Tribunal directs deletion of transfer pricing adjustment on outstanding receivables, emphasizes overall profitability.

The Tribunal allowed the appeal, directing the deletion of the transfer pricing adjustment on outstanding receivables treated as deemed loan. It emphasized the importance of considering overall profitability and established transfer pricing principles, concluding that further adjustments based solely on outstanding receivables would distort the transaction's nature. The Tribunal referenced a High Court decision affirming this approach, noting that the Revenue's appeal to the Supreme Court did not affect the High Court's binding decision.

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Issues:
Transfer pricing adjustment on outstanding receivables treated as deemed loan.

Analysis:
The appeal was against the order of the Dy. Commissioner of Income Tax regarding the transfer pricing adjustment of outstanding receivables beyond 60 days from associated enterprises as deemed loan. The appellant company provided IT services and software development to its Group Company. The TPO proposed charging notional interest on delayed payments as unsecured loan advance to AEs. The TPO calculated an upward adjustment based on SBI base rate plus 400 basis points. The DRP upheld the TPO's action but directed to add 300 basis points and considered 60 days as a reasonable period for charging interest.

During the proceedings, the appellant argued that interest on receivables was not an international transaction as it was already included in the sale price. The operating profit margin was not affected, and no separate adjustment was needed for outstanding receivables. The DR supported the DRP's decision, emphasizing the consideration given to the objections raised by the assessee.

The Tribunal analyzed the profit margins and working capital adjustments, noting that the appellant's margin was higher than comparables. Referring to a previous case, the Tribunal concluded that the approach of aggregating international transactions and receivables was in line with established TP principles. The Tribunal cited a decision of the Hon'ble High Court of Delhi affirming the coordinate bench's ruling, emphasizing that further adjustments based solely on outstanding receivables would distort the transaction's nature.

The Tribunal noted that the Revenue had filed an SLP before the Supreme Court against the High Court's judgment but held that the High Court's decision was binding since the operation was not stayed. Following the previous decisions, the Tribunal directed the Assessing Officer/TPO to delete the addition of the transfer pricing adjustment on outstanding receivables.

Ultimately, the Tribunal allowed the appeal, emphasizing the importance of considering the overall profitability and established TP principles in transfer pricing assessments.

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