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2025 (4) TMI 1266 - AT - Income TaxTP adjustment - interest on outstanding receivables from Associated Enterprises (AEs) by imputing interest thereon - HELD THAT - On perusal of the audited financial statements of the assessee company we find that the entire invoices are raised by the assessee on its AEs in foreign currency and realization were made in foreign currency and receivables are also reflected in foreign currency which got ultimately restated in Indian currency as per the Accounting Standard-11 issued by ICAI. Hence LIBOR plus 400 points should be applied in the instant case. AR prayed for grant of working capital adjustment to be applied on the comparable margin which in either case if granted there would no need to separately impute interest on outstanding receivables as the same would get subsumed - Reliance in this regard was placed on the decision of Kusum Healthcare 2017 (4) TMI 1254 - DELHI HIGH COURT - We find that the DRP had also directed the ld TPO / AO to grant working capital adjustment to the assessee which has not been followed by the ld TPO. Hence the order passed by the TPO had to be considered as not passed in consonance with the binding directions u/s 144C(10) of the Act of ld DRP. On this limited count itself the order of TPO deserves to be quashed and is hereby quashed. Accordingly original Ground Nos. 2 and 3 raised by the assessee are hereby allowed. Action of the AO in enhancing the income and the tax liability in the final assessment order which was not even proposed by him in the draft assessment order - The draft assessment order gets merged with the order of the ld DRP and the final assessment order is merely giving effect to the directions of the ld DRP. As per section 144C(10) of the Act directions given by the DRP are binding on the ld AO. Hence AO could not carry out even arithmetical exercise in the final assessment order proceedings which is passed pursuant to the directions of the ld DRP. Accordingly any issue that was not subject matter of consideration in the draft assessment proceedings or before the ld DRP cannot take its birth strangely for the first time in the final assessment order. The alternative recourse is provided in the statute for the same. Hence the Ground No. 4 raised by the assessee is allowed. Chargeability of interest u/s 234A AO is directed to verify the extended due date of filing of return u/s 139(1) of the Act for AY 2020-21. Accordingly the ld AO is directed to decide the chargeability of interest u/s 234A of the Act. Chargeability of interest u/s 234B is consequential in nature. Interest u/s 234C the law is settled that the same has to be charged only on the returned income and not on the assessed income.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Appellate Tribunal in this appeal are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Transfer Pricing Adjustment on Interest for Outstanding Receivables Relevant Legal Framework and Precedents: Explanation (1)(c) to Section 92B of the Act was amended to include the concept of 'Capital Financing' which allows the tax authorities to impute interest on delayed payments or outstanding receivables beyond the agreed credit period in international transactions between Associated Enterprises. The principle aims to ensure that the transfer price reflects an arm's length consideration, including the cost of financing. Court's Interpretation and Reasoning: The TPO observed that the assessee was realizing dues from its AEs beyond the stipulated credit period of 30 days. Consequently, the TPO treated such delayed payments as capital financing and proposed imputation of interest at SBI PLR plus 300 basis points (16.55%). The assessee submitted invoice-wise details of delays and payment dates. The DRP intervened and reduced the adjustment amount but directed the TPO to consider a 60-day credit period and examine the applicability of LIBOR plus 400 basis points if payments were received in foreign currency. Key Evidence and Findings: The assessee's audited financial statements showed that invoices were raised and payments received in foreign currency, with receivables reflected in foreign currency and converted to INR as per Accounting Standard-11. This fact was not initially accepted by the TPO, who relied on SBI PLR. Application of Law to Facts: Given that the transactions were denominated and settled in foreign currency, the Tribunal held that LIBOR plus 400 basis points is the appropriate benchmark for imputing interest, aligning with the arm's length principle for foreign currency transactions. Treatment of Competing Arguments: The assessee argued that the working capital adjustment should be granted on the comparable margin, which would subsume the need for separate interest imputation. The DRP had directed such working capital adjustment, but the TPO failed to implement it. Conclusions: The TPO's order was quashed for non-compliance with the DRP's binding directions under Section 144C(10) of the Act regarding working capital adjustment. The Tribunal allowed the grounds challenging the interest imputation adjustment and held that the LIBOR plus 400 basis points rate should apply given the foreign currency nature of transactions. Issue 2: Application of Working Capital Adjustment Relevant Legal Framework: The DRP's directions under Section 144C(10) of the Act are binding on the AO and TPO. The working capital adjustment is a recognized method to account for the cost of financing related to working capital in transfer pricing analysis. Court's Interpretation and Reasoning: The DRP had directed the TPO and AO to grant working capital adjustment to the assessee. The TPO's failure to comply with this direction rendered the order non-consonant with statutory mandates. Application of Law to Facts: The Tribunal emphasized the binding nature of DRP directions and quashed the TPO order on this ground alone, allowing the assessee's challenge. Issue 3: Enhancement of Income and Tax Liability in Final Assessment Order Relevant Legal Framework: Section 144C(10) of the Act provides that the directions of the DRP are binding on the AO. The final assessment order is to give effect to the DRP's directions and cannot introduce any new additions or enhancements not considered earlier. Court's Interpretation and Reasoning: The AO enhanced the income and tax liability in the final assessment order without proposing such additions in the draft assessment order or obtaining DRP's consideration. The Tribunal held that such action is impermissible under the statutory framework. Application of Law to Facts: The final order merely gives effect to the DRP's directions. Any new issue arising for the first time in the final order is not sustainable and must be challenged through the alternative statutory remedies. Conclusions: The Tribunal allowed the ground challenging the enhancement of income and tax liability in the final assessment order, holding it contrary to the provisions of Section 144C(10). Issue 4: Chargeability of Interest under Sections 234A, 234B, and 234C Relevant Legal Framework: Section 234A deals with interest for delay in filing return, Section 234B with interest for default in payment of advance tax, and Section 234C with interest for deferment of advance tax installments. Court's Interpretation and Reasoning: The AO was directed to verify the extended due date of filing the return under Section 139(1) for AY 2020-21 to decide on Section 234A interest. The chargeability under Section 234B was held consequential. The Tribunal clarified that interest under Section 234C should be levied only on returned income and not on assessed income. Application of Law to Facts: The Tribunal remanded the issue to the AO for verification and appropriate decision. Issue 5: Initiation of Penalty Proceedings under Section 270A Relevant Legal Framework: Section 270A penalizes concealment of income or furnishing inaccurate particulars. Court's Interpretation and Reasoning: Given the Tribunal's decision to allow the assessee's grounds on transfer pricing adjustments and enhancements, the initiation of penalty proceedings lacked foundation. Conclusions: The Tribunal allowed the ground challenging penalty initiation, holding that it had no legs to stand in light of the other findings. 3. SIGNIFICANT HOLDINGS On Transfer Pricing Adjustment and Interest Imputation: "On perusal of the audited financial statements of the assessee company, we find that the entire invoices are raised by the assessee on its AEs in foreign currency and realization were made in foreign currency and receivables are also reflected in foreign currency which got ultimately restated in Indian currency as per the Accounting Standard-11 issued by ICAI. Hence, LIBOR plus 400 points should be applied in the instant case." On Binding Nature of DRP Directions: "The order passed by the TPO had to be considered as not passed in consonance with the binding directions u/s 144C(10) of the Act of ld DRP. On this limited count itself, the order of ld TPO deserves to be quashed and is hereby quashed." On Final Assessment Order and AO's Powers: "As per section 144C(10) of the Act, directions given by the ld DRP are binding on the ld AO. Hence, the ld AO could not carry out even arithmetical exercise in the final assessment order proceedings which is passed pursuant to the directions of the ld DRP. Accordingly, any issue that was not subject matter of consideration in the draft assessment proceedings or before the ld DRP, cannot take its birth strangely for the first time in the final assessment order." On Interest under Sections 234A, 234B, and 234C: "With regard to interest u/s 234C of the Act, the law is settled that the same has to be charged only on the returned income and not on the assessed income." On Penalty Proceedings: "In view of the decision given by us on the above grounds, initiation of penalty would have no legs to stand." These holdings establish that transfer pricing adjustments must be consistent with the currency of transactions and the arm's length principle, that DRP directions are binding and must be followed by the AO and TPO, and that the AO cannot introduce new additions in the final order beyond the DRP's scope. The Tribunal also clarifies the correct approach to interest and penalty under the relevant provisions of the Act.
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