Logix Micro Systems Ltd vs. ACIT (ITAT Bangalore)

Even if commercial transaction is at arms’ length, debt overdue for long period attracts transfer pricing interest

The assessee had transactions with its associated enterprise in USA which were accepted by the TPO to be at arms’ length. At the end of the year, an amount of Rs.7.73 crores was receivable by the assessee from the AE and of this an amount of Rs.5.52 crores was outstanding for more than six months. The TPO held that the assessee ought to have earned interest on the said funds and computed interest of Rs. 56.60 lakhs on the outstanding of Rs. 5.52 crores by adopting the Prime Lending Rate (PLR) of 10.25% as the interest. On appeal, the CIT (A) approved the decision of the TPO in principle though he held that the PLR could not be taken but the LIBOR / US-FED rate had to be taken as that would be payable by the AE if it had borrowed in the USA. He also held that a reasonable period for collection of the receivables had to be allowed and the interest calculated only for the period over-flowing the reasonable time limit. On cross appeals to the Tribunal, HELD:

(i) Though the reference made by the AO to the TPO related only to the international transactions and did not cover the aspect of delay in collecting the receivables, the TPO was entitled to go into the issue. When a file is referred to the TPO for examining the ALP, the entire gamut of international transactions are open for the TPO’s consideration. Further, as the receivables were the financial result of the international transactions they cannot be treated as a separate transaction for transfer pricing purposes;

(ii) The assessee’s explanation for non-collection of the huge outstanding for more than 6 months is not convincing. The facts showed that the assessee was financing the business of the AE by accommodating delayed remittance of receivables;

(iii) The fact that the international transactions are at ALP does not mean that no addition can be made on the funds kept by the assessee with the AE. If the assessee had received funds within the normal period, it could have earned interest on the same. The potential loss is a factor to be considered while evaluating the financial impact of the international transactions between the assessee and the AE. However, a reasonable period has to be provided as interest-free period;

(iv) As the transaction is not a “loan” but is a receivable, the terms applicable to a loan such as its term, credit-standing of the borrower, security etc should not be considered. The interest should not be calculated at LIBOR/US-FED rate but by adopting the Indian rate as that is the loss suffered by the assessee for not bringing the funds within the normal period. The rate available on short-term deposits (5%) should be taken and not the PLR (10.25%);