Tribunal allows appeal, deletes transfer pricing adjustment. Outstanding receivables not separately adjusted. Interest rate rejection.

The tribunal partially allowed the appeal by directing the deletion of the transfer pricing adjustment made by the TPO/AO. The grounds related to the timeliness of the assessment order and separate benchmarking of outstanding receivables were dismissed. The tribunal found that the outstanding receivables were linked to main transactions already at arm's length, and thus no separate adjustment was warranted. The tribunal also rejected the adoption of a specific interest rate for outstanding receivables, citing that it would distort the transaction. The order was pronounced on 02/11/2022.

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Issues Involved:
1. Timeliness of the final assessment order.
2. Addition of Rs. 1,26,43,352/- on account of interest chargeable on trade receivables.
3. Treatment of outstanding trade receivables as a separate international transaction.
4. Justification for no addition on account of delay in realization of trade receivables.
5. Adoption of average 6 months USD LIBOR + 450 Basis Points for calculating interest on outstanding receivables.

Issue-Wise Detailed Analysis:

1. Timeliness of the Final Assessment Order:
The first ground raised by the assessee argued that the final assessment order dated 21 February 2022 was non-est as it was passed beyond the time prescribed by Section 144C(13) of the Act. However, this ground was not pressed during the hearing and was dismissed as not pressed.

2. Addition of Rs. 1,26,43,352/- on Account of Interest Chargeable on Trade Receivables:
The assessee contested the addition made by the TPO/AO under the directions of the DRP, which amounted to Rs. 1,26,43,352/-. The TPO had computed this adjustment by adopting an interest rate of average 6 months USD LIBOR plus 450 basis points (5.97%) on invoices outstanding for more than 90 days. The assessee argued that the outstanding receivables were a consequence of international transactions already benchmarked and found to be at arm's length, and thus, no separate adjustment was warranted. The tribunal found merit in the assessee's submission and directed the TPO/AO to delete the adjustment on account of outstanding receivables in respect of provision of medical transcription services and IT and IT enabled services.

3. Treatment of Outstanding Trade Receivables as a Separate International Transaction:
The TPO treated the outstanding trade receivables as a separate international transaction and proposed an upward adjustment. The assessee argued that these receivables were incidental to the main transactions, which were already at arm's length. The tribunal agreed with the assessee's view that the outstanding receivables were intrinsically linked to the main transactions and thus no separate benchmarking was required. Consequently, the tribunal directed the deletion of the adjustment made by the TPO/AO.

4. Justification for No Addition on Account of Delay in Realization of Trade Receivables:
The assessee contended that no addition was warranted for delay in realization of trade receivables since the transactions were already at arm's length. The tribunal noted that the assessee had conducted a comparative analysis showing that the average line rate charged to the AE was higher than the rate charged by third-party vendors, even after including the imputed interest cost. The tribunal found merit in this submission and concluded that no further adjustment was warranted.

5. Adoption of Average 6 Months USD LIBOR + 450 Basis Points for Calculating Interest on Outstanding Receivables:
The TPO adopted an interest rate of average 6 months USD LIBOR plus 450 basis points for calculating interest on outstanding receivables. The assessee argued that this was inappropriate as the main transactions were already at arm's length. The tribunal, referencing the Delhi High Court's decision in PCIT vs Kusum Healthcare (P) Ltd., held that any further adjustment based solely on outstanding receivables would distort the transaction and was impermissible. Therefore, the tribunal directed the TPO/AO to delete the adjustment.

Conclusion:
The tribunal allowed the appeal partly, directing the deletion of the entire transfer pricing adjustment made by the TPO/AO. Grounds related to the timeliness of the assessment order and separate benchmarking of outstanding receivables were dismissed as not pressed. The tribunal's order was pronounced in open court on 02/11/2022.

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