ITAT, Mumbai: A continuing debit balance is not, per se, an international transaction on which Arms Length Pricing of interest can be done

Nimbus Communications v. ACIT, decided on 5^th January, 2011

Question before the Hon’ble Tribunal: Whether the Commissioner (Appeals) was justified in sustaining an arm’s length price (ALP) adjustment in respect of interest not charged by the assessee on debit balances, overdue beyond thirty days, of assessee’s associated enterprises.

Relevant facts: During the relevant previous year, the assessee had international transactions with one of its associated enterprises, i.e. World Sports Nimbus Pte Ltd Singapore, and the said associated enterprises had some overdue payments, to be made to the assessee. The assessee did not charge any interest on these overdue payments.

The TPO made an arm’s length adjustment of Rs 12,51,175. The quantification of notional interest was done by adopting interest at 2.19 % LIBOR on overdue amount beyond 30 days.

Allowing the appeal of the assessee, the Hon’ble Court held that:

(Para 5): “A continuing debit balance, in our humble understanding, is not an international transaction per se, but is a result of the international transaction. In plain words, a continuing debit balance only reflects that the payment, even though due, has not been made by the debtor… What can be examined on the touchstone of arm’s length principles is the commercial transaction itself, as a result of which the debit balance has come into existence, and the terms and conditions, including terms of payment, on which the said commercial transaction has been entered into.”

The Hon’ble Tribunal concluded that: “In view of these discussions, in our considered view, a continuing debit balance per se, in the account of the associated enterprises, does not amount to an international transaction under section 92B in respect of which ALP adjustments can be made.”

The judgment is available here.