Mumbai ITAT: Continuing debit balance is not an international transaction

Mumbai Bench of Income-tax Appellate Tribunal (Mumbai – ITAT, in short) has pronounced a very important judgment, dated January 5, 2011, relating to overdue of trade receivables from associated enterprises in case of Nimbus Communications Ltd. vs. Asst. Commissioner of Income-tax (ITA No.: 6597/Mum/09). Though the judgment is not generic, however it put emphasis on evaluation of transactions between associated enterprises in light of conduct between third parties. Further, one of the important observation in the judgment is that the interest rates for the purpose of borrowing of money (in current case LIBOR) should not be used as comparable rates for overdue of trade receivables.

Facts of the Case

The taxpayer, Nimbus Communications Ltd, is engaged in the business of marketing of airtime available on television programs, cricket and other sports events, and is also in the business of producing television serials.

During year under consideration, the taxpayer had international transactions with one of its associated enterprise, i.e. World Sports Nimbus Pte Ltd Singapore, and the said associated enterprise had some overdue payments, to be made to the taxpayer. The taxpayer did not charge any interest on these overdue payments. The taxpayer does not charge any interest on the debit balances with the independent parties nor does it paid any interest to any international creditors.

The Assessing Officer referred these transactions, for ascertainment of arm’s length price, to the Transfer Pricing Officer (TPO) and the TPO passed the order stating that charging of interest on outstanding balances, after a period of time of normally 30 days, would be the expected normal arm’s length price, thus, interest at 2.19%LIBOR on balances outstanding beyond 30 days was recognized as the income.

Aggrieved taxpayer carried the matter before Commissioner of Income-tax (Appeals), but without any success. Not satisfied with the judgment of Commissioner of Income-tax (Appeals), the taxpayer pleaded before Mumbai ITAT.

Observation of Mumbai ITAT

   

Mumbai ITAT observed in the captioned case that;

• A continuing debit balance is not an international transaction per se, but is a result of international transaction. Unlike loan or borrowing it is not an independent transaction to be viewed on standalone basis
• There is nothing on record to show that not realizing the debts from the Associated Enterprises has any impact on profit, income, losses or assets of the taxpayer. Hence it doesn't amount to international transaction under the provision of the Income-tax Act.
•  The factum of payment has to be considered vis-a-vis terms of payment set out in transactional arrangement and not in isolation with the commercial terms. Moreover, the LIBOR rate as considered by the revenue authorities is relevant only in case of lending and borrowing of funds and not in case of commercial overdues as in the instant case.
• In any event, even when 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 from the borrower.
• It is also to be seen whether the taxpayer charges such interest from independent parties or other enterprises have charged such interest in similar business transactions with independent parties. No such exercise has been carried out in this case nor it has been shown that realizing debts in time from the Associated Enterprises would have any impact on profits, income, losses or assets of the taxpayer.
• The appeal of the taxpayer is allowed by Mumbai ITAT.

Conclusion

We understand that in the captioned case the important fact which went in favor of the taxpayer was that as per normal business practice no interest was charged on overdue payments by the taxpayer or independent third parties, however the outcome may have been different if charging of an interest on overdue payments was a normal business practice.                      

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Gaurav Garg 

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JGarg Economic Advisors

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