2019 (8) TMI 1749 - AT - Income Tax

TP Adjustment - adjustment to the international transaction of the assessee on account of the arm‟s-length price with respect to the interest on overdue receivable - HELD THAT - Outstanding receivable from the associated enterprises which are shown as a debtor in the books of the assessee are part of the working capital of the assessee. If the outstanding debtors are part of the working capital of the assessee, they have already been included in the working capital adjustment worked out. Thus, if the adjustment proposed by the learned transfer pricing officer and approved by the learned dispute resolution panel accepted working capital adjustment, then it will amount to double addition in the hands of the assessee. The issue is also squarely covered by the decision of KUSUM HEALTHCARE PRIVATE LIMITED 2017 (4) TMI 1254 - DELHI HIGH COURT wherein as accepted the reasoning that with the assessee having already factored in the impact of the receivable on the working capital and thereby on its pricing/profitability and that of its comparables, any further adjustments only on the basis of the outstanding receivable would have distorted the picture and re-characterize the transaction - No reason to sustain the addition made by the learned transfer pricing officer incorporated in the final assessment order. Ground number 2 of the appeal of the assessee is allowed.

Summary

Issues involved:
1. Transfer pricing adjustment on outstanding receivables.
2. Application of working capital adjustment in transfer pricing.
3. Compliance with principles of natural justice in assessment order.

Issue 1: Transfer pricing adjustment on outstanding receivables:
The appeal was filed against the order of the Deputy Commissioner of Income tax regarding a transfer pricing adjustment under section 92CA (3) of the Income tax Act. The appellant contested the adjustment of INR 30,82,559 on the total income, specifically related to notional interest on outstanding receivables. The appellant argued against the re-characterization of inter-company receivables as an unsecured loan transaction and the imputation of interest. The appellant also highlighted that the accounts receivable/payable were closely linked to the primary international transaction, and no separate adjustment should be made. The appellant further argued that no interest was charged for delayed realization from third-party customers and that the interest rate applied lacked legal basis.

Issue 2: Application of working capital adjustment in transfer pricing:
The Assessing Officer found that the appellant, engaged in providing IT-enabled services, had entered into international transactions and referred the matter to the Transfer Pricing Officer. The Transactional Net Margin Method was used, resulting in a proposed adjustment on ITES services and interest on overdue receivables. The appellant argued that the working capital adjustment considered in the Transfer Pricing Officer's order should negate the need for a separate adjustment on overdue receivables. The Tribunal agreed, citing the double addition if both adjustments were accepted, and referenced a Delhi High Court decision supporting the appellant's position. Consequently, the adjustment on overdue receivables was reversed.

Issue 3: Compliance with principles of natural justice in assessment order:
The appellant contended that the assessment order was vitiated due to a violation of natural justice principles and was arbitrary. However, the Tribunal dismissed this ground as general in nature. The Tribunal, after considering the contentions and lower authorities' orders, allowed the appeal in part, reversing the adjustment on outstanding receivables but upholding the assessment on other grounds. The consequent stay petition was dismissed as infructuous.

This judgment by the Appellate Tribunal ITAT Delhi addressed the issues of transfer pricing adjustments on outstanding receivables, the application of working capital adjustment in transfer pricing, and compliance with principles of natural justice in the assessment order. The Tribunal ruled in favor of the appellant regarding the adjustment on outstanding receivables, citing the working capital adjustment and a Delhi High Court decision in support of their decision. The Tribunal partially allowed the appeal, dismissing the general ground related to natural justice and upholding the assessment on other grounds.