2024 (2) TMI 1400 - AT - Income Tax

TP Adjustment - interest on the receivables from AE - HELD THAT - As decided in ALCATEL LUCENT INDIA LIMITED 2023 (4) TMI 980 - ITAT DELHI held that case of Kusum Healthcare 2017 (4) TMI 1254 - DELHI HIGH COURT is still the binding precedent on the issue of interest on outstanding receivables as held that the inclusion in the Explanation to section 92B of the Act of the expression receivables does not mean that de hors the context every item of receivables appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterized as an international transaction and (ii) With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and recharacterized the transaction. Addition deleted - Decided in favour of assessee.

Summary

Issues:
Computing interest on receivables from AE by way of Transfer Pricing Adjustment.

Analysis:
The appeal concerns the computation of interest amounting to Rs.5,68,919/- on receivables from AE through Transfer Pricing Adjustment. The assessee argued that notional interest should not be added to the receivables as the company is debt-free, conducts 100% business with the AE, and has not paid or received any interest from third parties. The assessee cited various case laws to support this argument. On the contrary, the Departmental Representative relied on lower authorities' orders and referred to the Tribunal's decision in the case of Bechtel India Pvt. Ltd. vs ACIT.

Upon careful consideration, the Tribunal referred to the case of Alcatel Lucent India Limited, where a similar issue was discussed. The Tribunal highlighted that the working capital adjustment considers the impact of outstanding receivables, and no further adjustment is necessary if the assessee's margin is higher than the adjusted margin of comparables. The Tribunal also referenced decisions in the cases of Kusum Healthcare, Ameriprise India (P.) Ltd., and McKinsey Knowledge Centre (P) Ltd. to support its analysis.

The Tribunal noted that the decision of the Hon'ble Delhi High Court in the case of Kusum Healthcare remains the binding precedent on the issue of interest on outstanding receivables. The Tribunal followed this precedent, stating that since the facts are identical and the High Court's decision is still binding, they set aside the lower authorities' orders and decided the issue in favor of the assessee. As a result, the appeal of the assessee was allowed, and the addition made by the Assessing Officer was deleted.

In conclusion, the Tribunal's decision was based on the established position set by the Hon'ble Delhi High Court in the case of Kusum Healthcare, which was followed in subsequent cases. The Tribunal upheld the principle that interest on outstanding receivables should not be added based on notional calculations, especially when the company is debt-free and conducts significant business with the related party. The decision was in line with the binding precedent and resulted in the allowance of the assessee's appeal.