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:

1. The transaction of sale with the A.E. has been accepted by the Assessing Officer at arm’s length, therefore, no separate adjustment can be made on account of credit period provided by the assessee to the A.E. for realization of sale proceeds.
2. The credit period provided to the A.E. is not a separate international transaction but it is a closely linked transaction with the sale transaction with the A.E., therefore, this transaction as to be considered along with the international transaction of the assessee in respect of sale with the A.E.

Contentions of Appellant:

1^st Contention

• Tribunal in Gold Star Jewellery Ltd. (supra), while dealing with an identical issue, has held that the transaction of allowing credit period to   A.E.   on   realization   of   sale   proceeds   is   not   an   independent international transaction but it is a closely linked or continuous transaction along with the sale transaction to the A.E.
• Therefore, the credit period extended by the assessee to the A.E. cannot be examined independently but the same has to be considered along with the international transaction being sale to the A.E.

2^nd Contention

• The Tribunal, Delhi Bench, in Kusum Healthcare Pvt. Ltd.(supra), held that instead of making a separate adjustment on account of credit provided to the A.E. only working capital adjustment for the operating margin of the comparable company has to be worked out.
• Thus, the learned counsel submitted that only the differential impact of working capital has to be taken into account

Contention by Revenue:

1^st Contention

• Insofar as the credit period provided by the assessee in terms of the agreement between the parties and as per the terms of the sale, the same may be considered as part of the international transaction of the sale.
• However, the assessee has given extra credit period over and above 60 days which is given to the A.Es, the same has to be treated as a separate international transaction because it was not agreed between the parties at the time of sale but it is a post facto   decision   of   allowing   the   credit   to   the   A.E.

2^nd Contention

• The assessee has not produced any evidence to show that the extension of the credit period is as per the terms of the sale between the parties. It has not been provided in the invoice of sale transaction, therefore, the assessee has failed to demonstrate from the record that the extra credit period provided by the assessee to the A.E. was part of the sale transaction. The interest on the credit is compensation for delayed payment and based on the principle of time value in money.
• Therefore, the overdue of receivable has to be considered as a separate international transaction of providing the credit to the A.E.

Ruling of Honorable Mumbai Bench:

• The sale transaction of the assessee with its A.E. have been accepted by the Transfer Pricing Officer / Assessing Officer at arm’s length and no adjustment has been made in respect of the sale transaction.
• However, the Transfer Pricing Officer has made the adjustment on account of credit period provided by the assessee to the A.E. On realization of sale proceeds.
• Bench note that an identical issue has been considered by the co–ordinate bench of the Tribunal, Mumbai Benches, in GoldstarJewellery Ltd. (supra), vide Para–8.
• Thus, it is clear that the Tribunal has taken a view that the transaction of allowing the credit period to the A.E. on realization of sale proceeds has to be considered along with the main international transaction in respect of sale to A.E.
• Bench set aside this issue to the record of the Assessing Officer / Transfer Pricing Officer and direct to re–do the exercise of determination of arm’s length price in the light of the above decisions of the Tribunal.
• The grounds raised in this cross objection are allowed for statistical purposes.
• In the result, appeal of the Revenue is dismissed and cross objection of the assessee is allowed for statistical purposes.

Key Take Away

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.

(Author can be reached at  CASurajRA@icai.org)

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