2022 (5) TMI 1567 - AT - Income Tax

Tribunal allows appeal on interest adjustment for inter-company receivables under Income Tax Act

The Tribunal allowed the appeal in the case concerning the adjustment of interest on outstanding inter-company receivables under the Income Tax Act, 1961. ... TP Adjustment - interest on outstanding inter-company receivables - TPO estimated the delay on estimated average of outstanding receivables of 6 months and calculated interest for 182 days @ 4.31% (LIBOR + 400 basic points) - HELD THAT:- The decision of Hon’ble Delhi High Court in the case of Kusum Healthcare [2017 (4) TMI 1254 - DELHI HIGH COURT] is still the binding precedent on the issue of interest on outstanding receivables as held with the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterized the transaction. Needless to mention that the law laid down by the Hon’ble High Court in the case of Kusum Healthcare was followed by the Co-ordinate Benches of the ITAT. There is complete uniformity in the act of the assessee in not charging interest from both the AE and Non AE debtors and the delay in realization of the export proceeds in both the cases is same. Reliance is being placed on the decision of case of Indo American Jewellery Ltd. [2013 (1) TMI 804 - BOMBAY HIGH COURT]. Thus neither interest has been charged nor paid, we hereby allow the appeal of the assessee on this ground. Issues:Adjustment of interest on outstanding inter-company receivables under the Income Tax Act, 1961.Issue Analysis:1. Adjustment of Interest on Outstanding Inter-Company Receivables:The appellant challenged the adjustment made by the AO concerning interest on outstanding inter-company receivables. The appellant argued that outstanding receivables and payables are interconnected due to transactions involving import of capital assets, components, export of finished goods, and provision of services. The appellant highlighted the substantial difference between outstanding payables and receivables from its AEs, emphasizing that no interest was charged by AEs on both receivables and payables. The appellant referred to the decision in AVL India P. Ltd. Vs. DCIT and argued for the benefit of netting interest on aggregate amounts receivable and payable from all AEs. The Tribunal considered previous cases like Kusum Healthcare Pvt. Ltd. vs. ACIT, Ameriprise India P. Ltd. vs. ACIT, and McKinsey Knowledge Centre Pvt. Ltd. Vs. DCIT, which discussed working capital adjustments and the impact on ALP in similar contexts. The High Court's rulings in Kusum Healthcare and Mckinsey Knowledge cases were also referenced. Ultimately, the Tribunal allowed the appeal, citing the binding precedent set by the decision in Kusum Healthcare and emphasizing the uniformity in the appellant's practice of not charging interest from both AE and non-AE debtors.In conclusion, the Tribunal's judgment in the present case addressed the issue of adjustment of interest on outstanding inter-company receivables under the Income Tax Act, 1961. The decision considered various legal precedents, including rulings from the High Court and previous Tribunal cases, to support the appellant's argument against the adjustment made by the AO. The Tribunal's analysis highlighted the interconnected nature of outstanding receivables and payables, emphasizing the lack of interest charged by AEs on both types of transactions. Ultimately, the Tribunal allowed the appeal, relying on the binding precedent established by the High Court's decision in Kusum Healthcare and the appellant's consistent practice regarding interest charges.