TPO cannot impute interest on overseas receivables when working capital adjustment already accounts for them

ITAT DELHI ruled that TPO cannot impute interest on outstanding receivables from overseas associated enterprises if working capital adjustment already accounts for these receivables. The tribunal relied on its previous decision for assessment year 2010-11, upheld by Delhi HC, establishing that additional interest imputation is unwarranted when receivables are properly considered in working capital adjustment. Since TPO's order lacked verification of whether receivables were included in working capital adjustment, the matter was remanded to TPO for factual verification. Appeal allowed for statistical purposes.

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Issues:
Challenging assessment order under section 143(3)/92CA for the assessment year 2011-12 - whether TPO justified in treating outstanding receivables from overseas AEs as unsecured loans and imputing interest thereon.

Analysis:
The assessee exported pharmaceutical products to its Associated Enterprises (AEs) and non-group companies during the assessment year 2011-12. The international transactions were benchmarked using the Transactional Net Margin Method (TNMM). The profitability of the tested party, Glad Pharm Ltd., Ukraine, was compared with margin earned by comparable companies. The TPO accepted the transactions to be at arm's length. However, the TPO proposed a TP adjustment of Rs. 3,38,19,514 due to outstanding trade receivables exceeding 180 days, treating them as unsecured loans and imputing notional interest.

The assessee contended that the working capital adjustment already considered the outstanding receivables, hence no additional imputation of interest was warranted. Referring to a previous Tribunal decision and High Court order, the assessee argued against imputing interest on receivables from AEs. The DRP upheld the TPO's decision, emphasizing the significant volume of transactions with AEs compared to non-AEs.

The Tribunal noted the previous decision regarding working capital adjustment and the importance of analyzing the impact on working capital and pricing. Citing a High Court order, the Tribunal held that if the working capital adjustment accounted for outstanding receivables, no additional interest imputation was necessary. However, as the TPO's order did not mention consideration of outstanding receivables in the working capital adjustment, the issue was remanded to the TPO for verification.

In conclusion, the Tribunal allowed the appeal for statistical purposes and directed the TPO to verify whether the outstanding receivables were considered in the working capital adjustment. The decision highlighted the importance of proper analysis in determining the need for additional interest imputation on outstanding receivables from AEs.

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