2022 (3) TMI 1503 - AT - Income Tax

TP adjustment - interest imputed on outstanding receivables - TPO computed interest on outstanding receivables at the rate equal to 5.87 % PLR (6 months LIBOR 400 basis points) - DRP directed the Ld.AO to apply short term deposit rate of SBI prevailing for financial year relevant to assessment year under consideration that lead to enhancement - HELD THAT - We note that expression debt arising during the course of business refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international transaction he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment on account of interest income short charged or uncharged. As argued that insertion of Explanation with retrospective effect covers Assessment Year under consideration and hence under/non-payment of interest by AEs on debt arising during course of business becomes international transactions calling for computing its ALP. This Bench referred to decision of Special Bench of this Tribunal in case Of Instrumentation Corpn. Ltd. 2016 (7) TMI 760 - ITAT KOLKATA held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE. hence it is an international transaction as per explanation to section 92B of the Act. We also perused decision relied upon by the Ld.AR. In our considered opinion these are factually distinguishable and thus we reject argument advanced by the Ld.AR. Alternatively it has been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and loans and advances to international transaction would amount to double taxation. We deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding it in conformity with the above referred judgment ORANGE BUSINESS SERVICES INDIA SOLUTIONS PVT. LTD. VERSUS DCIT CIRCLE-3 GURGAON 2018 (2) TMI 1151 - ITAT DELHI Needless to say the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Appeal filed by the assessee stands allowed for statistical purposes.

Summary

Issues:
Transfer Pricing adjustment on outstanding trade receivables.

Analysis:
1. The appeal was filed against the final assessment order related to the Assessment Year 2017-18. The main issue contested by the assessee was the adjustment made by the Transfer Pricing Officer (TPO) on outstanding trade receivables. The TPO imputed interest on outstanding receivables from Associated Enterprises (AE) at a rate of 5.87%, resulting in an adjustment of INR 1,72,72,093/-. The Assessing Officer (AO) incorporated this adjustment in the draft assessment order, along with disallowing TDS. The Dispute Resolution Panel (DRP) directed the AO to enhance the adjustment to INR 3,48,38,463/- without issuing a show cause notice to the assessee.

2. The assessee argued that outstanding receivables were closely linked to the main transaction and should not be considered a separate international transaction. They highlighted previous tribunal and high court decisions supporting their stance that no interest should be charged on such receivables. The Revenue, on the other hand, contended that interest on receivables is an international transaction, and the TPO's determination of its Arm's Length Price (ALP) was correct.

3. The Tribunal noted that the Finance Act, 2012, included debt arising during the course of business as an international transaction, covering delays in realization of trading debts. However, the Tribunal referred to a Special Bench decision that treated outstanding invoices as a loan advanced to foreign AEs, therefore constituting an international transaction. The Tribunal rejected the argument that working capital adjustments already accounted for sundry creditors, leading to potential double taxation.

4. Ultimately, the Tribunal set aside the adjustment made by the TPO and remitted the matter back to the AO/TPO for fresh consideration in line with previous judgments. The assessee was granted a reasonable opportunity to present their case in the fresh proceedings. The appeal was allowed for statistical purposes.

By carefully considering the arguments presented by both parties and analyzing relevant legal provisions and precedents, the Tribunal concluded that the adjustment made on outstanding trade receivables required further examination. The decision emphasized the need for a detailed inquiry into the nature of outstanding receivables and their impact on the working capital of the assessee before determining whether interest should be imputed as part of transfer pricing adjustments.