Allowing credit period to the AE has to be considered along with main international transaction of sale of goods

Suraj R. Agrawal

Brief of the Case-

The transaction of allowing credit period to the AE on realization of sale proceeds is not an independent transaction and has to be considered along with the main international transaction of sale of goods.

Facts of the case:

1. The assessee is engaged in providing the software development and allied services to its group companies.
2. During the course of proceedings before the Transfer Pricing Officer, it was observed that the assessee provided a credit period of 60 days to all its A.Es.
3. While examining the details in this regard, Transfer Pricing Officer observed that the assessee has provided additional credit period beyond 60 days mutually agreed for sale transaction without charging any interest on the same.
4. The assessee was asked as to why the interest be not charged in computation of arm’s length price in respect of such transaction.
5. The assessee filed its submissions and justified that no interest adjustment was required considering the facts of the case and even any adjustment has to be made the same should be through working capital adjustment by adjusting the profits margin of the comparables.
6. The Transfer Pricing Officer turned down the submission of the assessee and made an adjustment of Rs. 10,87,343, on account of the arm’s length interest on the credit period provided by the assessee to its A.E. in realization of sale proceeds.
7. The Transfer Pricing Officer applied Primary Lending Rate (PLR) of State Bank of India as arm’s length interest.
8. The assessee challenged the action of the Transfer Pricing Officer before the learned CIT (A).
9. The learned CIT(A) though confirmed the transaction of extending the credit period subject to transfer pricing provisions, however, instead of PLR as an arm’s length interest, it was directed that LIBOR based interest rate should be taken as arm’s length interest rate for the purpose of computing the adjustment.
10. Thus, the Revenue as well as the assessee are aggrieved by the impugned order of the learned CIT(A), whereby the LIBOR based interest is applied for the purpose of adjustment instead of PLR whereas the assessee is aggrieved against the finding that the credit period extended to the A.E. Is a separate international transaction subject to arm’s length price as per the transfer pricing provisions?

Issue put before Honorable Mumbai Bench: