2015 (9) TMI 1681 - AT - Income Tax

TP Adjustment - interest calculated @ 18% on the delayed credit period on the import made by AEs beyond 180 days - HELD THAT - Assessee has undertaken 33 transaction of exports for the value aggregating Rs. 18.45 crores out of which in 25 transactions the payments was received well before the expiry of credit period of 180 days. For the balance 8 transactions in 6 transactions the delay was less than 30 days as given in the table incorporated above. If overall credit period of all the 33 transactions is to be analyzed then it is evident that the average credit period for all the transactions is only 139 days the working for which has been given at page 5 of the paper book. For making any adjustment in the arms length price a comparability analysis is to be carried out with the uncontrolled transactions to benchmark the price or profit in a third party situation. Here in this case neither the TPO nor the assessee has given any comparable instance as to whether in such a situation or condition an unrelated party would have charged interest. If in the majority transaction there no delay then for few transactions interest cannot be imputed unless it is benchmarked with the transactions with some unrelated parties. However no such comparable instance has been filed or sown before us. 8 transactions where there is a delay beyond the period of 180 days the interest if at all should be levied. Then same should be on the basis of LIBOR 150 points (i.e. 1.5%) - we direct the TPO/AO to apply the interest rate of LIBOR 1.5% and worked out the adjustment on account of interest for the transactions which are beyond the period of 180 days. Accordingly grounds raised by the assessee are partly allowed.

Summary

Issues:
Transfer pricing adjustment on delayed credit period for imports made by Associated Enterprises (AEs) beyond 180 days.

Analysis:
The appellant, engaged in the manufacturing of diamond studded jewelry, imported rough diamonds from its AEs and exported polished diamonds and jewelry back to them. The Transfer Pricing Officer (TPO) observed a delay in debt realization from the AEs without any interest charged, which he deemed unusual in a third-party scenario. The TPO applied an interest rate of 18% per annum, based on average bond yields, to calculate an adjustment of interest on delayed realization amounting to Rs. 6,00,102. The appellant contended that most payments were received on time and no interest was charged for occasional delays exceeding 180 days as per group policy. The CIT(A) upheld the adjustment, considering delayed payments in related party transactions as international transactions not warranting interest charges. The appellant argued against interest charges for minor delays, citing precedents for applying LIBOR-based rates. The Tribunal analyzed the transactions, noting that most payments were within 180 days and average credit period was 139 days. Without comparable instances of interest charges in unrelated party transactions, the Tribunal directed the TPO/AO to apply LIBOR + 1.5% for transactions exceeding 180 days, partially allowing the appellant's appeal.

In conclusion, the Tribunal's decision highlights the importance of comparability analysis in transfer pricing adjustments, emphasizing the need for benchmarking interest rates in related party transactions. The judgment provides clarity on interest rate application based on LIBOR for delayed transactions exceeding 180 days, ensuring a fair assessment of arm's length pricing in international business dealings.