2022 (8) TMI 1364 - AT - Income Tax

ALP adjustment in respect of Interest on Outstanding Receivables - Prescribed method for determining international transactions - HELD THAT - We are of the considered view that there is merit in the contentions raised by the ld. AR. As rightly submitted by the ld. AR the ALP of the international transactions have to be determined by following one of the prescribed methods under the I.T. Rules. Admittedly the TPO/DRP in the instant case has not followed the same. Accordingly we deem it proper to remit the issue to the file of AO/TPO for determining the ALP with regard to interest on delayed receivables by following the Rules with a proper benchmarking study. AO/TPO is also directed to rectify the mistakes done in computation of interest raised by the assessee - Appeal by the assessee is allowed for statistical purposes.

Summary

Issues:
1. Transfer Pricing Adjustment on Software Development Services
2. Adjustment for Interest on Delayed Receivables

Transfer Pricing Adjustment on Software Development Services:
The appeal pertains to an order passed by the National Faceless Assessment Centre under the Income-tax Act, 1961 for the assessment year 2017-18. The appellant, a private limited company providing software development services to its Associated Enterprise (AE), filed its income tax return declaring total income. The Transfer Pricing Officer (TPO) made adjustments in the software development services segment and towards interest on delayed receivables. The Dispute Resolution Panel (DRP) provided relief to the appellant by deleting the TP adjustment in the software development services but upheld the interest levy on delayed receivables. However, the TPO did not rectify computational errors as directed by the DRP, leading to an increased TP adjustment. The appellant challenged the final assessment order before the Tribunal.

Adjustment for Interest on Delayed Receivables:
The appellant raised multiple grounds challenging the ALP adjustment on "Interest on Outstanding Receivables." The grounds included the lack of benchmarking analysis, no adjustment for interest if the company is debt-free, failure to consider payables to AEs, computational mistakes, and the incorrect period of receipt of invoices. The appellant argued that the TPO did not conduct proper benchmarking analysis and committed computational errors. The appellant contended that being a debt-free company, no adjustment for interest on delayed receivables was warranted. The Tribunal agreed with the appellant's contentions, remitting the issue back to the AO/TPO for proper determination of ALP and rectification of computational errors. The appellant's appeal was allowed for statistical purposes.

This judgment highlights the importance of following prescribed methods for determining ALP in international transactions and the need for proper benchmarking analysis. It underscores the significance of rectifying computational errors and considering specific circumstances, such as being a debt-free company, in adjusting interest on delayed receivables. The decision emphasizes the right of the appellant to challenge TP adjustments and computational mistakes before the appropriate authorities.