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2020 (10) TMI 190 - AT - Income TaxTP Adjustment - Interest on outstanding receivable from AE - HELD THAT - When we examine audited profit and loss account it shows that taxpayer is a debt free entity. It is settled principle of law that when taxpayer is debt free company there is no question of receiving any interest on the receivables. Perusal of TP study of the taxpayer shows working capital adjustment has been granted to the taxpayer in the year under assessment as well as in the earlier years. When undisputedly impact of working capital of tested party vis- -vis its comparables has been factored in the profitability of the taxpayer while benchmarking international transaction qua IT and ITES segments have been held to be at arm s length, then there is no need to impute the interest on outstanding receivables from associated enterprises (AE). Coordinate bench of tribunal in case of M/s. Target Sourcing Services India Pvt. Ltd. 2020 (1) TMI 127 - ITAT DELHI following the decision rendered in case of Pr. CIT vs. Kusum Health Care Pvt. Ltd. 2017 (4) TMI 1254 - DELHI HIGH COURT held that re-characterization of outstanding receivables as loan by the TPO and thereby imputing the interest on such outstanding receivables is not sustainable in the eyes of law Addition made by TPO/DRP on account of interest on outstanding receivable from AE is not sustainable, hence, order to be deleted. - Decided in favour of assessee. Deduction u/s 10AA on account of interest income and miscellaneous income - addition on the ground that the said income cannot be set to have any direct nexus with the assessee business because the assessee is not into the business of finance and investment - HELD THAT - As relying on own case 2018 (2) TMI 1084 - ITAT DELHI we are of the considered view that the taxpayer is entitled for deduction u/s 10A on the interest earned on the fixed income and miscellaneous income as Section 10A is a complete code providing the mechanism for computing profit of the business eligible for deduction and as such taxpayer is held to be entitled for deduction u/s 10AA. Approach adopted by AO/DRP is legally and factually misconceived that order of Tribunal has not yet attained finality, more particularly when order passed by Tribunal has not been stayed by the higher forum. - Decided in favour of assessee.
Issues Involved:
1. Validity of the assessment order passed in the name of a non-existent entity. 2. Transfer pricing adjustments on inter-company receivables. 3. Disallowance of deductions under section 10AA of the Income Tax Act on interest and miscellaneous income. Detailed Analysis: 1. Validity of the Assessment Order: The taxpayer contended that the final assessment order passed by the Additional Commissioner of Income Tax and the Dispute Resolution Panel (DRP) was void ab initio as it was issued in the name of an entity, UnitedHealth Group Information Services Pvt. Ltd., which was no longer in existence at the time of passing such orders. The tribunal did not make specific findings on this issue as it was considered general in nature. 2. Transfer Pricing Adjustments: - Ground No. 3 to 11: - The taxpayer argued against the transfer pricing adjustment of INR 5,43,68,348/- made by the Deputy Commissioner of Income Tax, Transfer Pricing Officer (TPO). The TPO had re-characterized inter-company receivables as unsecured loans and imputed interest on them without applying any prescribed method under section 92C of the Income Tax Act. - The tribunal observed that the taxpayer is a debt-free entity, and as per the settled principle of law, there is no question of receiving any interest on receivables. This principle was supported by the Delhi High Court's decision in the case of Pr. Commissioner of Income Tax-2 vs. M/s. Bechtel India Pvt. Ltd. - The tribunal noted that the working capital adjustment had been granted to the taxpayer, factoring in the impact of working capital on profitability while benchmarking international transactions. Therefore, there was no need to impute interest on outstanding receivables from associated enterprises (AE). - The tribunal referenced the decision in M/s. Target Sourcing Services India Pvt. Ltd. vs. ACIT, which held that re-characterization of outstanding receivables as loans and imputing interest on them is not sustainable. Consequently, the tribunal ordered the deletion of the addition made by the TPO/DRP on account of interest on outstanding receivables. 3. Disallowance of Deductions under Section 10AA: - Ground No. 12: - The Assessing Officer disallowed deductions claimed by the taxpayer under section 10AA on interest income of INR 7,57,24,178/- and miscellaneous income of INR 2,90,63,825/-, arguing that these incomes did not have a direct nexus with the taxpayer's business. - The taxpayer contended that this issue had already been decided in its favor for the assessment years 2010-11 and 2011-12 by the tribunal. The tribunal noted that the Assessing Officer and DRP had declined to follow the tribunal's previous order on the grounds that it had not attained finality. - The tribunal referenced its earlier decisions, including the case of Riviera Home Furnishing vs. Additional CIT, which held that interest on fixed deposits and miscellaneous income are part of the business profits eligible for deduction under section 10AA. - The tribunal reiterated that section 10AA is a complete code providing the mechanism for computing the profit of the business eligible for deduction. Therefore, the taxpayer was entitled to deductions on interest and miscellaneous income, and the disallowance by the AO/DRP was legally and factually misconceived. Conclusion: The tribunal allowed the taxpayer's appeal, ordering the deletion of the transfer pricing adjustment on inter-company receivables and granting the deductions under section 10AA on interest and miscellaneous income. The decision emphasized the principles of law regarding debt-free entities and the comprehensive mechanism provided by section 10AA for computing eligible business profits.
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