2017 (11) TMI 178 - AT - Income Tax

TPA - working capital adjustment - Held that - As gone through the TP study of the assessee and also the TP order of the TPO. Though the AO has stated that the working capital adjustment is allowed, the working of such adjustment is not available on record and it is not evident that the margins of the assessee and the comparables are arrived at after such adjustment. The decisions relied upon by the learned Counsel for the assessee support this contention. Though, we agree with the assessee s contention that no separate addition of interest on receivables is required after allowing working capital adjustment, in the absence of material on record, we are unable to give any relief to the assessee on this ground. Therefore, we deem it fit and proper to direct the AO to examine if the final margins of the comparables and the assessee have been arrived at after WC adjustment to hold the international transactions of the assessee to be at ALP and if it is found to be so, then we direct that no further addition on account of interest on receivables shall be made. However, in the event, it is found that WCA has not been made to the final margins which are compared to the margin of the assessee, then the AO shall allow the reasonable period of credit i.e. three months from the date of notice and on the outstanding balance exceeding such period, the interest at LIBOR rate may be applied for making the adjustment. Assessee s appeal is treated as allowed for statistical purposes.

Summary

Issues involved:
1. Transfer pricing adjustment on notional interest on delayed receivables
2. Selection of comparables for determining Arms' Length Price (ALP)
3. Levying of interest under sections 234B, 234C, and 234D of the Act

Transfer pricing adjustment on notional interest on delayed receivables:
The assessee appealed against a Transfer Pricing Officer's (TPO) adjustment resulting in a demand due to a Transfer Pricing (TP) adjustment. The TPO had proposed an adjustment and charged interest on delayed receipts. The Dispute Resolution Panel (DRP) partially upheld the assessee's appeal, directing the use of SBI interest rates on short-term fixed deposits instead of the TPO's rate. The final assessment order was challenged by the assessee, arguing against the interest charge. The Tribunal directed the Assessing Officer (AO) to examine if the margins were calculated after working capital adjustment and if so, no further interest adjustment was necessary. Otherwise, interest at LIBOR rate could be applied on the outstanding balance exceeding a reasonable credit period.

Selection of comparables for determining Arms' Length Price (ALP):
The TPO rejected the assessee's TP study, citing the use of multiple-year data and lack of contemporaneous data for comparables. After conducting an independent search, the TPO determined the ALP for software development services. The assessee argued that the working capital adjustment should negate the need for further ALP adjustments. The Tribunal reviewed the TP study and TPO's order, noting the lack of clarity on the working capital adjustment's impact on margins. It directed the AO to ensure margins were calculated post-adjustment before considering any additional interest on receivables.

Levying of interest under sections 234B, 234C, and 234D of the Act:
The AO proposed interest under various sections of the Income Tax Act due to delayed receipts by the assessee. The DRP modified the interest rate but upheld the interest charge. The assessee contended that the interest should be calculated based on LIBOR+300 basis points, not Indian interest rates. The Tribunal, while acknowledging the delay in receipts, directed the AO to reassess the need for interest based on the working capital adjustment's impact on margins and the reasonableness of the credit period before applying LIBOR rates if necessary.

This judgment highlights the complexities of transfer pricing adjustments, the importance of accurate comparables selection, and the necessity for thorough assessments before levying interest under tax laws.