate international transactions but rather as consequential to the principal transaction. 3. Benchmarking Interest Rate for Receivables The Tribunal analyzed whether the SBI short-term deposit rate was an appropriate benchmark for interest on foreign currency denominated receivables. The Tribunal highlighted that the domestic interest rates, like the SBI rate, are not applicable for international transactions. Instead, the LIBOR or a similar international rate should be used, as these transactions involve foreign currency. The Tribunal cited several precedents, including decisions from the Delhi High Court and Bombay High Court, supporting the use of LIBOR for benchmarking. 4. Consideration of Previous Tribunal Decisions The Tribunal addressed the issue of whether the DRP erred by not following the Tribunal's decisions in the assessee's own case for previous years. The Tribunal noted that the doctrine of res judicata does not apply to tax matters, as each year's assessment is independent. However, it criticized the DRP's failure to consider the Tribunal's past rulings as judicial indiscipline. 5. Computation of Interest under Section 234C The Tribunal considered the objection regarding the incorrect computation of interest under section 234C. It noted that the levy of interest under this section is mandatory and consequential, directing the Assessing Officer to recompute the interest after giving effect to the Tribunal's order. SIGNIFICANT HOLDINGS The Tribunal's significant holdings include:
The appeal was allowed for statistical purposes, with the Tribunal providing clear guidance on the appropriate benchmarking for outstanding receivables and emphasizing the need for judicial consistency in transfer pricing matters.
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