2024 (9) TMI 27 - HC - Income Tax

TP Adjustment - DRP Re-characterizing inter-company receivables as unsecured loan - Whether the Ld. Tribunal erred in not appreciating that the Ld. DRP/TPO/AO erred in law on facts and circumstances of the case by notionally treating receivables as separate international transaction, which is admittedly not leveled? HELD THAT We find that the appellant relied on the judgement of Kusum Health Care Pvt 2017 (4) TMI 1254 - DELHI HIGH COURT - The Tribunal has considered the judgement of the Delhi High Court and stated that they have no quarrel to the proposition laid down by the aforesaid judgement that once working capital adjustment is granted to the assessee, there is no need for further imputation of interest on outstanding receivables at the end of the year as the same gets subsumed in the working capital adjustment. After agreeing with this proposition, the Tribunal has directed the TPO to once again look into the bills submitted by the appellant and directed TPO to ascertain whether interest is to be imputed on bills that have been realised after credit period of 70 days. In our view, the direction given to the TPO to examine the bills is correct, however, the direction for imputing interest on the bills was not necessary and the TPO is required to act keeping in view the judgment of Kusum Health Care 2017 (4) TMI 1254 - DELHI HIGH COURT Accordingly, the impugned order is modified to the extent that the TPO shall look into the entire aspect in light of the judgement of Kusum Health Care (Supra) and pass orders accordingly.

Summary

Issues:
1. Interpretation of provisions of Income Tax Act, 1961 regarding re-characterization of inter-company receivables.
2. Determination of international transactions and working capital adjustments.
3. Application of notional interest on outstanding receivables.
4. Allegations of differential treatment between associated enterprises and unrelated parties.
5. Review of Tribunal's decision-making process and requirement for cogent reasoning.

Analysis:
The case involved appeals under Section 260A of the Income Tax Act, 1961 arising from an order passed by the Income Tax Appellate Tribunal for the assessment years 2011-12 & 2012-13. The appellant raised several questions of law, including the re-characterization of inter-company receivables as unsecured loans without statutory provision, treatment of receivables as separate international transactions, and the imposition of notional interest on outstanding receivables. The Tribunal considered a judgment of the Delhi High Court regarding working capital adjustments and directed the Transfer Pricing Officer (TPO) to re-examine the bills submitted by the appellant to determine if interest should be imputed on bills realized after the credit period of 70 days.

Upon review, the High Court found the direction to examine the bills appropriate but deemed the imposition of interest unnecessary in line with the Delhi High Court judgment. Consequently, the impugned order was modified, instructing the TPO to reconsider the matter in light of the Kusum Health Care judgment. The appeals were disposed of based on this direction.

The judgment highlighted the importance of aligning the TPO's actions with established legal principles and emphasized the need for reasoned decision-making processes. The Court's decision aimed to ensure that the TPO's actions were consistent with judicial precedents and principles, particularly regarding the treatment of working capital adjustments and imputation of interest on outstanding receivables. By providing specific directions to the TPO based on legal interpretations, the Court sought to uphold fairness and adherence to legal standards in the assessment of tax matters related to inter-company transactions.