The issue of interest on delayed payments, since the payer is to benefit from interest free funds has given rise to many disputes on whether adjustment should be made and if so what would be a reasonable rate at which such interest will be deemed to have been earned. In Dania Oro Jeweler Pvt Ltd v. ITO [ITA(TP) 6827/Mum/2012] ITAT Mumbai held that since there was considerable delay in collection of sales proceeds from Associated Enterprises (AEs) - as high as 1200 days, an adjustment had to be made. It differed from the Bombay High court in Indo American Jewellery that no adjustment is required on interest not earned.
Interest on deferred payment of receivables
The assessee argued that non-charging of interest has not been considered as an international transaction in the Transfer Pricing Study. Also it had not charged interest on payments overdue from third parties. It sought to rely on the judgment of the Bombay High court in Indo American Jewellery. On rate to be adopted for adjustment if at all required it claimed that it had significant free reserves with it and since average cost of borrowing was 3.07% and hence adjustment if any should be restricted to 3.07%. It sought to strengthen its argument stating that such adjustments in subsequent years have been set aside by the DRP.
The Tribunal decision
It was decided that as third parties had delayed payments to the extent of 200 days, all outstanding with AEs beyond 200 days should be considered for making adjustment. Thus, it would be appropriate to compute interest at LIBOR + 150 basis points.