2019 (10) TMI 1507 - AT - Income Tax

TP Adjustment - overdue receivables by determining the interest on such receivables - Whether interest on delayed realization of receivables is a separate international transaction and, therefore, requires separate benchmarking? - DR submitted that the interest on delayed realization of receivables is a separate international transaction and, therefore, requires separate benchmarking. It has nothing to do with the operations of the assessee company being with the debt free funds only - HELD THAT - Revenue has made out a case in its favour for this assessment year, i.e., 2013-14. Following the above decision 2017 (5) TMI 965 - ITAT DELHI we hold that the interest on delayed realization of receivables is a separate international transaction and, therefore, requires separate benchmarking. It has nothing to do with the operations of the assessee company being with the debt free funds alone. Appeal of the Revenue is allowed.

Summary

Issues Involved:
1. Whether the overdue receivables constitute an international transaction.
2. Whether the interest on delayed realization of receivables requires separate benchmarking.
3. Whether the assessee being a debt-free company affects the requirement for transfer pricing adjustment on overdue receivables.

Issue-wise Detailed Analysis:

1. Overdue Receivables as International Transaction:
The Transfer Pricing Officer (TPO) concluded that the overdue receivables by the assessee from its Associated Enterprises (AEs) should be treated as an act of financing or funding, thus constituting an international transaction. This conclusion was supported by the amendment to the term 'International Transaction' under the Finance Act 2012, which includes receivables as part of capital financing. The Commissioner of Income Tax (Appeals) [CIT(A)] and the ITAT upheld this view, citing the Bombay High Court's decision in Patni Computer Systems Ltd., which confirmed that receivables or any other debt arising during the course of business fall under the category of international transactions.

2. Interest on Delayed Realization of Receivables Requires Separate Benchmarking:
The TPO argued that the delayed realization of receivables is akin to providing an interest-free loan to the AEs, and thus, interest should be imputed on such receivables. The CIT(A) initially held that if the assessee is a debt-free company, no adjustment is required, referencing the Delhi High Court's decision in Bechtel India Pvt. Ltd. However, the ITAT emphasized that the interest on delayed receivables is a separate international transaction requiring separate benchmarking, irrespective of the company's debt status. This stance was supported by the Delhi ITAT's decision in the case of Bechtel India Pvt. Ltd., which clarified that the working capital adjustment does not subsume the interest on delayed receivables.

3. Impact of Assessee Being a Debt-Free Company:
The CIT(A) directed the Assessing Officer (AO) to verify whether the assessee is a debt-free company, as the Supreme Court's dismissal of the SLP in Bechtel India Pvt. Ltd. would be binding if the assessee is indeed debt-free. However, the ITAT concluded that the debt-free status of the assessee does not negate the requirement for a transfer pricing adjustment on overdue receivables. The ITAT reiterated that the interest on delayed realization of receivables is a separate international transaction and must be benchmarked independently of the company's debt status.

Conclusion:
The ITAT allowed the Revenue's appeal, holding that the interest on delayed realization of receivables is a separate international transaction that requires independent benchmarking, regardless of whether the assessee is a debt-free company. The ITAT's decision aligns with the retrospective amendment to Section 92B by the Finance Act 2012 and the relevant judicial precedents, emphasizing the need for transfer pricing adjustments on overdue receivables.