2020 (1) TMI 1604 - AT - Income Tax

TP Adjustment - Comparables for distribution segment of the assessee company - HELD THAT - Comparable as functionally different with that of assessee and with high turnover need to be deselected. Adjustment of interest on receivables - Since the facts of the impugned assessment year are identical to the facts of the case decided by the Tribunal in assessee s own case for A.Ys 2005-06 and 2014-15 therefore, respectfully following the same, we hold that if working capital adjustment is to be given, then, it subsumes the impact of outstanding receivables and payments by the assessee and, therefore, in the light of the ratio of the decision of the Hon ble Delhi High Court in Kusum Healthcase Pvt. Ltd. 2017 (4) TMI 1254 - DELHI HIGH COURT , no adjustment is warranted on account of interest on receivables. Working capital adjustment - Respectfully following the decision of the Tribunal in assessee s own case for A.Y. 2012-13 2019 (1) TMI 636 - ITAT DELHI we direct the AO/TPO to allow working capital adjustment to the assessee while working out the ALP of the international transaction. Appeal filed by the assessee is allowed.

Summary

Issues Involved:
1. Transfer Pricing Adjustment for Distribution Segment.
2. Transfer Pricing Adjustment for Interest on Overdue Receivables.
3. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Transfer Pricing Adjustment for Distribution Segment:
The primary issue revolves around the inclusion and exclusion of comparable companies for determining the Arm's Length Price (ALP) for the distribution segment of the assessee. The Tribunal noted that the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) had included certain companies that were not functionally similar to the assessee's distribution activities. The Tribunal emphasized the principle of judicial discipline, highlighting that in previous years, certain companies were excluded as comparables for the assessee's distribution segment. The Tribunal directed the exclusion of five companies, namely India Vision Satellite Communications Ltd., Maa Television Network Ltd., Malayalam Communications Ltd., Raj Television Network Ltd., and TV Today Network Ltd., on the grounds that these companies were content and channel owners with significantly different functional profiles compared to the assessee. The Tribunal reiterated that satellite TV channels and cable network operators have significantly different operating models and earning structures, thus they should not be included for comparability analysis. The Tribunal also directed the inclusion of two additional software distribution companies, Unisys Software and Holding Industries Limited and JMD Ventures Limited, proposed by the assessee, as they were functionally comparable.

2. Transfer Pricing Adjustment for Interest on Overdue Receivables:
The Tribunal addressed the issue of whether the outstanding receivables from Associated Enterprises (AEs) should be treated as unsecured loans and subjected to notional interest. The Tribunal referred to its own previous decisions and the judgment of the Hon'ble Delhi High Court in the case of PCIT vs. Kusum Healthcare Pvt. Ltd., which held that working capital adjustment subsumes the impact of outstanding receivables and payables. Consequently, if working capital adjustment is granted, no separate adjustment for interest on receivables is warranted. The Tribunal reiterated that outstanding receivables cannot be recharacterized as unsecured loans and that the assessee, being a debt-free entity, does not pay interest to its creditors. The Tribunal directed that no adjustment is warranted on account of interest on receivables once working capital adjustment is given.

3. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act:
The Tribunal did not specifically address the initiation of penalty proceedings under Section 271(1)(c) in detail. However, given the favorable decisions on the primary issues, it can be inferred that the Tribunal's stance would likely impact the penalty proceedings. The Tribunal's directions to exclude certain comparables and allow working capital adjustments would potentially nullify the basis for the penalty proceedings initiated by the Assessing Officer (AO).

Conclusion:
The Tribunal allowed the appeal filed by the assessee, directing the AO/TPO to exclude certain companies from the list of comparables, include additional comparable companies proposed by the assessee, and grant working capital adjustment. Consequently, no separate adjustment for interest on receivables was warranted. The Tribunal's decision emphasized adherence to judicial discipline and consistency with previous rulings. The appeal was allowed, providing relief to the assessee on all contested grounds.