2022 (12) TMI 920 - AT - Income Tax

Tribunal Rules Interest Adjustment on Receivables Unjustified

The tribunal allowed the appeal of the assessee, holding that the adjustment on interest on receivables was not justified. It was emphasized that ... TP Adjustment - adjustment on account of interest on receivables - HELD THAT:- The assessee entered into various international transactions with its AEs resulting in outstanding receivables as per the payment terms stipulated in the inter company policy entered into with the AEs. The assessee being a captive unit has received advances from some of its AEs for services to be provided in future. As relying on case of Mckinsey [2021 (10) TMI 751 - DELHI HIGH COURT] we are of the view that the Ld. AO/TPO is not justified in charging interest on receivables without factoring in the payables to the AEs. Working capital adjustment in the international transaction of rendering services - Hon’ble Delhi ITAT in Kusum Health Care Pvt. Ltd. [2015 (4) TMI 180 - ITAT DELHI] held that in case the differential impact of working capital of the assessee vis a vis its comparables has already been factored in the pricing/ profitability of the assessee, further adjustment to the margin of the assessee on the pretext of outstanding receivable is unwarranted and wholly unjustified. In case of Ameriprise India P. Ltd. [2015 (8) TMI 652 - ITAT DELHI] considered the decision of Coordinate Bench in the case of Kusum Health Care and held that allowing working capital adjustment in the international transaction of rendering services have no impact on the determination of ALP of the international transaction of interest on receivables from AEs. Having regard to the legal position set out above, we hold that the Ld. AO was not justified in making adjustment on account of interest on receivables in the facts and circumstances of the assessee’s case. Accordingly, the assessee succeeds. Issues:Adjustment on account of interest on receivables.Analysis:The appeal pertains to the adjustment made by the Transfer Pricing Officer (TPO) regarding interest on receivables in the international transactions with associated enterprises (AEs) for the assessment year 2014-15. The TPO treated the delay in receipt of payment from AEs as unsecured loans, applying a rate of interest @ 4.3311%. The issue contested before the tribunal was solely related to the adjustment on account of interest on receivables, as other issues had been settled in favor of the assessee previously.The assessee, a subsidiary of Trend Micro Taiwan, provided pre-sales and post-sales marketing support services and research and development support services to its AEs. The services were compensated on a cost-plus markup basis. The TPO reclassified outstanding receivables beyond the credit period as unsecured loans, treating them as separate international transactions. The Dispute Resolution Panel directed the TPO to recalculate the adjustment based on a credit period of 60 days.During the proceedings, the assessee argued that the adjustment made by the TPO did not consider payables received in advance, resulting in an unjustified interest calculation. The Delhi High Court's judgment in a similar case was cited to support the argument that no adjustment should be made without factoring in payables to AEs.The tribunal, considering the legal precedents and factual matrix, held that the TPO's adjustment on interest on receivables was not justified. It was noted that the assessee, being a debt-free company, had not borrowed funds for extending loans to AEs. The tribunal emphasized that outstanding balances do not constitute independent international transactions for which an arms-length price adjustment could be made.Referring to various court decisions, including those by the Delhi High Court and ITAT, the tribunal concluded that further adjustment on outstanding receivables was unwarranted if the impact of working capital had already been factored into the pricing and profitability of the assessee. Therefore, the tribunal allowed the appeal of the assessee, holding that the adjustment on interest on receivables was not justified in the given circumstances.Consequently, the charging of interest under sections 234A, 234B, 234C, and 234D of the Income Tax Act was deemed consequential, and the appeal of the assessee was allowed by the tribunal.