ITAT Hyderabad: TP adjustments on outstanding receivables disallowed, notional interest not chargeable

The ITAT Hyderabad allowed the Assessee's appeals and deleted the TP adjustments made on outstanding receivables, stating that notional interest was not chargeable. The Tribunal upheld the DRP's decision on the rate of interest, deeming the Revenue's appeal academic and dismissing it. Ultimately, the Assessee's appeals were successful, and the Revenue's appeal was rejected.

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Issues:
Transfer pricing adjustment on outstanding receivables at the end of the year by TPO/A.O.

Analysis:

Issue 1: Transfer Pricing Adjustment on Outstanding Receivables
The Assessee, engaged in providing engineering and geospatial software, filed returns for A.Y 2011-12 and 2012-13. The TPO found the Assessee's profit margin on software development services to be at arm's length in both years. However, the TPO considered outstanding receivables as part of 'international transactions' due to an amendment to Sec. 92B of the IT Act. The Assessee objected, citing it was not capital financing, being fully funded by the AE with no working capital risk. The Assessee argued that working capital adjustments already considered the receivables, and no separate TP adjustment was warranted. The TPO, rejecting the contentions, calculated interest and determined TP adjustments for both years.

Issue 2: Disagreement Between TPO, DRP, and Assessee
The Assessee raised objections before the DRP, which rejected the contention that outstanding receivables could not be considered international transactions. The DRP directed the A.O to calculate interest at 5% and outstanding amounts from invoice to payment time for A.Y 2011-12. However, the A.O repeated the TPO's addition without following the DRP's directions. In A.Y 2012-13, the DRP determined a variable rate of interest, but due to missing information from the Assessee, the same addition as proposed by the TPO was made in the final order.

Issue 3: Legal Arguments and Precedents
The Assessee contended that outstanding receivables were not international transactions, citing various propositions and case laws. The DR reiterated the TPO's stance, referring to Sec. 92B of the IT Act. The ITAT, considering the contentions and case laws, held that notional interest on outstanding receivables was not chargeable, and no TP adjustment was warranted. The Tribunal also noted that working capital adjustments factored in interest on receivables, as confirmed by previous decisions and the Hon'ble High Court of Delhi.

Conclusion
The Tribunal allowed the Assessee's appeals and deleted the additions made, as no TP adjustment was required. The issue of rate of interest raised by the Revenue was deemed academic and dismissed. The Tribunal upheld the DRP's decision on the rate of interest. Ultimately, the Assessee's appeals were allowed, and the Revenue's appeal was dismissed.

This comprehensive analysis of the legal judgment highlights the key issues, arguments, and decisions made by the ITAT Hyderabad regarding transfer pricing adjustments on outstanding receivables.

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