2018 (1) TMI 1733 - AT - Income Tax

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 ... TP Adjustment - TPO justification in treating the outstanding receivables from the overseas AEs as unsecured loans and to impute interest thereon - HELD THAT:- We find that the assessee’s own case for the assessment year 2010-11 [2015 (4) TMI 180 - ITAT DELHI] a coordinate bench of this Tribunal reached a conclusion that if the working capital adjustment takes into account the outstanding receivables, additional imputation of interest on the outstanding receivables is not warranted. This decision of the Tribunal is upheld by the Hon’ble Jurisdictional High Court in assessee’s own case [2017 (4) TMI 1254 - DELHI HIGH COURT] for this same assessment year by holding that no error was found in the order of ITAT giving rise to any substantial question of law for a determination. We, therefore, hold that in case the working capital adjustment properly takes into account the outstanding receivables, no additional imputation of interest on the same is warranted. As AR submitted that the working capital adjustment is worked out by properly taking into account the outstanding receivables. However from the order of the TPO, we do not find any mention of the Ld. TPO considering the same. We are, therefore, of the opinion that this fact needs verification at the end of the TPO - we set aside the issue to the file of TPO for verification of the fact, whether while making the working capital adjustment the outstanding receivables are taken into account or not. Appeal of the assessee is allowed for statistical purposes. 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.