2018 (1) TMI 939 - AT - Income Tax

Working capital adjustment - adjustment on account of receivables - Held that - Though in the instant assessment year, the working capital adjustment has already been allowed to the assessee, but in the order of the Ld. TPO, it is not clear at what point of time the receivables, inventory and payables are compared for computing working capital adjustment. Their level should be compared on average throughout the year. Further, it is also not evident from the order of the Ld. TPO what appropriate interest rate has been used for computing working capital adjustment. We feel it appropriate to restore the issue to the matter of the Ld. Assessing Officer/TPO for analysing the working capital adjustment given by the Ld. TPO and decide the issue in the light of the direction given by the Tribunal

Issues Involved:
1. Validity of the assessment order.
2. Legality of the directions issued by the Dispute Resolution Panel (DRP).
3. Transfer pricing adjustments, specifically regarding outstanding receivables from associated enterprises (AEs).
4. Initiation of penalty proceedings under Section 271(1)(c) of the Income-tax Act.
5. Levy of consequential interest under Sections 234B and 234C of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Validity of the Assessment Order:
The assessee challenged the assessment order passed by the Additional Commissioner of Income Tax, Special Range - 3, New Delhi, stating it was arbitrary, vitiated, and void ab-initio. The Tribunal did not find merit in this ground and dismissed it as general in nature.

2. Legality of the Directions Issued by the DRP:
The assessee argued that the directions issued by the DRP were prejudicial and bad in law. The Tribunal did not elaborate on this issue separately, indicating it was subsumed under the broader discussion of transfer pricing adjustments.

3. Transfer Pricing Adjustments:
The primary contention revolved around the transfer pricing adjustments related to outstanding receivables from AEs. The Tribunal noted that the assessee had benchmarked its international transactions using the Transactional Net Margin Method (TNMM) with operating profit/operating cost (OP/OC) as the Profit Level Indicator (PLI). The TPO recomputed the OP/OC margin and selected nine comparables, ultimately finding no adjustment necessary for the international transactions.

However, the TPO identified delays in the realization of invoices as a separate international transaction requiring benchmarking. The TPO applied an interest rate of 14.55% per annum, considering the receivables as akin to unsecured loans. The DRP upheld this view but directed the TPO to apply the SBI base rate plus basis points as per Safe Harbour Rules.

The Tribunal referenced its previous decisions in the assessee's own case for earlier assessment years, where it was held that no adjustment on account of receivables is needed if working capital adjustment has already been made. The Tribunal restored the matter to the TPO for recalculating interest on receivables, emphasizing the need for a proper inquiry and analysis over a period of time to discern a pattern indicating an international transaction intended to benefit the AE.

4. Initiation of Penalty Proceedings:
The assessee contested the initiation of penalty proceedings under Section 271(1)(c) for allegedly furnishing inaccurate particulars of income. The Tribunal did not specifically address this issue, implying it was consequential to the primary issues being adjudicated.

5. Levy of Consequential Interest:
The assessee also challenged the levy of consequential interest under Sections 234B and 234C. The Tribunal did not provide a detailed discussion on this issue, indicating it was not pressed or was consequential.

Conclusion:
The Tribunal allowed the appeal partly for statistical purposes, restoring the issue of interest on receivables to the TPO for recalculating in conformity with the ratio of the Hon'ble Delhi High Court judgment in the case of Kusum Healthcare Pvt. Ltd. The Tribunal emphasized the need for a detailed analysis and proper inquiry by the TPO, considering the working capital adjustment already allowed. Other grounds raised by the assessee were dismissed as infructuous or not pressed.

← Previous Next →