In a recent ruling, the Hyderabad bench of the Income Tax Appellate Tribunal (ITAT) held that it is unreasonable to calculate interest on trade receivables solely for determining arm’s length price (ALP).
The assessee Microchip Technology has approached the ITAT challenging the order dated 29/07/2022 passed by the Deputy Commissioner of Income Tax, for the assessment year 2018-19. The main issue in this case is regarding the arm’s length price (ALP) adjustment with regard to interest on the receivables.
The counsel on behalf of the petitioner contended that charging interest only in respect of trade receivables for the purpose of ALP is incorrect as the assessee has both trade receivables as well as payables. The counsel submitted that there is no disagreement regarding these dates or the assessee’s notification of the merging of MIPL and MTIPL to the authorities.
It was contended by the assessee that outstanding receivables with its Associated Enterprise are part of regular business operations and shouldn’t be treated as a separate international transaction. The assessee requested a set-off for trade payables and questioned the interest rate applied.
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The ITAT bench observed that it would be unreasonable to calculate interest only on trade receivables for the purpose of determining the ALP of the transaction in a scenario where the assessee has both trade receivables and trade payables.
In the interest of justice, the ITAT bench directed the Assessing Officer to consider both trade payables and trade receivables for the purpose of notional interest to be charged for determining the ALP value of the transaction.
The ITAT bench comprising of Manjunatha G. And K. Narasimha Chary allowed the appeal in part and the order was pronounced in the open court on 11-09-2024.
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