2023 (12) TMI 332 - AT - Income Tax

ITAT remands transfer pricing case on interest adjustment for receivables from associated enterprises back to authorities

The ITAT Hyderabad remanded the matter back to AO/TPO regarding TP adjustment on interest for outstanding receivables from associated enterprises. The ... TP Adjustment - Interest on outstanding receivables due from AEs - Whether outstanding receivables is not covered in the definition of international transaction as defined u/s 92B? - HELD THAT:- In the present case, DRP has not considered the submissions of the assessee on trade receivables and it is categorically mentioned that the period granted for furnishing the details was too short and therefore, there was violation of principles of natural justice and thereafter, DRP has directed the TPO to grant one more opportunity to the assessee to explain and decide the issue. TPO has passed the order pursuant to the direction of DRP on 22.06.2022 and thereafter, the AO has passed the order on 30.06.2022. In our view and in the light of the submissions made before us by AR that sufficient opportunity was not granted by the lower authorities, we are of the opinion that one more opportunity is required to be given to the assessee to explain its case before the TPO. We deem it appropriate to remand back the matter to the file of AO / TPO for passing a fresh order. Appeal of the assessee is allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether outstanding receivables due from associated enterprises constitute an 'international transaction' under section 92B for the purpose of transfer pricing adjustments. 2. Whether interest can be imputed on delayed/ outstanding receivables from associated enterprises and, if so, the proper method/rate/credit-period to determine such interest (including whether working capital adjustment under TNMM renders separate benchmarking unnecessary). 3. Whether failure to furnish adequate opportunity to the assessee on the issue of charging interest on delayed receivables amounted to violation of principles of natural justice requiring remand. 4. Whether penalty proceedings under section 274 read with section 270A were rightly initiated (raised as a ground but not expressly considered in the impugned orders before the Tribunal). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation: Are outstanding receivables 'international transactions' under section 92B? Legal framework: Section 92B defines 'international transaction' and contemplates transactions between associated enterprises which can include transfer of goods, provision of services, and other specified transactions; transfer pricing adjustments under Chapter X may follow where an international transaction is identified. Precedent treatment: The orders under appeal (TPO/DRP) treated outstanding receivables as subject to transfer pricing adjustment by imputing interest; the assessee contended receivables are not covered and are consequential/closely linked to principal services and thus aggregated under TNMM. Interpretation and reasoning: The record shows authorities considered receivables as linked to controlled services and yet proceeded to separately characterise delayed receivables and impute interest. The Tribunal did not finally decide the substantive characterisation on merits; rather the Tribunal identified procedural infirmity (inadequate opportunity) and remanded for fresh adjudication, implicitly requiring the TPO to revisit the characterisation while applying applicable law and precedents (including Tribunal decisions cited by parties). Ratio vs. Obiter: Remand on procedural grounds is ratio for the appellate outcome; no definitive ratio on substantive characterisation of receivables was laid down by the Tribunal in this order. Conclusion: The question remains to be adjudicated afresh by the TPO/Assessing Officer after giving proper opportunity; no conclusive finding on whether outstanding receivables per se qualify as separate international transactions was made by the Tribunal in this decision. Issue 2 - Imputation of interest on delayed receivables: method, rate, and credit period; role of working capital adjustment / TNMM Legal framework: Transfer pricing adjustments for controlled transactions may include imputation of interest on delayed payments; where imputed interest is applied, comparability and benchmarking principles under Chapter X, and accepted methods (including working capital adjustments under TNMM) are relevant. DRP direction referenced SBI short-term deposit rate and prescribed 30 days default credit period unless intercompany agreement/invoice specifies otherwise; parties referred to judicial/tribunal precedents on acceptable treatment. Precedent treatment: Revenue relied on Tribunal decisions (cited in submissions) that support imputing interest on overdue receivables and applying prescribed rates/credit periods. Assessee relied on other decisions (including a High Court decision) and prior Tribunal orders granting 60 days or otherwise treating receivables within working capital adjustments under TNMM without separate benchmarking. Interpretation and reasoning: The Tribunal noted competing contentions and that DRP directed TPO to consider credit period per intercompany agreement or invoice, or else 30 days; DRP also directed re-examination of a specific invoice. However, the Tribunal emphasized the procedural issue-insufficient time given to assessee to respond to show-cause and proposed adjustment-and remanded for fresh consideration. The Tribunal expressly directed the TPO to apply relevant Tribunal decisions (Zeta Interactive, Satyam Venture, Apache Footware and others) when re-deciding, indicating those precedents should guide the approach to credit period and benchmarking and to consider whether working capital adjustments already capture the receivables impact. Ratio vs. Obiter: The directive to apply existing Tribunal precedents and to consider credit period per agreement/invoice is part of the operative remand (ratio for relief granted). Detailed substantive pronouncements on preferred rate or method (e.g., SBI rate vs. international market rates for foreign currency) were not conclusively resolved (obiter references only to approaches taken by lower authorities and parties' submissions). Conclusion: The Tribunal did not decide on the imputation, rate, or method substantively; it remanded the issue for fresh adjudication with directions to give opportunity, consider invoice/agreement credit periods (or 30 days if none), examine weighted average realisation days, and apply relevant tribunal precedents and comparability principles under Chapter X when determining whether and how interest should be imputed. Issue 3 - Violation of principles of natural justice (inadequate opportunity) and need for remand Legal framework: Principles of natural justice require that a party be given a reasonable and adequate opportunity to present facts and objections to a proposed adverse adjustment; failure to do so vitiates the decision and often necessitates remand. Precedent treatment: DRP itself found the time given by TPO to furnish details on outstanding receivables (until 24.07.2021) was short, constituted a violation of natural justice, and expressly directed another opportunity be given and veracity of invoice dated 31.03.2017 be examined. Interpretation and reasoning: The Tribunal accepted the assessee's submission that sufficient opportunity was not granted and that DRP had already recorded this deficiency. Considering DRP's explicit direction to give another opportunity and the TPO's subsequent order passed pursuant to that direction, the Tribunal nonetheless concluded that one more opportunity should be given to the assessee to explain and produce documents before a fresh order is passed by TPO/Assessing Officer. The Tribunal emphasized that the assessee must cooperate and produce all documents/submissions and that the TPO should apply relevant legal precedents. Ratio vs. Obiter: This finding and remand for fresh hearing is ratio and the operative basis for allowing the appeal for statistical purposes. Conclusion: The Tribunal held there was a procedural defect amounting to violation of natural justice and remanded the matter to the Assessing Officer/TPO for fresh adjudication after affording adequate opportunity and considering submissions and applicable precedent; appeal allowed for statistical purposes. Issue 4 - Penalty under section 274 read with 270A: raised but not considered Legal framework: Penalty provisions require independent consideration and proof of misreporting/undisclosed income or other culpable conduct as defined in the relevant sections. Precedent treatment: The ground challenging initiation of penalty proceedings was raised in the grounds of appeal but the judgment record does not contain substantive consideration or decision on the penalty ground. Interpretation and reasoning: Because the Tribunal remanded the substantive transfer pricing issue on procedural grounds and did not reach a conclusive determination on the primary adjustments, it did not adjudicate the penalty ground in the present order. No directions were issued specifically addressing penalty proceedings. Ratio vs. Obiter: The omission to decide penalty is an evidentiary/procedural consequence of the remand and is effectively obiter in terms of substantive penalty law; it leaves the penalty issue open for appropriate consideration post remand. Conclusion: The Tribunal did not decide the challenge to initiation of penalty proceedings; the issue remains open for consideration by the Assessing Officer/TPO upon remand and after adjudication of the primary transfer pricing issues following due opportunity.