SBI short-term rate will prevail over LIBOR for benchmarking interest on trade-receivables

Considering an appeal involving the issue pertaining to issue of transfer pricing adjustment made with regard to trade receivables outstanding by the Assessee from its Associated Enterprise (AE), and application of SBI Short Term Deposit Interest rate for computing the Arm’s Length Price interest rate, the Bench of the Hyderabad Income Tax Appellate Tribunal upheld the application of the SBI Short Term Deposit Interest rate, observing it to be applicable whenever there were outstanding trade receivables.

A Division Bench of Mr. Rama Kant Panda, Accountant Member, and Mr. Laliet Kumar, Judicial Member, also rejected the Assessee’s contention of not being given any grace period for making the payment. The Bench found there to be no agreement between the Assessee and its AEs in respect of grace period, the Assessing Officer had rightly followed the general trend and allowed a 30-day grace period.

The Appellant-Assessee was represented by Mr. P Chidambaram, whereas the Respondent-Revenue was represented by Ms. K Haritha, CIT(DR).

Briefly, the Assessee-company is engaged in purchase and sale of vegetable seeds as well as research and development in this area. The Assessee filed ITR for the relevant period, declaring total income of about Rs 16.04 Crores under the normal provisions of the Income Tax Act 1961, and of about Rs 14.78 Crores under Section 115JB of the Act.

On assessment, the Assessing Officer (AO) observed that the Assessee entered into international transactions as per Section 92CA of the Act and so the matter was referred to the Transfer Pricing Officer (TPO) for computing Arm’s Length Price (ALP) of the transactions.

The TPO passed order under Section 92CA of the Act proposing adjustment of about Rs 38.74 Lakhs in respect of interest on delayed receivables. Accordingly, additions of about Rs 38.74 Lakhs were framed to the Assessee’s income.

Subsequently, the Dispute Resolution Panel (DRP) directed the TPO to adopt SBI short term deposit rates for subject year as ALP interest rate and compute the adjustment. Taking into consideration, the order giving effect dt.07.07.2022, assessment was completed determining the taxable income at about Rs 16.48 Crores.

On considering the contentions raised by both parties, the Bench observed that the Assessee was to receive the amount from its AE for the services rendered to its AE and that the amount had been withheld by the AE, due to which the Assessee had to approach banks in India for raising the necessary funds for carrying out daily operations. In these circumstances, the Assessee would be required to pay interest to the lending bank.

With these observations, the ITAT sustained the orders passed by the AO/TPO and dismissed the Assessee’s appeal.

Cause Title: HM Clause India Private Limited vs DCIT, Circle-2(1), Hyderabad [ITA-TP.No.495/Hyd/2022 / 2023-Enterslice-18-ITAT-Hyderabad]

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HM-Clause-India-Private-Limited-vs-DCIT