Income Tax, Issue Update

Interest on outstanding receivables: Transfer pricing implications

Case: Global Logic India Ltd vs Dy. CIT, Delhi ITAT

This case deals with the transfer pricing implications on interest on outstanding receivables.

The assessee herein tied up with an Associated Enterprise for executing certain international transactions. The Tribunal observed that when outstanding receivables is not a separate international transaction, the delay in realization of the sale proceeds is incidental to the transaction of sale and as such no notional interest can be levied by treating the same as unsecured loan. Whether notional interest can be computed by the Transfer Pricing Officer on Accounts Receivables from Associated Enterprises?

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Facts

  • The Assessee was engaged in the provision of software development services to Global Logic Inc. and other Global Logic group companies. It filed its return of income on 27.11.2013 declaring the total income at Rs.33.89 Crs.
  • Since the Assessee had entered into certain international transactions, the Assessing Officer referred the matter to the Transfer Pricing Officer(TPO) for determination of the Arm’s Length Price of the international transaction. The TPO, during the course of assessment proceedings, observed that the Assessee had entered into various international transactions.
  • The TPO observing the same held that the overdue receivables constituted separate international transaction and the working capital adjustment did not subsume interest on overdue receivables. Hence, the TPO made an upward adjustment of Rs.4.17 Crs.

Key points

  • The Tribunal placed reliance on the decision in the Assessee’s own case, wherein it was held that no adjustment was to be made on account of notional interest on receivables by relying upon Explanation (i), (a) & (c) of section 92B by treating the continued debt balance as an international transaction.
  • Further, there was similar delay in receipt of receivables from others and the Assessee was not charging any interest on delay in receipt of receivables against services rendered to unrelated third party.
  • Therefore, following the same in the present facts of the case, no adjustment on account of interest due on receivables from its Associated Enterprise could be made.

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