ITAT directs re-examination of Transfer Pricing assessment on notional interest, sets principles

The ITAT partially allowed the appeal challenging Transfer Pricing assessment on notional interest on outstanding payments from associated enterprises. It directed the TPO to re-examine the working capital adjustment and determined that no adjustment on notional interest for outstanding receivables was required if the working capital adjustment was found to be correct, based on established legal principles and precedents.

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Issues:
- Challenging Transfer Pricing assessment on notional interest on outstanding payments from associated enterprises.
- Working capital adjustment and its impact on receivables from AEs.
- Application of LIBOR rate and SBI PLR rate for adjustments in different assessment years.

Analysis:
1. Transfer Pricing Assessment on Notional Interest:
- The appeals were filed against orders by the CIT (Appeals) for assessment years 2012-13 and 2013-14 regarding Transfer Pricing assessment on notional interest on outstanding payments from associated enterprises (AE).
- The TPO made adjustments of Rs.46,07,661/- for 2012-13 and Rs.23,98,532/- for 2013-14, considering outstanding receivables as unsecured loans and applying interest rates.
- Assessee argued that the outstanding receivables were part of primary transactions and should be benchmarked using an aggregate approach with principal international transactions. They also contended that working capital adjustments negate the need for separate adjustments.

2. Working Capital Adjustment and Impact on Receivables:
- Assessee provided working capital adjustments before the TPO/AO to show that no separate adjustment on receivables from AEs was required, as the adjusted margin was higher than comparable companies.
- The working capital adjustment based on net margin profit of comparables was significantly lower than the margin earned by the assessee, justifying no further adjustments.
- The ITAT directed the TPO to examine the working capital adjustment and if found correct, no adjustment should be made on proposed notional interest on outstanding receivables.

3. Application of LIBOR and SBI PLR Rates:
- The TPO applied different rates (LIBOR rate plus 400 basis points and SBI PLR rate) for adjustments in different assessment years, leading to varying adjustment amounts.
- The ITAT emphasized the need to consider working capital adjustments and the impact on pricing/profitability before making adjustments solely based on outstanding receivables beyond stipulated periods.
- Citing precedents and the decision in the case of Pr. CIT Vs. Kusum Healthcare Private Limited, the ITAT concluded that no further adjustment was warranted if working capital adjustments had already factored in the differential impact between the assessee and comparable companies.

In conclusion, the ITAT partially allowed the appeal, directing the TPO to re-examine the working capital adjustment and determining that no adjustment on notional interest for outstanding receivables was required if the working capital adjustment was found to be correct, based on the principles established in relevant case laws.

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