2019 (7) TMI 85 - AT - Income Tax

TP Adjustment - adjustment made on account of the outstanding receivables - delay in the receivables - interest for the period of the outstanding dues - HELD THAT - Assessee is not charging interest on overdue debts from the third parties and also the assessee is a debt free company and not paying any interest on funds utilized is business. We have also noted that the assessee company has a margin of 23.3% on Software Development segment as compared to the margin of 11.42% of the comparable companies. The working capital adjusted margin of the assessee have already factored into account the delay in the receivables and therefore no separate adjustment on this account is required to be made. The credit period of the comparable companies has been found to be 147 days as against the credit period allowed by the assessee of the 30 days. In view of the decision of CIT Vs EKL Appliances Ltd D 2012 (4) TMI 346 - DELHI HIGH COURT we are of the opinion that impact of the delayed receivables has already been factored in the working capital adjustment and, therefore, any further adjustment on the outstanding receivables is not required separately in the instant case. Accordingly, we direct the Assessing Officer to delete the adjustment made on account of the outstanding receivables. - Decided in favour of assessee.

Issues Involved:
1. Addition of ?12,74,485 by benchmarking receivables on transactions of sales/services using the prime lending rate of SBI plus markup of 300 basis points.
2. Determination of whether receivables constitute an international transaction.
3. Applicability of LIBOR rate for computation of interest instead of SBI prime lending rate.

Issue-wise Detailed Analysis:

1. Addition of ?12,74,485 by Benchmarking Receivables:
The learned Commissioner of Income Tax (Appeals) upheld the addition by adopting the prime lending rate of SBI plus a markup of 300 basis points. The assessee argued that once the arm’s length price (ALP) in a sale/service transaction is determined, no separate adjustment for interest on outstanding receivables is necessary. The assessee also contended that since it does not charge interest on overdue debts from third parties and is a debt-free company, the notional interest on outstanding receivables with Associated Enterprises (AE) is neither factually nor legally sustainable. Additionally, the assessee highlighted that it had not made any adjustment for working capital and had earned a higher margin of 23.33% compared to the margin of 11.42% of comparable companies, thereby negating the need for further adjustment.

2. Determination of Whether Receivables Constitute an International Transaction:
The assessee contended that receivables are not an international transaction per se. They argued that 'receivable' under Explanation to Section 92B of the Income-tax Act does not include 'accounts receivable' and thus, outstanding balances cannot be treated as independent transactions. The appellant maintained that allowing a credit period to the AE is not an independent international transaction but is dependent on the sales made to the AE. Reliance was placed on various judicial pronouncements to support this view, including cases such as PCIT vs. B.C. Management Services (P) Ltd and ACIT vs. Nimbus Communications Ltd.

3. Applicability of LIBOR Rate for Computation of Interest:
The assessee argued that the LIBOR rate should be applied for computing interest, in line with the judgment of the jurisdictional High Court in CIT vs. Cotton Naturals (I) (P) Ltd. They contended that since the AE is not based in India, the SBI prime lending rate is not a valid comparable, and the interest rates should be as per the prevalent borrowing rates in other countries, which is LIBOR.

Tribunal's Decision:
The Tribunal noted that the assessee is not charging interest on overdue debts from third parties and is a debt-free company. It was also observed that the assessee had a margin of 23.3% on the Software Development segment compared to the margin of 11.42% of comparable companies. The working capital adjusted margin of the assessee had already factored in the delay in receivables, thus no separate adjustment was warranted. The credit period of comparable companies was found to be 147 days against the credit period of 30 days allowed by the assessee. Citing the decision of the Hon’ble Delhi High Court in CIT Vs EKL Appliances Ltd, the Tribunal opined that the impact of delayed receivables had already been factored in the working capital adjustment, and any further adjustment on the outstanding receivables was not required. Consequently, the Tribunal directed the Assessing Officer to delete the adjustment made on account of the outstanding receivables, rendering other arguments of the assessee academic.

Conclusion:
The appeal of the assessee was allowed, and the adjustment and addition upheld by the learned Commissioner of Income Tax (Appeals) were deleted. The order was pronounced in the open court on 28th June 2019.

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