2018 (12) TMI 1930 - AT - Income Tax

TP Adjustment - interest on receivables - treating the receivables outstanding beyond 60 days from the associated enterprises AEs as deemed loan and charging notional interest on the basis of average State Bank of India base rate of 9.83% per annum plus 300 basis points - HELD THAT - Since no disturbance has been made in so far as OP margin of the assessee is concerned the OPN has been arrived after making working capital adjustment. Operating mark up of the appellant company is 16.19% whereas the comparables working capital adjustment mark up comes to 15.72%. This shows that the profit margin of the appellant company is higher than that of the comparables. The ratio laid down by the Tribunal in the case of Kusum Healthcare Pvt Ltd 2015 (4) TMI 180 - ITAT DELHI also affirmed by HC 2017 (4) TMI 1254 - DELHI HIGH COURT squarely applies DR pointed out that the Revenue has preferred SLP before the Hon ble Supreme Court against the judgment of the Hon ble High Court of Delhi. In our understanding since the operation of the judgment of the Hon ble High Court is not stayed by the Hon ble Supreme Court the same is binding on us and therefore respectfully following the decision of the coordinate bench affirmed by the Hon ble High Court supra we direct the Assessing Officer/TPO to delete the addition - Decided in favour of assessee.

Summary

Issues:
Transfer pricing adjustment on outstanding receivables treated as deemed loan.

Analysis:
The appeal was against the order of the Dy. Commissioner of Income Tax regarding the transfer pricing adjustment of outstanding receivables beyond 60 days from associated enterprises as deemed loan. The appellant company provided IT services and software development to its Group Company. The TPO proposed charging notional interest on delayed payments as unsecured loan advance to AEs. The TPO calculated an upward adjustment based on SBI base rate plus 400 basis points. The DRP upheld the TPO's action but directed to add 300 basis points and considered 60 days as a reasonable period for charging interest.

During the proceedings, the appellant argued that interest on receivables was not an international transaction as it was already included in the sale price. The operating profit margin was not affected, and no separate adjustment was needed for outstanding receivables. The DR supported the DRP's decision, emphasizing the consideration given to the objections raised by the assessee.

The Tribunal analyzed the profit margins and working capital adjustments, noting that the appellant's margin was higher than comparables. Referring to a previous case, the Tribunal concluded that the approach of aggregating international transactions and receivables was in line with established TP principles. The Tribunal cited a decision of the Hon'ble High Court of Delhi affirming the coordinate bench's ruling, emphasizing that further adjustments based solely on outstanding receivables would distort the transaction's nature.

The Tribunal noted that the Revenue had filed an SLP before the Supreme Court against the High Court's judgment but held that the High Court's decision was binding since the operation was not stayed. Following the previous decisions, the Tribunal directed the Assessing Officer/TPO to delete the addition of the transfer pricing adjustment on outstanding receivables.

Ultimately, the Tribunal allowed the appeal, emphasizing the importance of considering the overall profitability and established TP principles in transfer pricing assessments.