The taxpayer made sales to both to related parties (associated enterprises) and unrelated parties. The credit period allowed for related parties was 180 days, but the amounts receivable in fact remained outstanding for more than one year.
The Transfer Pricing Officer found significant outstanding balances due from the taxpayer’s related parties (i.e., for more than one year), and thus treated these unpaid amounts as a separate international transaction and imposed “notional interest” (deemed interest) on these unpaid amounts at a rate of 10%.
On administrative appeal, the Commissioner of Income-tax Appeals found, among other items, that the profit of one of the related parties was negligible and that the other related party had incurred losses, and thus concluded that the taxpayer had not transferred profits outside India by not charging interest on the outstanding payments. Thus, the notional interest assessment was rejected.
On appeal, the Income-tax Appellate Tribunal in February 2012 upheld the determination of the Commissioner of Income-tax Appeals.
The High Court recently affirmed the decision of the tribunal in removing the notional interest assessment on the outstanding amounts of export proceeds realized late by the taxpayer.
The tribunal in its February 2012 decision noted that interest on the outstanding balances was part of the sales transaction, and not a separate transaction itself. However, the Finance Bill, 2012 (introduced 28 February 2012 and later enacted) specifically broadened the definition of “international transaction” to include overdue receivables—with retroactive effect—within the definition of international transaction. It has been observed that the High Court in the instant case refrained from commenting on this issue, and limited its findings to the facts of the case.
Thus, the High Court reiterated that no interest can be deemed on outstanding balances with comparable aging from related parties if no interest is charged by the taxpayer on outstanding balances from unrelated parties.
Read a January 2013 report [PDF 193 KB] prepared by the KPMG member firm in India: No notional interest chargeable on outstanding export proceeds for sales made to associated enterprises
Contact a tax professional with KPMG's Global Transfer Pricing Services.