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2018 (10) TMI 1180 - AT - Income TaxTPA - receivables forming a part of international transaction - international transaction - ALP determination - receivables beyond 180 days - Held that - As relying on case of Kusum Healthcare Pvt. Ltd. Vs. ACIT 2017 (4) TMI 1254 - DELHI HIGH COURT , there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis- -vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way. The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis- -vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction. This was clearly impermissible in law as explained by this Court in CIT v. EKL Appliances Ltd. (2012 (4) TMI 346 - DELHI HIGH COURT). - Decided in favour of assessee.
Issues Involved:
1. Computation and levy of interest on outstanding receivable balance. 2. Determination of arm's length interest rate on outstanding receivables. 3. Application of interest rates and restriction of interest computation period. Detailed Analysis: Issue 1: Computation and Levy of Interest on Outstanding Receivable Balance The assessee, engaged in providing IT solutions, filed its return for AY 2013-14. The case was selected for scrutiny, and the AO referred the matter to the TPO for determining the arm's length price of international transactions. The TPO proposed to charge interest at 14.45% p.a. on receivables received beyond the credit period, arguing that receivables form part of international transactions as per the retrospective introduction of explanation to Section 92B. The TPO rejected the assessee's contention that receivables are part of the working capital adjustment (WCA) and charged interest on delayed receivables. Issue 2: Determination of Arm's Length Interest Rate on Outstanding Receivables The CIT(A) directed the AO to apply domestic term deposit rates of SBI for the relevant financial year instead of the 14.45% rate applied by the TPO. The CIT(A) observed that the TPO should give credit for any interest amount already offered by the assessee while working out the interest adjustment. The CIT(A) also restricted the computation of interest to the relevant assessment year, referencing the decision of the Hon'ble Mumbai ITAT in Technimont ICB House vs. DCIT. Issue 3: Application of Interest Rates and Restriction of Interest Computation Period The CIT(A) held that the TP adjustment should be restricted to the period of the relevant assessment year and considered the receivables from the beginning of the financial year and invoices raised during the financial year. The CIT(A) found no infirmities in the TPO/AO's observation regarding charging interest for delay after the 90-day credit period. Appeal Before ITAT: The assessee appealed against the CIT(A)'s order, arguing that the outstanding receivables are consequential to the main international transaction of software services and not a separate international transaction. The assessee contended that the impact of outstanding receivables on working capital adjustments had already been factored in, and any further adjustment would be unjustified. The assessee also argued that the receivables should be benchmarked with international market rates for foreign currency loans. ITAT's Consideration: The ITAT considered the rival submissions and various case laws, including the decision in Kusum Healthcare Pvt. Ltd. Vs. ACIT, where the Hon'ble Delhi High Court held that not every item of receivables constitutes an international transaction. The court emphasized the need for a proper inquiry by the TPO to discern a pattern indicating that the arrangement benefits the AE. The court found that the AO's focus on one AY did not justify concluding that receivables beyond 180 days constituted an international transaction. Conclusion: Respectfully following the decision of the Hon'ble Delhi High Court and the coordinate benches of Hyderabad, the ITAT set aside the order of the CIT(A) and directed the AO to delete the interest charged on the outstanding receivables. The appeal of the assessee was allowed.
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