ITAT Upholds Interest On 'Outstanding Interest Receivable' Against Parle Biscuits

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has upheld the levy of interest on 'outstanding interest receivable' against Parle Biscuits.

The bench of Kuldip Singh (Judicial Member) and Padmavathy S. (Accountant Member) has observed that in a transfer pricing transaction, what needs to be looked into is whether, in an uncontrolled similar transaction, the third party would charge such interest or not. The interest on a loan is compensation received towards the utilisation of funds given by the assessee to its AE, and the interest element on the said loan, if not paid, improves the liquidity position of the AEs and becomes part and parcel of the said loan transaction.

The appellant assessee company was established in 1974 in Mumbai and is a 100% subsidiary of Parle Products Pvt. Ltd. The assessee manufactures a wide range of biscuits, confectionery, snacks, and bakery products.

During the course of TP proceedings, the TPO noticed that the assessee has given loans to its AE and has been charging 5.5% interest. The Assessing Officer treated the interest receivable as a separate international transaction and accordingly charged interest.

The assessee contended that interest on interest receivable is not a separate international transaction and that the interest is a hypothetical income, not real income. The interest receivable from AEs cannot be termed an international transaction; the notional interest on interest receivables is equal to hypothetical income and not real income, and there are entity-specific reasons for the AEs outstanding interest receivables.

The assessee contended that there is no provision to charge interest on interest since, as per the loan agreement, there are only interest terms agreed with the AEs.

The department contended that there has been an inordinate delay in the interest receivable and, therefore, the AEs are benefiting by not making the payment of interest that needs to be compensated. In similar circumstances, the third party would have definitely charged interest on the outstanding amount. The TPO has correctly benchmarked the transaction separately and has applied the same rate of interest as has been applied by the assessee while lending the loan to its AE.

The ITAT ruled that the assessee has not properly substantiated the reasons for the delay in interest receivables, which has resulted in improving the liquidity position of the AE, and that the assessee needs to be compensated accordingly.

Case Title: Parle Biscuits Private Limited Versus Assessment Unit

Case No.: I.T.A. No.2484/Mum/2022

Date: 30-06-2023

Counsel For Appellant: Ketan Ved

Counsel For Respondent: Samuel Pitta

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