Transfer Pricing Dispute: Interest on Receivables Benchmarking

The case involved a dispute regarding transfer pricing adjustment on interest on receivables from Associated Enterprises (AEs). The Dispute Resolution Panel (DRP) upheld the separate benchmarking of interest on receivables outstanding beyond 60 days, citing the retrospective effect of an Explanation in Section 92B of the Income Tax Act. The Tribunal ruled in favor of the assessee, stating that working capital adjustment subsumes interest on receivables, and no separate benchmarking is required. The Tribunal directed the Assessing Officer to grant the credit of Tax Deducted at Source (TDS) as per law, partially allowing the appeal and dismissing the stay application filed by the assessee.

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Issues:
Transfer Pricing Adjustment on Interest on Receivables, Interpretation of Section 92B of the Income Tax Act, 1961, Application of Arm's Length Principle, Working Capital Adjustment, Deeming Fiction of Separate International Transaction, Judicial Precedents on Interest on Receivables, Credit of TDS.

Transfer Pricing Adjustment on Interest on Receivables:
The case involves an appeal by the assessee against the Assessment Order for the assessment year 2016-17, which suggested enhancing the income of the assessee by a specific amount on account of interest on receivables from Associated Enterprises (AEs). The assessee contended that the intercompany receivables arising from primary transactions should conform to the arm's length principle if the primary transaction is at arm's length. The Dispute Resolution Panel (DRP) upheld the separate benchmarking of interest on receivables outstanding beyond 60 days, citing the retrospective effect of an Explanation in Section 92B of the Act.

Interpretation of Section 92B of the Income Tax Act, 1961:
The DRP referred to the amendment in the Act, creating a deeming fiction treating payments or deferred payments of receivables as a separate international transaction. This led to a conclusion that working capital adjustment and interest on receivables operate in different fields, with interest payable from the expiry of the stipulated period in the agreement. The DRP negated the assessee's contention based on this interpretation.

Application of Arm's Length Principle:
The assessee argued that no notional interest should be charged on outstanding receivables from AEs as the company did not charge interest from third-party customers, aligning with an arm's length scenario. The DRP, however, upheld the separate benchmarking of interest on receivables, emphasizing the impact of the retrospective amendment in the Act.

Working Capital Adjustment:
The Tribunal analyzed previous decisions and emphasized that working capital adjustment subsumes interest on receivables, eliminating the need for a separate benchmark. Citing the decision in Kusum Healthcare, the Tribunal held that the addition made on account of interest on receivables could not be sustained.

Deeming Fiction of Separate International Transaction:
The retrospective amendment introduced a deeming fiction treating receivables as a separate international transaction, leading to the DRP's decision to benchmark interest on receivables outstanding beyond a specified period separately.

Judicial Precedents on Interest on Receivables:
The Tribunal referred to various judicial precedents, including the decision in Kusum Healthcare, to support the contention that working capital adjustment encompasses interest on receivables, and no separate benchmarking is necessary.

Credit of TDS:
The Tribunal directed the Assessing Officer to verify and grant the credit of TDS as per law, allowing the appeal in part and dismissing the stay application filed by the assessee.

This detailed analysis of the judgment highlights the key issues, legal interpretations, arguments presented, and the final decision rendered by the Tribunal.

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