2019 (1) TMI 1205 - AT - Income Tax

TPA - international transaction - interest on receivables - Held that - By the Finance Act of 2012 an Explanatory note has been brought to book into the statute book w.e.f. 1.4.2002. The relevant transactions before us relate to the financial year 2011-12. Therefore, the assessee cannot be expected to consider such a transaction as an international transaction during the relevant previous year. This Tribunal, in a number of cases has held that such interest on receivables is not an international transaction prior to the amendment. Thus we hold that the interest on receivables is not an international transaction for the relevant A.Y. - Decided in favour of assessee.

Summary

Issues involved:
1. Transfer pricing matters - Imputing interest on outstanding receivables.
2. Corporate tax issues - Computation of interest u/s 244A and levy of penalties u/s 271AA and 271BA.

Detailed Analysis:
1. Transfer Pricing Matters:
The assessee appealed against the assessment order, challenging the Transfer Pricing Officer's (TPO) adjustment of interest on outstanding receivables. The TPO imputed interest at 5% on receivables related to services provided to Associated Enterprises (AEs). The assessee argued that the receivables were closely linked to the principal transaction and should be aggregated for determining the Arm's Length Price (ALP) under the Transactional Net Margin Method (TNMM). The assessee contended that the interest should be benchmarked with international market rates for foreign currency loans. The dispute centered on whether interest on outstanding receivables constituted an international transaction. The Tribunal analyzed various case laws and held that interest on receivables was not an international transaction for the relevant assessment year, as the statutory amendment clarifying this was effective from a later financial year. Consequently, the Tribunal allowed the appeal on this ground.

2. Corporate Tax Issues:
The assessment also involved the computation of interest under section 244A and the levy of penalties under sections 271AA and 271BA. The AO proposed charging interest on outstanding receivables at 14.75%, which was later reduced to 5% by the Dispute Resolution Panel (DRP). The assessee argued that the interest on receivables should not be taxed based on legal precedents and the retrospective nature of the statutory amendment. The Revenue contended that the explanatory note treating interest on receivables as an international transaction was effective retrospectively. The Tribunal, considering the timing of the statutory amendment and legal interpretations, concluded that interest on receivables was not an international transaction for the relevant assessment year. As a result, the Tribunal partly allowed the appeal, ruling in favor of the assessee on this issue.

In conclusion, the ITAT Hyderabad ruled in favor of the assessee regarding the imputation of interest on outstanding receivables, holding that it was not an international transaction for the relevant assessment year. The Tribunal's decision provided detailed legal analysis and precedent-based reasoning to support its judgment, ultimately resulting in the partial allowance of the assessee's appeal.