2019 (8) TMI 606 - AT - Income Tax

TP adjustment - assessee had adopted TNMM for determining theALP for principal amount of exports to AE, same was also accepted by AO - separate benchmarking of notional interest on the outstanding receivables - HELD THAT - Assessee had adopted TNMM method for determining the arm s length price for principal amount of exports to AE and it was duly accepted by the TPO. No adjustment under section 92 CA of the Act was suggested in respect of the price for their exports to AE. TPO had taken the notional interest on the outstanding receivables as a separate international transaction and suggested for the adjustment, which the assessee has been assisting basing on the decision of Kusum HealthcarePvt.Ltd. 2017 (4) TMI 1254 - DELHI HIGH COURT It is the settled principle of law, after the decision of Kusum Healthcare Pvt.Ltd. (supra), that in TNMM, the net margin earned was exposed with appropriate working capital adjustment to comparable companies; that the receivable mentioned in the Explanation to Sec.92B can be taken up for transfer pricing scrutiny only when it is a standalone activity or a demonstrated approach is adopted by the assessee to use Accounts Receivable to have free working capital funding; and that if the impact of extended credit period on working capital was factored in the pricing / profitability, then there is no tax leakage or evasive tactics adopted by the taxpayer while transacting with the AE. With this view of the matter, we find it difficult to countenance the argument that, had the funds been received in time and deployed would have earned interest income, which would have been relevant only when the original transaction of sale or services provided to the AE was benchmarked under CUP method. We are of the considered opinion that, if the impact of extended credit period on working capital was factored in the pricing / profitability, then any credit period allowed to AE gets subsumed in TNMM and there is no tax leakage or evasive tactics adopted by the taxpayer while transacting with the AE, and there is no need for a separate benchmarking. - Decided in favour of assessee.

Summary

Issues involved:
Transfer pricing adjustment under section 92CA of the Income Tax Act, 1961 regarding interest on outstanding receivables in international transactions.

Detailed Analysis:

1. Facts of the case: The appellant, an export-oriented unit engaged in manufacturing and exporting polyethylene bags, filed a return of income showing NIL income for the assessment year. The appellant entered into various international transactions during the year, including export of finished goods, import of raw materials, spare parts, charge for cylinder cost, loan conversion to equity shares, and issue of share capital.

2. Transfer Pricing Methodology: The appellant adopted the Transactional Net Margin Method (TNMM) for determining the Arm's Length Price (ALP) for exports to Associated Enterprises (AE). The Transfer Pricing Officer (TPO) accepted the TNMM but suggested an adjustment under section 92CA of the Act for interest on outstanding receivables.

3. Dispute Resolution Panel (DRP) Directions: The DRP directed that interest on receivables should be computed based on the decision of the Delhi High Court in a specific case and limited to the year under consideration. The appellant challenged these directions, arguing that the credit period on sale of goods to AE was not a separate international transaction and was already embedded in the TNMM.

4. Legal Precedents: The appellant relied on the decision of the Jurisdictional High Court in a specific case to support their argument that the credit period allowed to AE should be considered within the TNMM framework and did not require separate benchmarking.

5. Judgment and Analysis: The Tribunal examined the submissions and legal principles. It noted that the TNMM method had been accepted for determining ALP for exports to AE, and no adjustment was suggested for export prices. The Tribunal considered the impact of extended credit periods on working capital and profitability within the TNMM framework. It concluded that if the credit period allowed to AE was factored into pricing and profitability, there was no tax leakage or evasion, and separate benchmarking was unnecessary.

6. Conclusion: Based on the settled legal position and analysis, the Tribunal allowed the appeal of the assessee, finding it difficult to sustain the transfer pricing adjustment for interest on outstanding receivables. The addition was deleted, and the judgment was pronounced in favor of the appellant on 31st July 2019.