2020 (12) TMI 391 - AT - Income Tax

TP adjustment - imputing interest on outstanding receivables as on March 31st 2013 relating to sales of services to AE s - HELD THAT - Outstanding receivable is a separate international transaction and requires to be benchmarked post amendment in Clause (c) of Explanation to Section 92B of the Act by the Finance Act 2012. However since in the instant case the working capital adjustments had been granted by the ld. TPO on which fact there is absolutely no dispute the outstanding receivables thereon gets subsumed thereon. Hence there is no need to make separate adjustment towards outstanding receivables by imputation of interest on the same. This aspect has been considered in assessee s own case for A.YRs. 2011-12 and 2012-13 2018 (6) TMI 508 - ITAT HYDERABAD - we direct the ld. TPO not to make any adjustment by way of imputation of interest on outstanding receivables in the peculiar facts and circumstances of the instant case. Accordingly the grounds raised by the assessee are allowed in this regard.

Summary

Issues:
1. Whether outstanding receivables could be considered as a separate international transaction and imputation of interest thereon could be made?
2. Whether separate adjustment to arm's length price of outstanding receivables could be made, if working capital adjustment is granted to the assessee?

Analysis:

Issue 1:
The appeal in ITA No. 2032/Hyd/2017 for A.Y. 2013-14 pertained to the consideration of outstanding receivables as a separate international transaction and the imputation of interest thereon. The Tribunal considered the contentions of the assessee and the Transfer Pricing Officer (TPO) regarding the nature of outstanding receivables related to the sale of services to associated enterprises (AEs). The TPO proposed to charge interest on the receivables, which the assessee contested, arguing that the outstanding receivables were part of the Working Capital Adjustment (WCA) computation and that interest was already factored into the arm's length margin. The Dispute Resolution Panel (DRP) held that deferred receivables constituted an international transaction and directed the Assessing Officer to apply short-term fixed deposit rates for the interest adjustment. The Tribunal, considering past judgments and the working capital adjustments granted by the TPO, held that outstanding receivables did not require a separate adjustment for imputation of interest, as it was subsumed within the working capital adjustments.

Issue 2:
The second issue revolved around whether a separate adjustment to the arm's length price of outstanding receivables could be made if working capital adjustment was granted to the assessee. The Tribunal referred to its previous order for A.Yrs. 2011-12 and 2012-13, where it was held that working capital adjustment accounted for interest on receivables, eliminating the need for further adjustments. Citing relevant case laws and the decision of the High Court, the Tribunal directed the TPO not to make any adjustment by imputing interest on outstanding receivables in the present case. Consequently, the grounds raised by the assessee were allowed in this regard.

Other Grounds:
Ground No. 3 raised by the assessee pertained to the charging of interest u/s. 234D, deemed consequential in nature. Ground No. 4 related to the initiation of penalty proceedings u/s. 271(1)(c) and 271AA, deemed premature for adjudication at that stage. The Tribunal allowed the appeal of the assessee based on the detailed analysis and findings on the primary issues discussed.

This comprehensive analysis of the judgment highlights the key legal arguments, interpretations of relevant provisions, and the Tribunal's decision on each issue presented in the appeal.