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:
Decision by ITAT
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  51 taxmann.com 41 (Mumbai – Trib.), Dy. CIT v. Tech Mahindra Ltd.  46 SOT 141 (URO), Eyonik Degussa India (P.) Ltd. v. Asstt. CIT  28 taxmann.com 285, Lintas India (P.) Ltd. v. Asstt. CIT  27 taxmann.com 300 (Mumbai – Trib.), Nimbus Communications Ltd. v. Asstt. CIT  43 SOT 695, V.I.P. Industries Ltd. v. Additional CIT  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  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 Livingstones v. Dy. CIT  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.
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