2019 (1) TMI 1598 - AT - Income Tax

TP Adjustment - arm s length price of interest on receivables and the shortfall - Adjustment on credit period beyond 90 days - no credit period was agreed between the parties - HELD THAT - TPO has made the independent TP analysis and found that the tax payers margins are within /- 3% variation of the comparable companies and has not made any working capital adjustment. However noticed that assessee has huge outstanding in receivables and made adjustment on interest receivable on such outstandings. We noticed that TPO has allowed the credit period at 90 days as per agreement and wherever assessee allowed the credit period beyond 90 days he made the adjustment. TPO has made the adjustment wherever assessee has allowed the credit period beyond 90 days and failed to acknowledge that assessee has received certain payment within 90 days also. We are in agreement with ld. AR that we need to consider the overall average credit period for the AY or should be compared with the industry average. TPO has applied 90 days period selectively. Therefore in our view TPO should calculate the average of collection for the year under consideration of all the transactions carried on by the assessee. In case it is found that such collection period is beyond 90 days he can do the adjustment only to the extent it crossed 90 days. TPO cannot calculate the collection period selectively for those which are beyond 90 days. Therefore we remit this issue back to the TPO to calculate the average collection period for this AY and determine the adjustment as per the above directions. Accordingly the grounds raised by the assessee on this issue are treated as allowed for statistical purposes.

Summary

Issues Involved:
1. Transfer pricing adjustment on outstanding receivables.
2. Computation methodology for transfer pricing adjustment.
3. Interest liability under sections 234B and 234C of the Income-tax Act.

Detailed Analysis:

1. Transfer Pricing Adjustment on Outstanding Receivables:

The core issue revolves around whether the outstanding receivables from associated enterprises (AEs) should be considered a separate international transaction warranting a transfer pricing adjustment. The TPO noted that the assessee had receivables at the end of the year and proposed to charge interest at 14.45% on receivables beyond the due date, amounting to Rs. 1,07,27,259/-. The assessee contended that these receivables were part of the principal international transaction of software development services and should not be treated separately. The Dispute Resolution Panel (DRP) directed the AO to apply the domestic term deposit rates of SBI, reducing the adjustment to Rs. 48,84,781/-. The Tribunal observed that the TPO should calculate the average collection period for the year and make adjustments only for periods exceeding 90 days, remitting the issue back to the TPO for recalculation.

2. Computation Methodology for Transfer Pricing Adjustment:

The assessee argued that the TPO's approach of applying a 90-day credit period selectively was flawed. The Tribunal agreed, noting that the TPO failed to consider payments received within the 90-day period and should instead calculate the average collection period for all transactions within the assessment year. The Tribunal directed the TPO to determine adjustments only for deviations beyond a reasonable period, emphasizing that the average collection period should be used rather than selective periods.

3. Interest Liability Under Sections 234B and 234C:

The assessee raised a ground regarding the computation of interest liability under sections 234B and 234C of the Income-tax Act. The Tribunal noted that charging interest under these sections is mandatory and directed the AO to compute the interest liability accordingly.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, instructing the TPO to recalculate the average collection period for the assessment year and make adjustments only for periods exceeding 90 days. The Tribunal also upheld the mandatory nature of interest computation under sections 234B and 234C, directing the AO to proceed accordingly.