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2022 (7) TMI 260 - AT - Income TaxTPA - Notional interest charged on receivables outstanding - Whether receivables constitute separate international transactions under section 92B read with section 92F of the Act and Rule 10B of the Rules? - delayed payments received by the assessee from its various AEs as unsecured loan advanced to the AEs and charged a rate of interest based Libor plus 300 bps i.e. 4.78% on receivables outstanding for more than 54 days - HELD THAT - As Hon'ble Delhi High Court in the case of Kusum healthcare Pvt. Ltd. 2017 (4) TMI 1254 - DELHI HIGH COURT it is held that the appellant having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-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. In view of the same the transfer pricing adjustment made by the AO/TPO is deleted. The ground of appeal is decided in favour of the assessee.
Issues:
Transfer Pricing - Treatment of outstanding receivables as an international transaction under section 92B read with section 92F of the Act and Rule 10B of the Rules. Analysis: The case involved an appeal by the Revenue against the order of the Ld. CIT (Appeals)-44, New Delhi for Assessment Year 2013-14. The primary issue revolved around the treatment of outstanding receivables as an international transaction. The assessee, engaged in providing business process outsourcing services to its Associated Enterprises, selected Transactional Net Margin Method (&39;TNMM&39;) as the most appropriate method for determining the arm&39;s length price. The Revenue contended that outstanding receivables constitute a separate international transaction. The TPO considered delayed payments as unsecured loans to AEs, applying interest rates based on Libor plus 300 bps for outstanding receivables over 54 days. The TPO's order was based on amendments in the Act related to international transactions and transfer pricing regulations. The TPO argued that the delay in payment for receivables was an international transaction under section 92B(1) read with clause (v) of section 92F of the Act. The TPO emphasized the doctrine of "substance over form" and applied transfer pricing regulations considering the overall business arrangement of the taxpayer. The TPO highlighted that the delay in receipt of receivables provided a benefit to AEs through interest-free loans disguised as delays. In response, the assessee argued that the working capital adjustment was already factored into the pricing/profitability vis-a-vis comparables, as supported by a Delhi High Court decision. The Ld. CIT(A) found in favor of the assessee, citing the Delhi High Court's decision and emphasizing the need for a case-by-case investigation into outstanding receivables' impact on working capital. The Ld. CIT(A) held that any further adjustment solely based on outstanding receivables would distort the transaction's characterization. Upon appeal, the Tribunal upheld the Ld. CIT(A)'s order, following the precedent set by the Delhi High Court. The Tribunal dismissed the Revenue's appeal, maintaining that the adjustment made by the AO/TPO regarding outstanding receivables was unwarranted, considering the impact on working capital and pricing/profitability already factored in by the assessee. In conclusion, the Tribunal's decision aligned with the principle of consistency and the Delhi High Court's precedent, emphasizing the need for a thorough analysis of outstanding receivables' impact on working capital before characterizing them as a separate international transaction. The appeal filed by the Revenue was dismissed based on these grounds.
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