Transfer Pricing Adjustment- Interest free Credit Period as an International Transaction
The treatment of extended credit period to Associated Enterprises(AEs) as an international transaction and making adjustment of notional interest on the same has always been bone of contention between the assessee and department.
In a recent case of Tally Solutions Pvt. Ltd. Vs. ACIT (I.T.(T.P) A. No.1364/Bang/2011) as reported in [TS-620-ITAT-2016(Bang.)], interest free credit period allowed to AE by assessee was held by ITAT to be an international transaction but not a separate transaction from sale of services. Brief facts and analysis of the case are as under:
Facts
- The assessee engaged in the business of development and export of computer software specialized in financial management and accounting software.
- Assessee rendered software research and development services and other related services to its AE, Tally Solutions FZ LLC, Dubai, UAE and applied TNMM method.
- The TPO accepted the price charged by the assessee for rendering software development services to its AE at arm’s length.
- However, in respect of significant debts outstanding from its AE, the TPO treated the extended credit facility similar to interest free working capital loan to its AE and determined arm’s length interest @14% per annum applying CUP method
- DRP confirmed the order of AO/TPO.
- Aggrieved assessee preferred appeal before ITAT.
Decision by ITAT
- ITAT rejected assessee’s contention that transaction of extending credit period to the AE could not be regarded as an international transaction as it did not gave rise to income to the assessee which is must for applying provisions of chapter X of Income Tax Act.
- ITAT observed that the transaction was otherwise capable of generating income but because related parties decided not to charge or pay to each other, the basic character and nature of transaction would not change.
- ITAT held that provision of chapter X were applicable not only in in the case where the assessee was charging or receiving the price under the international transaction but also where assessee was having international transaction with the AE by not charging any price or receiving any price
- ITAT relying on ITAT rulings in Goldstar Jewellery Ltd. (ITA No.6570/Mum/2012 Dt.14.1.2015), Avnet India P. Ltd. (IT(TP)A No.757/Bang/2011 Dt.18.11.2015), ACIT Vs. Information System Resource Centre P. Ltd. (ITA No.7757/Mum/2012 Dt.29.5.2015) further held that extending credit period for realization of sales to the AE was a closely linked transaction with the transaction of providing services to the AE and therefore could not be treated as an individual and separate transaction of advance or loan.
- Accordingly, ITAT directed AO/TPO to redo the exercise of determination of ALP by clubbing and aggregating the transaction of providing credit period in realization of sales proceeds with the transaction of providing services to the AE.
Analysis:
ITAT judgement treated extended credit period as an international transaction and then directed to treat it as a factor in determining ALP of sales of services. In one place, ITAT held that allowing credit period to AE is an international transaction then gives direction to TPO/AO not to treat it as individual/separate transaction but club it with sale of services for determination of ALP. The judgement needs reconsideration and review.
Further, the plea raised by assessee that ‘no income means no international transaction’ was mistaken the first place and deserve an adverse reaction from the tribunal. Also, the assessee did not raise any of the pleas as mentioned below in successful cases in respect of credit period.
There are a plethora of judgements clearly stating that non-charging of interest in respect of extended credit period cannot be held as an international transaction provided assessee giving similar treatment to both AEs and non AEs.
Some of the judgements are :
Dinurje Jewellery (P.) Ltd. v. ITO [2014] 51 taxmann.com 41 (Mumbai - Trib.), Dy. CIT v. Tech Mahindra Ltd. [2011] 46 SOT 141 (URO), Eyonik Degussa India (P.) Ltd. v. Asstt. CIT [2012] 28 taxmann.com 285, Lintas India (P.) Ltd. v. Asstt. CIT [2012] 27 taxmann.com 300 (Mumbai - Trib.), Nimbus Communications Ltd. v. Asstt. CIT [2011] 43 SOT 695, V.I.P. Industries Ltd. v. Additional CIT [2015] 54 taxmann.com 51 (Mum. - Trib.) and CIT Vs. Indo American Jewellery Ltd. (2014) 44 taxmann.com 310 (Bom).
Also, in a very recent decision of Delhi HC, Pr. CIT vs. Bechtel India Pvt. Ltd. [TS-508-HC-2016(Del)-TP] it was held that interest adjustment on receivables not permitted where debtor is a debt-free company.
Further, in Patni Computer Systems Ltd. v. Dy. CIT [2012] 19 taxmann.com 180 it was held that Extension of credit to AEs beyond stipulated credit period cannot be construed as an ‘international transaction’.
Also, where delay in payment is normal is such business of assessee, no notional interest is to be levied on delayed payment by AEs as was held in the Living stones v. Dy. CIT [2014] 41 taxmann.com 499 (Mumbai - Trib.).
Overall the judgement would not impact the TP adjustment considering the huge margin available with the assessee in TNMM as the AO/TPO had computed assessee’s margin at 81.89% whereas average margin of comparables selected by TPO was 25.14%. Hence the TPO would not be able to make any meaningful adjustment in ALP of sale of services even after clubbing of notional interest.
The author can also be reached at ca.guptarohit@gmail.com
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