2018 (3) TMI 65 - AT - Income Tax

Transfer pricing - Adjustment to the income of the assessee on account of interest on receivables - Not charging interest from A.Es and non-A.Es - Held that - All international transactions were accepted by the TPO to be at arm s length, except, payment of interest on loan. The authorities below have treated the delayed payment beyond 30 days as loans. In fact, no loan have been extended by the assessee. It was the amount due against the A.Es. as well as non-A.E. on which interest have been charged by considering the deemed loans. Therefore, the decision of ITAT, Delhi Bench in the case of M/s. Kusum Healthcare Pvt. Ltd., (2015 (4) TMI 180 - ITAT DELHI), squarely apply in the case of the assessee, since the assessee earned significantly higher margin than the comparable companies, which have been accepted by the TPO, therefore, there was no justification to charge interest on outstandings. The assessee also explained that there are similar delays in collection of outstanding receivables from both A.Es and non-A.Es which is due to business and commercial reasons. Therefore, there is uniformity in act of assessee in not charging interest from A.Es and non-A.Es. Considering the nature of business of assessee and the facts explained above, we are of the view that there was no justification for the authorities below to make adjustment to the income declared by assessee. Adjustment to the income of the assessee is wholly unjustified on account of interest on receivables - Decided in favour of assessee

Issues Involved:

1. Enhancement of income by ?22,40,719/- by treating receivables outstanding beyond 30 days from associated enterprises (AEs) as deemed loans and charging notional interest.
2. Failure to appreciate submissions made by the appellant.
3. Disregard of detailed arguments/submissions by the appellant during the course of the DRP/assessment proceedings.

Issue-wise Detailed Analysis:

1. Enhancement of Income by ?22,40,719/-:
The primary issue in this case revolves around the enhancement of the appellant's income by ?22,40,719/-. The TPO treated the receivables outstanding beyond 30 days from associated enterprises (AEs) as deemed loans and charged notional interest. The appellant argued that the TPO's findings were erroneous, contrary to facts, and based on conjectures and surmises. The appellant highlighted that the average outstanding days for recovering sales dues was 57 days for AEs and 66 days for non-AEs. The appellant did not charge interest on outstanding receivables from both AEs and non-AEs due to business and commercial considerations, long-term business relationships, and the nature of services provided. The appellant relied on the decision of M/s. Indo American Jewellery Ltd., which held that there was no need to compute notional interest if the assessee did not charge interest on outstanding recoverables from both AEs and non-AEs.

2. Failure to Appreciate Submissions:
The appellant contended that the TPO failed to appreciate the submissions made and contentions raised, making several factually incorrect and legally untenable allegations, observations, assertions, and inferences. The appellant provided detailed submissions, including the average debtors' collection period for comparable companies, which was 122 days, whereas the appellant's average collection period was 68 days. The appellant argued that the interest on receivables is not an international transaction, as the interest proposed to be charged is already built into the sale price. The appellant relied on the decision of ITAT, Delhi Bench in the case of M/s. Kusum Healthcare Pvt. Ltd., which held that the approach of aggregating international transactions pertaining to the sale of goods to AE and receivables arising from such transactions is in accordance with established TP principles.

3. Disregard of Detailed Arguments/Submissions:
The appellant argued that the DRP disregarded the detailed arguments and submissions put forth during the course of the DRP/assessment proceedings. The DRP rejected the appellant's contentions regarding the treatment of transactions on account of "outstanding receivables" due to the retrospective amendment of Section 92B(1) of the I.T. Act, 1961, which covered all such transactions as "International Transactions." The DRP upheld the TPO's order, noting that the appellant did not furnish any details of comparable group affiliates or independent third parties who entered into similar transactions. The appellant relied on various judgments, including the decision of Hon'ble Bombay High Court in the case of CIT vs. Indo American Jewellery Ltd., which held that the AO was not justified in making an addition of notional interest to the assessee's ALP if there was uniformity in not charging interest from both AEs and non-AEs debtors.

Conclusion:
The tribunal, after considering the rival submissions and material on record, concluded that the adjustment to the appellant's income on account of interest on receivables was wholly unjustified. The tribunal relied on the decision of ITAT, Delhi Bench in the case of M/s. Kusum Healthcare Pvt. Ltd., and the decision of Hon'ble jurisdictional Delhi High Court in the case of Pr. CIT vs. Kusum Healthcare Pvt. Ltd., which held that there was no justification to charge interest on outstanding receivables if the assessee earned significantly higher margins than comparable companies. The tribunal set aside the orders of the authorities below and deleted the entire addition, allowing the appeal of the assessee.

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