2017 (4) TMI 1254 - HC - Income Tax

Court dismisses Revenue's appeal on transfer pricing adjustments, emphasizing case-by-case analysis over OECD guidelines

Pr. Commissioner of Income Tax-V Versus Kusum Health Care Pvt. Ltd.

The court condoned the delay in re-filing the appeal and dismissed the Revenue's appeal against the ITAT's order regarding transfer pricing adjustments on ... TPA - international transaction - profit level indicators (PLIs) - Held that:- The inclusion in the Explanation to Section 92B of the expression ‘receivables’ does not mean that dehors the context every item of ‘receivables’ appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studied. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way. The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-à-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. This was clearly impermissible in law as explained by this Court in CIT v. EKL Appliances Ltd. (2012 (4) TMI 346 - DELHI HIGH COURT ). Issues:1. Delay in re-filing the appeal.2. Transfer pricing adjustment on outstanding receivables as an international transaction.Analysis:1. The delay of 309 days in re-filing the appeal was condoned by the court based on the reasons stated in the application.2. The appeal under Section 260A of the Income Tax Act, 1961 was filed by the Revenue against the order of the Income Tax Appellate Tribunal (ITAT) for the Assessment Year 2010-11. The case involved transfer pricing adjustments on outstanding receivables treated as a separate international transaction. The Tax Processing Officer (TPO) proposed an adjustment to the Assessee's income, which was incorporated by the Assessing Officer (AO) in the draft assessment order. The Disputes Resolution Panel (DRP) rejected the Assessee's objections, leading to an addition to the Assessee's income. The ITAT set aside the assessment order, noting that the Assessee had already factored in the impact of outstanding receivables on its working capital and profitability compared to its comparables. The ITAT found further adjustment on outstanding receivables unwarranted and unjustified.3. The Revenue argued that outstanding receivables could constitute an international transaction based on the OECD Transfer Pricing Guidelines. However, the court disagreed, emphasizing the need for a case-by-case investigation to determine if outstanding receivables truly reflect an international transaction benefiting the associated enterprise (AE). The court highlighted the importance of analyzing the impact on the Assessee's working capital over time to establish a pattern indicating a transaction intended to benefit the AE. The court concluded that the AO's focus on a single assessment year was insufficient to justify re-characterizing the transaction based solely on outstanding receivables. The court referenced a previous case to support its decision, emphasizing that any further adjustment would distort the transaction's nature and pricing.4. The court found no error in the ITAT's order and dismissed the appeal, stating that no substantial question of law arose for determination.