2018 (12) TMI 1209 - AT - Income Tax

Transfer pricing - additions towards interest on inter-company outstanding receivables (arising on account of provision of IT-enabled services) - assessee has not charged any interest on the inter-company receivables which have been received beyond the period of agreement - Held that - We find that the assessee has not charged any interest on the inter-company receivables which have been received beyond the period of agreement. The case of assessee pertains to A.Y. 2010-11, during which the inter-company receivables were not included in the category of international transaction. The inclusion of such receivables in international transaction was made by Finance Act, 2012 with retrospective effect. Therefore, it was not possible for the assessee to perform the formalities enunciated by the Finance Act, while preparing the TP study report for the year under consideration. It was not open for the assessee to include inter-company receivable in the international transactions in the TP study report and thus, the assessee had a good excuse for the same, as also held in various decision relied by the ld. AR. The case of the assessee stands on parallel footings EVONIK DEGUSSA INDIA P. LTD. VERSUS ASSTT. COMMISSIONER OF INCOME TAX, MUMBAI 2012 (11) TMI 1248 - ITAT MUMBAI In the case in hand, there is no interest liability or any external borrowings. In the agreement too, there is no condition to charge any interest for delayed payments by the AEs. The Revenue could not be able to adduce any contrary material against the aforesaid decision. Therefore, respectfully following the decision of co-ordinate Bench, the ld. Authorities below are not justified to make addition on inter-company receivables, as computed by them. Accordingly, the appeal of the assessee deserves to be allowed on this count. The other grounds raised by the assessee are consequential to this issue and therefore, the same do not need separate adjudication. - Decided in favour of assessee

Issues Involved:
1. Transfer Pricing Adjustment
2. Economic Analysis Rejection
3. Adjustment under Section 92CA(3)
4. Outstanding Receivables as Separate International Transaction
5. Imputing Interest on Outstanding Receivables
6. Flawed CUP Analysis
7. Working Capital Adjustment
8. Re-computation of Arm’s Length Margin
9. Penalty Proceedings under Section 271(1)(c)
10. Interest Levy under Section 234B

Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue was the addition of INR 11,432,576 to the total income of the appellant due to a transfer pricing adjustment. The Transfer Pricing Officer (TPO) calculated trade interest on delayed payments, treating outstanding receivables as loans extended by the appellant to its associated enterprise (AE), and imputing interest on the same.

2. Economic Analysis Rejection:
The TPO did not accept the economic analysis undertaken by the appellant and modified the list of comparable companies for determining the Arm's Length Price (ALP) of the impugned transactions.

3. Adjustment under Section 92CA(3):
The TPO made an adjustment under Section 92CA(3) without finding the existence of any circumstances specified in clauses (a) to (d) of subsection (3) of Section 92C of the Act.

4. Outstanding Receivables as Separate International Transaction:
The TPO considered outstanding receivables as a separate international transaction and benchmarked them using the Comparable Uncontrolled Price (CUP) method as the Most Appropriate Method.

5. Imputing Interest on Outstanding Receivables:
The TPO treated outstanding receivables as a loan extended by the appellant to its AE and imputed interest on the same, resulting in an adjustment of INR 11,432,576 to the returned income of the appellant.

6. Flawed CUP Analysis:
The appellant argued that the CUP analysis undertaken by the TPO and upheld by the Dispute Resolution Panel (DRP) was flawed and did not represent an uncontrolled transaction.

7. Working Capital Adjustment:
The appellant contended that once working capital adjustment is granted, no separate adjustment is required on account of interest on outstanding receivables.

8. Re-computation of Arm’s Length Margin:
The TPO recomputed the arm’s length margin of the international transaction pertaining to IT-enabled services, leading to the adjustment.

9. Penalty Proceedings under Section 271(1)(c):
The appellant challenged the initiation of penalty proceedings under Section 271(1)(c) of the Act.

10. Interest Levy under Section 234B:
The appellant contested the levy of interest under Section 234B, arguing that it disregarded the provisions of the Act and judicial precedents.

Judgment Summary:

Main Issue - Receivables:
The Tribunal found that the assessee had not charged interest on inter-company receivables received beyond the agreement period. The inclusion of such receivables as international transactions was made by the Finance Act, 2012, with retrospective effect. Therefore, it was not possible for the assessee to include inter-company receivables in the TP study report for the year under consideration.

Principle of Impossibility of Performance:
The Tribunal accepted the principle of "Impossibility of Performance," recognizing that the assessee could not have included inter-company receivables in the TP study report due to the retrospective amendment.

Re-characterization of Receivables:
The Tribunal disagreed with the TPO’s re-characterization of outstanding receivables as unsecured loans, noting that the transactions were conducted in the regular course of business and were not intended as loans.

Precedent Cases:
The Tribunal referenced the decision in Evonik Degussa India Private Limited, where it was held that notional interest on delayed payments could not be added without evidence of undercharging real income. The Tribunal found no interest liability or external borrowings in the assessee’s case, and the agreement did not stipulate interest for delayed payments.

Conclusion:
The Tribunal concluded that the authorities were not justified in making the addition on inter-company receivables. The appeal was allowed, and the other grounds raised by the assessee were deemed consequential and did not require separate adjudication.

Order Pronounced:
The appeal was allowed, and the order was pronounced in the open court on 20th December 2018.

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