Nimbus Communications Ltd vs. ACIT (ITAT Mumbai)

If commercial transaction is at arms’ length, no transfer pricing addition for non-charging of interest on overdue debt

The assessee had an “international transaction” with its associated enterprise because of which it was due to receive payment which was overdue. No interest was charged on the said dues. The TPO took the view that charging of interest on outstanding balances after about 30 days was the expected normal arm’s length price and made an adjustment of Rs 12.51 lakhs being the notional interest calculated at 2.19% LIBOR on the overdue amount beyond 30 days. This was confirmed by the CIT (A). On appeal to the Tribunal, HELD allowing the appeal:

(i) A transfer pricing adjustment can be made u/s 92 in respect of an “international transaction”. A continuing debit balance is not an “international transaction” per se but is a “result” of the international transaction. A continuing debit balance reflects that the payment, even though due, has not been made by the debtor. It is not necessary that a payment is to be made as soon as it becomes due. Many factors, including terms of payment and normal business practices, influence the fact of payment in respect of a commercial transaction. Unlike a loan or borrowing, it is not an independent transaction which can be viewed on standalone basis. What has to be examined is whether the commercial transaction is at arms length. The payment terms are an integral part of any commercial transaction and the transaction value takes into account the terms of payment such as permissible credit period as well. Even the residuary clause in the definition of ‘international transaction’ i.e. “any other transaction having a bearing on the profits, incomes, losses or assets of such enterprises” does not apply to a continuing debit balance as there is nothing on record to show that as a result of not realizing the debts from the AE there has been an impact on profits, incomes, losses or assets of the assessee;

(ii) Further, when an ALP is made in respect excessive credit period allowed under the CUP method, the comparable has to be dues recoverable from a debtor and not a borrower. The adoption of interest @ 2.19% LIBOR on balances which exceed 30 days is not justified because LIBOR is relevant only in the case of lending or borrowing of funds and not to commercial over-dues. Assuming the continuing debit balances can be treated as an ‘international transaction’, the TPO ought to have applied the CUP method by considering whether the assessee had charged interest on overdues from independent enterprises (internal CUP) or whether other enterprises had charged interest in respect of overdues in respect of similar business transactions from independent enterprises (external CUP).