2023 (4) TMI 1153 - AT - Income Tax

TP adjustment - arm s length price determination of outstanding receivables - TPO characterized overdue receivables from the AEs as a deemed loan stating that it constitutes a separate international transaction - HELD THAT - We are under the jurisdiction of Hon ble Delhi High Court. The ITAT in several recent decisions has found that the decision of Hon ble Delhi High Court in the case of Pr. CIT vs Kusum Health Care (P.) Ltd. 2017 (4) TMI 1254 - DELHI HIGH COURT continuous to be a binding precedent. Thus we set-aside the orders of the authorities below and delete the transfer pricing adjustment in respect of arm s length price determination of outstanding receivables.

Summary

Issues Involved:
1. Legality of the order passed under Section 143(3) read with Section 144C(13) and Section 144B of the Income-tax Act, 1961.
2. Transfer pricing adjustment concerning the arm's length price determination of outstanding receivables from Associated Enterprises (AE).
3. Computation of assessed income and tax demand.
4. Disallowances under various sections of the Income-tax Act.
5. Charging of interest under Section 234B and 234C.
6. Initiation of penalty proceedings under Section 270A.

Issue-Wise Detailed Analysis:

1. Legality of the Order:
The assessee contended that the order passed by the Assessing Officer (AO) under Section 143(3) read with Section 144C(13) and Section 144B is bad in law and should be quashed to the extent it confirms the additions/disallowances made in the assessment order.

2. Transfer Pricing Adjustment:
The primary issue pressed by the assessee was related to the transfer pricing adjustment for outstanding receivables from AE. The AO/TPO/DRP had enhanced the income by INR 78,42,899 by treating the overdue receivables as a separate international transaction and applying an interest rate of 6 months LIBOR plus 400 basis points with a credit period of 30 days. The assessee argued that:
- The overdue receivables should not be re-characterized as a deemed loan.
- Working capital adjustment already accounts for the arm's length determination of outstanding receivables.
- The principal international transactions being at arm's length price subsume the receivables, and no separate determination is required.
- The adjustment was contrary to various judicial pronouncements, including the Delhi High Court's ruling in Kusum Healthcare Private Limited.

The Tribunal noted that the Delhi High Court's decision in Kusum Healthcare is a binding precedent, which states that not every item of receivables automatically constitutes an international transaction. The impact on working capital and profitability must be considered, and a proper inquiry should be conducted. The Tribunal found that the adjustment did not satisfy the criteria laid down by the High Court and deleted the transfer pricing adjustment for outstanding receivables.

3. Computation of Assessed Income and Tax Demand:
The assessee argued that the AO erred in considering the assessed income at INR 42,00,78,120 instead of INR 38,12,62,658 and made an adjustment of INR 3,88,15,462 without independent application of mind. The Tribunal did not delve into this issue as it was not pressed by the assessee.

4. Disallowances:
The assessee contended that the AO incorrectly disallowed INR 2,97,22,970 under Section 40A(7) for gratuity provision and INR 90,92,490 under Section 36(1)(va) for employees' contribution to provident fund, which was paid before the due date. These grounds were not pressed by the assessee and were dismissed.

5. Charging of Interest:
The assessee argued that the interest charged under Section 234B and 234C was excessive. This issue was not pressed by the assessee and was dismissed.

6. Penalty Proceedings:
The assessee contended that the AO erred in proposing to initiate penalty proceedings under Section 270A mechanically. This ground was not pressed by the assessee and was dismissed.

Conclusion:
The Tribunal, following the precedent set by the Delhi High Court in Kusum Healthcare, deleted the transfer pricing adjustment related to the arm's length price determination of outstanding receivables. The appeal was partly allowed, with the Tribunal setting aside the orders of the authorities below concerning this issue. The other grounds raised by the assessee were dismissed as not pressed. The order was pronounced in the open court on 23rd January 2023.