2020 (7) TMI 620 - AT - Income Tax

TP Adjustment - adjustment of arm s-length price with respect to the outstanding debtors - HELD THAT - It is apparent that associated enterprise is only paying assessee the amount which is enough for defraying expenditure to keep it afloat and keeping all other sums in the form of outstanding trade receivable. In view of above peculiar facts, where total shareholders funds are available with its associated enterprise as an interest free trade receivable clearly shows that outstanding receivable from the associated enterprise is not at all the transaction of sale of goods/services to the assessee. In view of this, agreeing with the view of the coordinate bench in assessee s own case in earlier year, order of the learned transfer pricing officer cannot be found fault with in considering the overdue outstanding receivable from its associated enterprise as a separate international transaction. AR argument that if a working capital adjustment has been given to the assessee then there cannot be any addition/adjustment with respect to the outstanding receivable from its associated enterprise is devoid of any merit for the peculiar facts in this case wherein total shareholders funds are enjoyed by the associated enterprise as outstanding receivable. No document whereby the assessee has made any request before the learned transfer pricing officer or before the learned dispute resolution panel with respect to granting of working capital adjustment. Even in the transfer pricing study report submitted by the assessee which is placed the learned authorised representative could not show us that assessee himself has claimed any working capital adjustment while preparing its comparability analysis. In transfer pricing study report the assessee has stated what kind of assets it has employed and it has not stated that any working capital has been employed by the assessee. Even otherwise the assessee could not show us what is the difference in working capital of the assessee compared with comparable companies. Thus the adjustment of working capital was not at all there in case of assessee for this year. In view of this, we reject this argument. - Decided against assessee.

Issues Involved:
1. Re-computation of arm's length price (ALP) of international transactions.
2. Classification of outstanding receivables as an international transaction.
3. Re-characterization of trade receivables as unsecured loans and interest imposition.
4. Application of Comparable Uncontrolled Price (CUP) Method and interest rate determination.
5. Adjustments for differences in risk profiles.
6. Validity of penalty proceedings and computation of interest under sections 234B and 234C.

Issue-wise Detailed Analysis:

1. Re-computation of ALP of international transactions:
The assessee, a subsidiary of Aptara Inc. USA, filed its return of income for the Assessment Year 2012-13. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) to determine the ALP of the international transactions. The assessee used the Transactional Net Margin Method (TNMM) with an operating profit to total cost (OP/OC) ratio of 15.54%. The TPO adjusted the margins, resulting in a proposed adjustment of ?14,36,27,996. However, the Dispute Resolution Panel (DRP) directed the TPO to include/exclude certain comparables, leading to no addition on this account.

2. Classification of outstanding receivables as an international transaction:
The TPO identified that the assessee had total trade receivables of ?1,324,807,379 from its Associated Enterprise (AE). The TPO treated the outstanding receivables as an international transaction under Section 92B(1) of the Income Tax Act. The DRP upheld this view, noting that the trade receivables beyond the specified time limit are a separate international transaction.

3. Re-characterization of trade receivables as unsecured loans and interest imposition:
The TPO re-characterized the trade receivables as unsecured loans advanced to the AE and computed interest on the outstanding receivables at ?104,576,291. The DRP directed that interest should be chargeable on outstanding debt beyond 150 days, using the LIBOR + 300 basis points rate. The TPO recalculated the interest, resulting in an addition of ?1,64,05,578.

4. Application of CUP Method and interest rate determination:
The assessee argued against the CUP method applied by the TPO and the interest rate of LIBOR + 300 basis points. The DRP and TPO justified the interest rate based on the Delhi High Court's decision in the case of Cotton Naturals. The Tribunal upheld the DRP's direction to apply the LIBOR + 300 basis points rate.

5. Adjustments for differences in risk profiles:
The assessee claimed that adjustments for differences in risk profiles were not considered. The Tribunal found that the working capital adjustment, which accounts for the impact of outstanding receivables on profitability, was not claimed by the assessee in its transfer pricing documentation. Therefore, the argument was rejected.

6. Validity of penalty proceedings and computation of interest under sections 234B and 234C:
The assessee challenged the initiation of penalty proceedings under Section 271(1)(c) and the computation of interest under sections 234B and 234C. The Tribunal noted that the initiation of penalty proceedings is premature and the computation of interest is consequential in nature, thus dismissing this ground.

Conclusion:
The Tribunal dismissed the appeal of the assessee, upholding the DRP and TPO's findings regarding the classification of outstanding receivables as an international transaction, the re-characterization of trade receivables as unsecured loans, and the application of the LIBOR + 300 basis points interest rate. The Tribunal also rejected the arguments related to working capital adjustments and the validity of penalty proceedings.

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