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According to the press release issued by CBDT on 31 March 2023, CBDT has entered into 95 APAs in FY 2022-23 which is the highest number of APAs entered into in a single year with Indian tax payers. This includes 32 Bilateral APAs and 63 Unilateral APAs.
The CBDT achieved successful milestones during FY 2022-23, by signing a largest number of APAs (i.e. 21 APAs) on a single day, since the beginning of the APA programme and also entered into the maximum number of BAPAs till date.
The APAs entered by the CBDT provides certainty to a taxpayer for the transfer pricing method to be applied and/ or in determining the arm's length price of its international transactions in advance for a period of 5 future years. Further, the taxpayer also has an option to rollback the APA for 4 preceding years, and as a result, tax certainty can be achieved for in total 9 years.
As on 31 March 2023, the total number of APAs has gone up to 516 APAs comprising of 96 Bilateral APAs and 420 Unilateral APAs.
In a recent ruling on the issue of overdue receivables, Hyderabad Income Tax Appellate Tribunal ("ITAT") in the case of Apache Footwear India Private Limited [ITA-TP No 568/Hyd/2022], accepted the stand of the tax authorities in holding overdue receivables from associated enterprises ("AEs") as an international transaction and imputed notional interest at the rate of 6 per cent on the amount of overdue receivables.
As per facts of the said case, the taxpayer had recovered majority of its receivables except for a few overdue invoices, for which payments from AEs were outstanding beyond a credit period of 60 days. During the assessment proceedings, no explanation was given by the taxpayer regarding the reason for the delay in receipt and agreed credit period as per intercompany agreement. Relying on past judicial rulings, the tax authorities considered 60 days as a reasonable credit period for computation of notional interest.
As the matter came up before the Ahmedabad Bench of Income Tax Appellate Tribunal ("ITAT"), the taxpayer submitted that it is a debt free company, not paying interest on working capital funds and hence it is not liable to be compensated for the outstanding receivables. This argument was rejected on the ground that initial sale prices are negotiated with reference to an agreed credit period and effect of extra credit period is not factored in the agreed pricing. Further no prudent business would allow use of its working capital to let other entity earn profits on that amount of capital.
Thus, in essence the ruling recognises that delay in receipt of receivables beyond a reasonable credit period partakes the character of an advance and therefore results in an international transaction in view of explanation to section 92B(2) of the Income-tax Act, 1961 which is subject to notional interest.
In another ruling on the issue of payment of interest on External Commercial Borrowing ("ECB") by the taxpayer to its AE, the Visakhapatnam ITAT in the case of Teejay India Private Limited [ITA No. 152/Viz/2021] accepted the arm's length price of payment of interest of ECB at LIBOR plus 200 basis points as considered by the lower tax authorities.
The ITAT observed that the rates prescribed by Reserve Bank of India ("RBI") through its Master Circular under ECB guidelines in respect of ECBs and trade credits are all in cost ceiling, and thus, can be considered as maximum rates that can be levied for regulatory purposes.
The said ruling becomes significant especially in the case of a taxpayers who have relied on the interest rate ceiling prescribed by the RBI, also for justification of the interest rates for transfer pricing purposes. In this connection, taxpayers are advised to determine the interest rate on the basis of supplementary benchmarking analysis under CUP Method, so as to avoid any transfer pricing challenges during tax assessment stage.
Newsletter India
Martin Wörlein
Partner, Head of India practice
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