2017 (12) TMI 1052 - AT - Income Tax

Adjustment on account of arm s length on interest on receivables - TPA - Held that - When the taxpayer has not been making any distinction between AE and non-AE in charging any interest on outstanding receivables, the adjustment made by the TPO/DRP/AO on account of arm s length interest is not sustainable. Moreover the interest can be charged only on loaning or borrowing of money and not in case of sale. Particularly when there is no penal clause in the agreement entered into between the taxpayer and its AE/non-AE to charge the interest on delayed receivables. Even otherwise, a transaction cannot be recharacterized merely on ground of delay in payment of receivables. Identical issue has also been examined by coordinate Bench of the Tribunal in Kadimi Tool Manufacturing Co. Pvt. Ltd. vs. DCIT 2017 (9) TMI 1578 - ITAT DELHI and has been decided in favour of the taxpayer by relying upon Kusum Healthcare Pvt. Ltd. vs. ACIT 2015 (4) TMI 180 - ITAT DELHI and Bechtel India Pvt. Ltd. (2016 (9) TMI 196 - DELHI HIGH COURT ) wherein SLP filed in the Hon ble Supreme Court has been dismissed. TPO/DRP/AO have erred in making adjustment on account of arm s length interest which is not sustainable in the eyes of law, hence no adjustment on account of interest on receivables can be made Not allowing credit of advance tax, TDS, foreign tax and tax paid under MAT provision while computing the tax liability on assessed income - Held that - While calculating the tax paid under MAT provision, it is required to be deducted from gross tax payable. Similarly, while calculating the tax credit of advance tax, TDS and foreign tax is also required to be set off first in computing the overall tax liability by the taxpayer. Particularly when tax liability of the taxpayer is higher as per peak profit computed under MAT provision of the Act, so AO is directed to recomptue the tax liability by considering the credit of advance tax, the TDS, the foreign tax and tax paid on MAT provision in the light of the decision rendered by Hon ble Allahabad High Court in the case of CIT vs. Vacment India (2014 (10) TMI 787 - ALLAHABAD HIGH COURT ) - Decided in favour of assessee.

Summary

Issues Involved:
1. Adjustment of income due to the receipt of receivables from associated enterprises considered as an international transaction.
2. Determination of arm's length price and rate of interest for the delay in realization of receivables.
3. Credit of advance tax, TDS, foreign tax, and tax paid under MAT provisions.
4. Levy of interest under Sections 234B and 234C of the Income-tax Act.

Detailed Analysis:

1. Adjustment of Income Due to Receivables from Associated Enterprises:
The assessing officer (AO) completed the assessment at a higher income than the returned income due to an adjustment made for the delay in realization of receivables from associated enterprises (AEs). The AO treated the delay as an 'international transaction' of loan and made adjustments based on the Transfer Pricing Officer's (TPO) order. The Dispute Resolution Panel (DRP) upheld the TPO's order, considering the delay as an international transaction under Section 92B of the Income-tax Act.

2. Determination of Arm's Length Price and Rate of Interest:
The TPO re-characterized the delay in receipt of receivables as unsecured loans to AEs and calculated the arm's length interest by considering the Prime Lending Rate (PLR) of SBI and applying the Comparable Uncontrolled Price (CUP) method. The taxpayer argued that the delay in receivables is not an international transaction per se but a consequence of services rendered. The taxpayer also contended that the transaction of delay in receivables was closely linked to the international transaction of exports and no separate adjustment was required. The Tribunal referred to the Delhi High Court's judgment in Pr. CIT-V vs. Kusum Health Care Pvt. Ltd., which held that not every item of receivables with foreign AEs automatically constitutes an international transaction. The Tribunal concluded that no adjustment can be made for notional interest on receivables, especially when the taxpayer is a debt-free company and has higher margins than comparable companies.

3. Credit of Advance Tax, TDS, Foreign Tax, and Tax Paid Under MAT Provisions:
The AO did not allow credit for advance tax, TDS, foreign tax, and tax paid under MAT provisions while computing the tax liability. The Tribunal directed the AO to recompute the tax liability by considering these credits, referencing the Allahabad High Court's decision in CIT vs. Vacment India, which mandates the deduction of tax paid under MAT provisions from gross tax payable and the setting off of advance tax, TDS, and foreign tax credits first in computing overall tax liability.

4. Levy of Interest Under Sections 234B and 234C:
The Tribunal noted that the grounds regarding the levy of interest under Sections 234B and 234C are consequential and do not require specific findings.

Conclusion:
The Tribunal ruled in favor of the taxpayer on the issues of adjustment of income due to receivables, determination of arm's length price, and credit of taxes paid. The Tribunal concluded that the delay in receivables does not constitute an international transaction warranting a transfer pricing adjustment and directed the AO to recompute the tax liability considering the credits for advance tax, TDS, foreign tax, and tax paid under MAT provisions. The levy of interest under Sections 234B and 234C was deemed consequential.