The Income Tax Appellate Tribunal, Bangalore, has clarified that delayed payment of trade receivables from associated enterprises constitutes an international transaction under Section 92B of the Income Tax Act, 1961, thereby subjecting such delays to transfer pricing adjustments. While upholding the principle that non-charging of interest on extended credit periods triggers tax implications, the Tribunal significantly reduced the benchmark interest rate applied by the Transfer Pricing Officer, setting a new precedent for future cases involving receivables from foreign AEs.
Background & Facts
The Dispute
The appellant, Livspace India Pvt. Ltd., a private limited company engaged in the sale of interior and decoration products, also provided Software Development Services (SWD) to its associated enterprise, Livspace Pte. Ltd., based in Singapore. During the assessment year 2022-23, the company entered into international transactions aggregating to approximately Rs. 332.57 crores with its associated enterprises. The Transfer Pricing Officer (TPO) observed that the appellant extended credit periods to its foreign AE beyond industry norms, resulting in delayed realization of trade receivables. The TPO treated this delay as a notional loan advanced by the appellant to its AE and computed notional interest on the outstanding receivables.
Key Facts
- The appellant’s international transactions with AE totaled Rs. 332.57 crores during AY 2022-23
- Trade receivables from AE remained outstanding beyond the standard credit period
- TPO treated delayed receivables as unsecured loans under Section 92B
- TPO computed notional interest using LIBOR + 450 basis points
- TPO allowed only a 30-day credit period before interest accrual
- Total upward adjustment made by TPO: Rs. 16,83,236/-
- Appellant submitted that comparable companies had average debtor turnover days of 57 days
- Appellant contended that a 180-day credit period was industry standard
Procedural History
- 26.12.2025: Direction issued by the Dispute Resolution Panel (DRP) under Section 144C(5) upholding TPO’s adjustment
- 20.04.2026: Hearing conducted before ITAT Bangalore
- 29.04.2026: Judgment pronounced by ITAT Bangalore
The Parties' Positions
For the Appellant
- Argued that delayed trade receivables are a consequence of the principal sale transaction and not a separate international transaction
- Contended that re-characterizing receivables as loans is legally untenable
- Challenged the LIBOR + 450 basis point rate as excessive and unsupported by comparables
- Submitted that a 180-day credit period was reasonable and aligned with industry practice
- Relied on working showing average debtor turnover days of comparable companies at 57 days
For the Respondent
- Maintained that the amendment to Section 92B explicitly includes deferred receivables as international transactions
- Cited judicial precedents affirming that non-charging of interest on extended credit periods triggers transfer pricing scrutiny
- Defended the use of LIBOR + 450 basis points as a commercially reasonable spread
- Argued that the 30-day credit period was conservative and aligned with global norms
Relief Sought
The appellant sought deletion of the notional interest adjustment of Rs. 16,83,236/-, reduction of the interest rate to a commercially reasonable level, and adoption of a 180-day credit period. Alternatively, it sought adoption of a 60-day credit period based on comparable company data.
The Legal Issue
The central question was whether the delay in realization of trade receivables from an associated enterprise constitutes an "international transaction" under Section 92B of the Income Tax Act, and if so, whether the LIBOR + 450 basis points rate and 30-day credit period adopted by the TPO were reasonable and legally sustainable.
Arguments Presented
For the Appellant
The appellant relied on the nature of trade receivables as incidental to commercial sales, arguing that treating them as separate financing transactions amounted to re-characterization without legal basis. It cited the absence of any loan agreement, interest clause, or repayment schedule to support the TPO’s classification. The appellant further challenged the interest rate as arbitrary, pointing to the average debtor turnover of comparable companies (57 days) and contending that LIBOR + 450 basis points was punitive and not benchmarked against market rates. It submitted that a 60-day credit period was more realistic and aligned with industry practice.
For the Respondent
The Revenue relied on the 2012 amendment to Section 92B, which inserted an Explanation explicitly including "deferred payment or receivable or any other debt arising during the course of business" within the definition of international transaction. It cited multiple judicial decisions, including Synechron Technologies (P.) Ltd. v. ACIT, to establish that courts have consistently upheld the TPO’s authority to impute interest on delayed receivables. The Revenue argued that the 30-day credit period was conservative and that LIBOR + 450 basis points reflected the risk premium for cross-border receivables.
The Court's Analysis
The Tribunal began by examining the amended text of Section 92B, noting that the Explanation clearly expands the scope of international transactions to encompass deferred receivables. It held that the non-charging or under-charging of interest on extended credit periods to an associated enterprise constitutes an international transaction, irrespective of whether a formal loan agreement exists. The Tribunal affirmed the principle established in Synechron Technologies (P.) Ltd. v. ACIT that such transactions are subject to benchmarking under transfer pricing rules.
"We have heard the rival submissions and perused the materials available on record. So far as the argument of assessee that the transaction of outstanding receivables is not an international transaction, we do not find any force in this argument because now there are so many judgements on this issue, wherein it has been held that the transactions of outstanding receivables is an international transaction. So far as the applicability of rate is concerned, we observe that TPO has erred in applying LIBOR+450 basis points as a rate of interest, therefore, we modify this rate of interest to the tune of LIBOR+200 basis points, in the interest of justice and direct the TPO to calculate the interest attributable to the outstanding receivables accordingly."
The Tribunal accepted the Revenue’s position on the classification of delayed receivables as an international transaction but found the interest rate of LIBOR + 450 basis points to be excessive. It noted that the appellant had submitted data showing comparable companies had an average debtor turnover of 57 days, which supported a longer credit period than the TPO’s 30-day allowance. The Tribunal adopted a 60-day credit period as a reasonable compromise, balancing commercial reality with tax compliance. It reduced the spread from 450 to 200 basis points, holding that the higher rate lacked adequate justification and was not benchmarked against market comparables.
The Verdict
The appeal was partly allowed. The Tribunal set aside the TPO’s computation of notional interest and directed the Transfer Pricing Officer to recompute the interest on delayed receivables by applying LIBOR plus 200 basis points, after allowing a credit period of 60 days. The TPO was further directed to verify the actual credit period of comparable companies before finalizing the adjustment. The upward adjustment of Rs. 16,83,236/- stands modified accordingly.
What This Means For Similar Cases
Notional Interest on Receivables Is Now Clearly an International Transaction
- Practitioners must treat extended credit periods to foreign AEs as potential transfer pricing exposures
- Any delay beyond arm’s length credit terms must be documented and justified
- Companies should maintain records of industry-standard credit periods for comparables
- The burden of proving reasonableness of credit terms now rests on the assessee
LIBOR Spread Must Be Benchmark-Driven, Not Arbitrary
- A spread of LIBOR + 450 basis points is no longer sustainable without robust comparability analysis
- A spread of 200 basis points may now serve as a reference point for similar cases
- TPOs must justify interest rate selections with market data, not generic assumptions
- Taxpayers should proactively submit comparable company credit period data to support their position
Credit Periods Must Reflect Commercial Reality
- A 30-day credit period is unlikely to be accepted where industry norms are longer
- Evidence of comparable company debtor turnover days is critical for relief
- A 60-day credit period may now be considered a reasonable default in absence of contrary evidence
- Companies should align internal credit policies with market benchmarks to avoid adjustments
