2023 (6) TMI 969 - AT - Income Tax

TP Adjustment - addition pertaining to interest on outstanding receivables - DRP have erred in rejecting the economic analysis undertaken by the Appellant by conducting a fresh economic analysis for the impugned transaction - HELD THAT - We note that the ITAT in assessee s own case for immediately preceding assessment year i.e. AY 2015-16 2023 (2) TMI 1105 - ITAT DELHI on the impugned issued as held since the assessee has provided similar services to unrelated parties and claims that no interest was charged with respect to outstanding receivables from unrelated parties in all fairness this contention cannot be brushed aside lightly though needs due verification by lower authorities. We therefore restore this issue to the file of the TPO/AO. Assessee is directed to furnish necessary documentary evidences to demonstrate that on outstanding receivables from unrelated parties no interest was charged on similar transactions as that with AEs and the Assessing Officer/TPO is directed to examine the same and decide the issue afresh as per provisions of law.

Summary

Issues involved:
The appeal challenges the order of the Assessing Officer passed following the directives of the Dispute Resolution Panel (DRP) for the assessment year 2016-17.

Grounds of Appeal:
1. The addition to total income due to adjustment in arm's length price of international transaction related to interest on receivables.
2. Rejection of economic analysis conducted by the appellant for the transaction.
3. Imputation of interest on outstanding receivables from Associated Enterprises, including re-characterization and failure to consider relevant factors.
4. Proposal to charge interest under section 234A of the Act.
5. Initiation of penalty under section 271(1)(c) of the Act.

Detailed Summary:
The assessee, engaged in software consulting services, submitted working capital adjusted margins of comparable companies during assessment proceedings. However, the AO/TPO rejected this analysis and imposed interest on inter-company receivables outstanding beyond 30 days. The adjustment amount was initially INR 5,54,066 but was later increased to INR 1,20,74,056 due to a computational error. The DRP upheld this adjustment in its directions dated 7th October 2020, allowing a credit period of 60 days.

The assessee appealed the final assessment order before the ITAT, citing a similar issue in the preceding year where the Tribunal had remitted the matter with directions to the TPO/AO. The ITAT, considering its previous decision, remitted the issue back to the AO/TPO for further examination based on the provided documentary evidence. The appeal was allowed for statistical purposes.

This judgment highlights the importance of proper economic analysis in transfer pricing matters and the need for thorough examination of relevant factors by tax authorities to ensure compliance with the law.