The Hyderabad Bench of Income Tax Appellate Tribunal (ITAT) has held that the SBI short-term deposit rates would be applicable to determine the interest on trade receivables under Section 92B(1) of the Income Tax Act.
The assessee HM Clause India Private Limited was a company engaged in the business of purchases and sale of vegetable seeds and research and development and settings. Assessee filed its return of income for A.Y. 2018-19 on 29.11.2018 declaring total income under normal provisions and at income under Section 115JB of the Income Tax Act, 1961. The case was selected for scrutiny.
During the year under consideration, the assessee company had entered into international transactions within the meaning of Section 92CA of the Income Tax Act. Thereafter, the case was referred to the Transfer Pricing Officer (TPO) in order to get the arm’s length price of those transactions determined by the TPO. The TPO vide order under Section 92CA(3) of the Income Tax Act proposed an amount in respect of interest on delayed receivables as the transfer pricing adjustment. Accordingly, made adjustment under Section 92CA of the Income Tax Act to be added to the income of the assessee.
Consequently, a draft assessment order was passed with total income to be assessed under Section 143(3) read with Section 144C(1) of the Income Tax Act.
The solitary issue raised was with respect to trade receivables outstanding by the assessee from its Associated Enterprise (AE). During the year under consideration, as per the Transfer Pricing Officer’s order, trade receivables by the assessee from it’s A.E and Assessing Officer, after affording an opportunity of hearing, had determined the interest on trade receivables under Section 92B(1) of the Income Tax Act by applying the SBI short-term deposit rates.
P. Chidambaram, on behalf of the assessee submitted that the assessee had a trade outstanding payable to its AE which was higher than the trade outstanding receivables from its AE. Therefore, no adjustment could be made in the hands of the assessee towards the trade receivables as there was a negative balance
He also submitted that the lower authorities had applied SBI short term deposit rate for short term fixed deposits’ interest to bench mark and compensate the interest to the assessee for the outstanding due. It was submitted that despite the SBI term deposit rate, the Libor + 200 basic points were required to be applied
K. Haritha, on behalf of the revenue submitted that as per the definition of Section 92B of the Income Tax Act, outstanding trade receivables were considered to be a separate international transaction which was required to be benchmarked. The outstanding payables by the assessee to its A.E. were not the subject matter of the present dispute. It was not relevant for the determination of Arm’s Length Price (ALP) and therefore, the contention raised by the assessee had no merit.
The two-member Bench of Rama Kanta Panda, (Vice President) and Laliet Kumar, (Judicial Member) observed that whenever there were outstanding trade receivables, the same were required to be benchmarked by applying the SBI Short term deposit interest rate for the subject year to determine the ALP interest rate.
The Bench dismissed the appeal filed by the assessee holding that in the absence of the availability of due amount, the assessee was required to approach the banks in India for the purposes of raising the funds necessary for carrying out its day-to-day activities in the form of short-term bank loan. If the assessee had received the amount within the stipulated time, then the said outstanding amount would have been available for operations of the assessee,the assessee would be required to pay interest to the said bank. On the contrary, if the assessee had a surplus amount, then the assessee may deposit the said amount with the bank and would earn interest as applicable to the short-term deposit.
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