Transfer Pricing: No notional interest addition for delayed payments by AE

Evonik Degussa India P. Ltd vs. ACIT (ITAT Mumbai)

The assessee raised invoices on its Associated Enterprise (AE) and gave 30 days credit for payment. As there was delay by the AE in making payment beyond the stipulated credit period, the TPO held that the assessee ought to have charged interest at the rate of 1% per month. A notional addition towards the said interest was made. This was upheld by the DRP. On appeal by the assessee to the Tribunal, HELD reversing the AO & DRP:

The assessee has no borrowings and so there is no interest liability. Even if the payments have been made by the AE beyond the normal credit period, there is no interest cost to the assessee. Moreover, there is no such agreement whereby interest is to be charged on such a delayed payment. The assessee does the billing on a quarterly basis and accordingly, the payment is being received. Therefore, the delay is not wholly on account of late payment by the AEs only. Moreover, the T.P. adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. Consequently, an addition an account of notional interest relating to alleged delayed payment in collection of receivables from the A.Es is uncalled for

See also Nimbus Communication 139 TTJ 214 (Mum) & Patni 141 TTJ 190 (Pune) where the issue is discussed in detail. Contrast with Logix Micro 136 TTJ 366 (Bang)