2020 (9) TMI 572 - AT - Income Tax

Tribunal upholds transfer pricing adjustment on interest, directs AO on foreign tax credit verification.

The Tribunal partly allowed the appeal, dismissing the general ground challenging the assessment order's validity and the ground disputing the levy of ... Transfer pricing addition being interest on receivables - HELD THAT:- As identical issue had come up before the Tribunal in assessee’s own case [2017 (12) TMI 1052 - ITAT DELHI]. The Tribunal, relying on various decisions including the decision of the Hon’ble Delhi High Court in the case of Kusum Healthcare Pvt. Ltd. [2017 (4) TMI 1254 - DELHI HIGH COURT] has deleted the addition on account of interest on receivables - no adjustment on account of interest due on receivables from its AE can be made. Accordingly, the grounds raised by the assessee are allowed. Denial of benefit of foreign tax credit while computing tax liability of the assessee - HELD THAT:- We deem it proper to restore this issue to the file of the AO with a direction to verify and allow the foreign tax credit of ₹ 14,08,409/- in accordance with the law. Needless to say, the AO shall give due opportunity of being heard to the assessee and decide the issue as per fact and law. We hold and direct accordingly. This ground raised by the assessee is allowed for statistical purposes. Issues Involved:1. Validity of the assessment order.2. Transfer pricing adjustment on account of interest on receivables.3. Denial of foreign tax credit.4. Levy of interest under Section 234B and Section 234C of the IT Act.Issue-Wise Detailed Analysis:1. Validity of the Assessment Order:The assessee challenged the assessment order framed by the AO under Section 143(3) read with Section 144C of the Income-tax Act, 1961, claiming it was bad in law, violative of principles of natural justice, and void ab-initio. However, this ground was dismissed as being general in nature.2. Transfer Pricing Adjustment on Account of Interest on Receivables:The main contention centered around the AO's adjustment of Rs. 4,71,35,199 to the arm’s length price (ALP) of international transactions related to accounts receivable. The AO, guided by the TPO and DRP, treated the delay in receivables as unsecured loans to associated enterprises (AEs) and applied a mark-up on the LIBOR rate to determine interest.- Assessee's Argument: The assessee argued that delay in receivables is not an international transaction per se under Section 92B of the Act but a consequence of services rendered. They emphasized that their profit margins were higher than comparables, and no interest was charged on receivables from unrelated parties.- Tribunal's Findings: The Tribunal referenced its own decisions in the assessee’s cases for previous years and the Delhi High Court's ruling in PCIT vs. Kusum Healthcare Pvt. Ltd., which held that not every item of receivables constitutes an international transaction. The Tribunal noted that the assessee was debt-free and had not charged interest on similar delays from unrelated parties. It concluded that no adjustment on account of notional interest on receivables was warranted.The Tribunal allowed grounds related to transfer pricing adjustments, stating that no adjustment on account of interest on receivables could be made.3. Denial of Foreign Tax Credit:The assessee contested the denial of foreign tax credit amounting to Rs. 14,08,409.- Tribunal's Decision: The Tribunal restored the issue to the AO for verification and directed to allow the foreign tax credit in accordance with the law, ensuring the assessee is given a fair opportunity to present their case.4. Levy of Interest under Section 234B and Section 234C:The assessee disputed the levy of interest under Sections 234B and 234C.- Tribunal's Decision: The Tribunal held that the levy of interest under these sections is mandatory and consequential in nature, thus dismissing this ground.Conclusion:The appeal was partly allowed. The Tribunal dismissed the general ground regarding the validity of the assessment order and the ground related to the levy of interest under Sections 234B and 234C. It allowed the grounds related to transfer pricing adjustments and restored the issue of foreign tax credit to the AO for verification. The decision was pronounced in the open court on 07.09.2020.