In a recent ruling, the Bengaluru bench of the Income Tax Appellate Tribunal ( ITAT ) directed the Transfer Pricing Officer ( TPO ) to apply the LIBOR rate for calculating interest on foreign currency receivables.
In this case, the assessee has been engaged in providing IT-enabled services regarding travel requests, travel bookings, and expense claims to its associated enterprises ( AEs ).
The assessee filed its Income Tax Returns ( ITR ), declaring a total income of Rs. 36,12,59,340.
Scrutiny proceedings were initiated, and one of the reasons for scrutiny was the examination of the TP aspect of international transactions based on TP risk parameters.
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The TPO identified a delay in receivables from AEs beyond the agreed period, treated it as a separate international transaction, and proposed an adjustment of Rs. 1,77,77,133 using SBI PLR at 13.27%. A total TP adjustment of ₹12,93,75,803 was included in the draft order under Section 144C(1) of the Income Tax Act, 1961 dated 26-09-2023, assessing the income at Rs. 49,06,81,713.
The assessee objected before the DRP, which reduced the adjustment for business support services to NIL but upheld the Rs. 1,77,77,133 interest adjustment.
One of the main issues in this case was whether the TPO was correct in computing the interest on trade receivables by applying the SBI PLR of 13.27%.
The TPO passed the assessment order under Section 143(3) of the Income Tax Act, 1961, determining the total income of the assessee at Rs. 37,90,36,473 against returned income of Rs. 36,12,59,340, in which only adjustment is on account of interest on delayed receivables.
The counsel on behalf of the assessee contended that the TPO recharacterized the outstanding receivable as of 31-03-2020 as a loan and applied an interest rate of 13.27% ( SBI PLR ) without providing a basis for determining the arm’s length interest.
By referring to paper book no. 2, invoice copies, and judicial precedents, the assessee’s counsel contended that applying the SBI PLR is unjust since the invoices are in foreign currency, making the SBI PLR inapplicable.
The bench observed that in the present case, the invoices had been raised in foreign currency, the interest rate for markup that should be used is the LIBOR rate for the financial year 2019-20.
The bench observed that it did not find any invoice raised by the assessee on its AEs in Indian currency.
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The ITAT further noted that the 13.27% interest rate applied by the TPO and upheld by the DRP lacks merit. Since the invoices are in foreign currency, the interest should be based on the LIBOR rate plus an appropriate markup. The bench directed the TPO to use the LIBOR rate to compute interest.
The bench directed the assessee to show the TPO what markup should be charged on the LIBOR rate for benchmarking the above transaction with various risk factors involved.
The bench, comprising Keshav Dubey ( Judicial Member ) and Prashant Maharishi ( Vice President ) allowed the appeal filed for statistical purposes.
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