TP – Notional Interest on Excess Credit Period/ Delayed Payment

Transfer Pricing – Notional Interest on Excess Credit Period/ Delayed Payment as 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