Tribunal directs deletion of adjustment on outstanding receivables for debt-free company

The Tribunal allowed the appeal of the assessee, directing the Assessing Officer to delete the adjustment made on outstanding receivables. The Tribunal found that the assessee, a debt-free company, had already factored in the delay in receivables through its working capital adjusted margin. It was concluded that no further adjustment was warranted, leading to the deletion of the addition made by the Commissioner of Income Tax (Appeals).

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Issues Involved:
1. Addition of Rs. 12,74,485 by benchmarking receivables on transactions of sales/services using the prime lending rate of SBI plus markup of 300 basis points.
2. Determination of whether receivables constitute an international transaction.
3. Applicability of LIBOR rate for computation of interest instead of SBI prime lending rate.

Issue-wise Detailed Analysis:

1. Addition of Rs. 12,74,485 by Benchmarking Receivables:
The learned Commissioner of Income Tax (Appeals) upheld the addition by adopting the prime lending rate of SBI plus a markup of 300 basis points. The assessee argued that once the arm’s length price (ALP) in a sale/service transaction is determined, no separate adjustment for interest on outstanding receivables is necessary. The assessee also contended that since it does not charge interest on overdue debts from third parties and is a debt-free company, the notional interest on outstanding receivables with Associated Enterprises (AE) is neither factually nor legally sustainable. Additionally, the assessee highlighted that it had not made any adjustment for working capital and had earned a higher margin of 23.33% compared to the margin of 11.42% of comparable companies, thereby negating the need for further adjustment.

2. Determination of Whether Receivables Constitute an International Transaction:
The assessee contended that receivables are not an international transaction per se. They argued that 'receivable' under Explanation to Section 92B of the Income-tax Act does not include 'accounts receivable' and thus, outstanding balances cannot be treated as independent transactions. The appellant maintained that allowing a credit period to the AE is not an independent international transaction but is dependent on the sales made to the AE. Reliance was placed on various judicial pronouncements to support this view, including cases such as PCIT vs. B.C. Management Services (P) Ltd and ACIT vs. Nimbus Communications Ltd.

3. Applicability of LIBOR Rate for Computation of Interest:
The assessee argued that the LIBOR rate should be applied for computing interest, in line with the judgment of the jurisdictional High Court in CIT vs. Cotton Naturals (I) (P) Ltd. They contended that since the AE is not based in India, the SBI prime lending rate is not a valid comparable, and the interest rates should be as per the prevalent borrowing rates in other countries, which is LIBOR.

Tribunal's Decision:
The Tribunal noted that the assessee is not charging interest on overdue debts from third parties and is a debt-free company. It was also observed that the assessee had a margin of 23.3% on the Software Development segment compared to the margin of 11.42% of comparable companies. The working capital adjusted margin of the assessee had already factored in the delay in receivables, thus no separate adjustment was warranted. The credit period of comparable companies was found to be 147 days against the credit period of 30 days allowed by the assessee. Citing the decision of the Hon’ble Delhi High Court in CIT Vs EKL Appliances Ltd, the Tribunal opined that the impact of delayed receivables had already been factored in the working capital adjustment, and any further adjustment on the outstanding receivables was not required. Consequently, the Tribunal directed the Assessing Officer to delete the adjustment made on account of the outstanding receivables, rendering other arguments of the assessee academic.

Conclusion:
The appeal of the assessee was allowed, and the adjustment and addition upheld by the learned Commissioner of Income Tax (Appeals) were deleted. The order was pronounced in the open court on 28th June 2019.

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