2024 (1) TMI 421 - AT - Income Tax

TP Adjustment - Interest on delayed payments from its AE s - proposed to benchmark the outstanding receivable from associate enterprises as separate transaction in the light of s. 92E and directed the AO for appropriate transfer pricing adjustment towards interest on delayed payments from its AE s consistent with arm s length principles - HELD THAT - We find merit in the plea of the assessee that the assessee being a foreign entity, the overdue receivables do not act detrimental to the Indian Transfer Pricing regulations and determination of ALP in the instant case. The delay in payment of such receivables if any, do not appear to operate to the prejudice of the revenue. Secondly, the issue is also covered in favour of the assessee by the observations in Kusum Healthcare ( 2017 (4) TMI 1254 - DELHI HIGH COURT ) that once the working capital adjustment is given on account dues receivables, it ordinarily subsumes the interest on receivables and no separate benchmarking for it is needed. We thus direct the Assessing Officer to reverse and cancel the adjustment in question. Appeal of assessee allowed.

Summary

Issues involved:
The appeal challenges the final assessment order under sections 143(3) and 144C(13) of the Income-tax Act, 1961 for Assessment Year 2017-18, specifically focusing on upward transfer pricing adjustments.

Details of the judgment:
The appeal was filed by a foreign entity located in France, disputing the transfer pricing adjustment of Rs. 6,63,370/- related to interest on delayed payments from its associate enterprises in India. The Dispute Resolution Panel (DRP) directed the Assessing Officer (AO) to make the adjustment based on the Transfer Pricing Officer's (TPO) order. The AO calculated the adjustment using the SBI base rate plus 300 basis points.

During the hearing, the assessee's counsel argued that the delay in payment did not impact the arm's length price as the foreign entity was not affected by the credit period extension. The counsel also highlighted that similar credit policies were applied to unconnected entities without charging interest. Referring to a judgment by the Delhi High Court, it was contended that no transfer pricing adjustment was necessary for overdue receivables by the foreign entity.

On the other hand, the Revenue's representative supported the lower authorities' orders. After considering both sides, the Tribunal agreed with the assessee that the overdue receivables from the foreign entity did not violate Indian Transfer Pricing regulations. It was noted that the working capital adjustment generally includes interest on receivables, as indicated in the Kusum Healthcare case. Consequently, the Tribunal directed the AO to reverse and cancel the adjustment.

As a result, the appeal of the assessee was allowed, and the adjustment was deemed unnecessary. The order was pronounced in the open court on 29.12.2023.