2018 (3) TMI 1465 - AT - Income Tax

Transfer Pricing Ruling: Impact on Interest & Penalties

The Tribunal allowed the assessee's appeal regarding the transfer pricing adjustment on outstanding receivables for software services. It held that ... TP adjustment - notional interest on outstanding receivables chargeability - Held that:- Notional interest on outstanding receivables is not chargeable and no TP adjustment can be made. See Pegasystems Worldwide Versus ACIT [2015 (10) TMI 2495 - ITAT HYDERABAD] Working capital adjustment takes into consideration the interest on the receivables as well. Therefore, on this ground also, no TP adjustment is required. See case of Kusum Healthcare Pvt Ltd.[2017 (4) TMI 1254 - DELHI HIGH COURT] Issues:1. Transfer pricing adjustment on outstanding receivables for software services2. Imposition of interest under sections 234B and 234D of the Act3. Penalty under section 271(1)(C) of the ActTransfer Pricing Adjustment on Outstanding Receivables for Software Services:The case involved an appeal by the assessee regarding a transfer pricing adjustment made by the Transfer Pricing Officer (TPO) on outstanding receivables for software services provided to Associated Enterprises (AEs). The TPO imputed interest on these receivables, leading to a dispute. The assessee contended that the transaction was not an international transaction as defined under section 92B of the Act. The TPO proposed interest at 12%, which was later reduced to 5% by the Dispute Resolution Panel (DRP). The Tribunal, citing precedents, held that notional interest on outstanding receivables cannot be charged as an international transaction. The Tribunal also noted that working capital adjustments considered by the Assessing Officer (AO) already factored in the interest on receivables, leading to the allowance of the appeal on these grounds.Imposition of Interest under Sections 234B and 234D of the Act:The TPO proposed interest at 12% on delayed receipts from outstanding receivables. The DRP reduced this to 5%, which was challenged by the assessee. The Tribunal, following precedents, held that no notional interest could be charged on outstanding receivables, thereby impacting the imposition of interest under sections 234B and 234D of the Act. The Tribunal directed the AO to provide any consequential relief to the assessee based on this decision.Penalty under Section 271(1)(C) of the Act:The imposition of penalty under section 271(1)(C) of the Act was not specifically discussed in the detailed judgment analysis provided. However, it can be inferred that the Tribunal's decision on the transfer pricing adjustment and interest implications would have a consequential impact on any penalty imposed under section 271(1)(C) of the Act. The Tribunal's decision to allow the appeal on the transfer pricing adjustment issue and the interest implications would likely influence any penalty determination related to the same transaction.In conclusion, the Tribunal's detailed analysis and decision in this case primarily revolved around the transfer pricing adjustment on outstanding receivables for software services, the imposition of interest under sections 234B and 234D of the Act, and the potential penalty under section 271(1)(C) of the Act. The Tribunal's reliance on precedents and legal interpretations guided the outcome of the appeal, resulting in the partial allowance of the assessee's appeal based on the specific issues raised and analyzed during the proceedings.