Outstanding receivables from Associated Enterprises are separate international transactions requiring notional interest adjustments under Section 92B

The ITAT Delhi held that outstanding receivables from Associated Enterprises constitute separate international transactions under Section 92B(i)(c) of the Income Tax Act. The Tribunal directed that notional interest adjustments on receivables should be computed following DRP directions, with LIBOR as appropriate benchmark rate plus reasonable mark-up. Interest charging requires case-by-case examination analyzing payment patterns over time, comparing with non-AE transactions. The AO must set off receivables cleared within 30 days or received in advance when computing adjustments. The assessee's appeal was partly allowed.

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Issues Involved:
1. Validity of assessment proceedings under section 143(3) read with section 144B.
2. Transfer Pricing adjustment due to notional interest on outstanding receivables.
3. Treatment of receivables as a separate international transaction.
4. Re-characterization of trade receivables as unsecured loans.
5. Common policy of not charging interest on delayed payments.
6. Set-off for receivables cleared in less than 30 days.
7. Determination of arm's length price using the Comparable Uncontrolled Price (CUP) method.
8. Ad-hoc determination of 60 days as the arm's length credit period.

Summary:

1. Validity of Assessment Proceedings:
The assessee challenged the validity of the assessment proceedings under section 143(3) read with section 144B, arguing that statutory procedures and principles of natural justice were violated. The Tribunal did not find merit in this argument and upheld the assessment proceedings.

2. Transfer Pricing Adjustment:
The assessee contested the Transfer Pricing adjustment of Rs. 5,36,99,972 for notional interest on outstanding receivables from Associated Enterprises (AEs). The Tribunal noted that the AO treated interest on outstanding receivables as a separate international transaction and upheld the adjustment, following the directions of the Dispute Resolution Panel (DRP).

3. Treatment of Receivables as a Separate International Transaction:
The assessee argued that outstanding receivables should not be treated as a separate international transaction. The Tribunal referred to the Delhi High Court's decision in Pr. CIT vs. Kusum Health Care Pvt. Ltd., which held that receivables factored into working capital adjustments do not require separate adjustment. However, the Tribunal distinguished this case and upheld the treatment of receivables as a separate transaction.

4. Re-characterization of Trade Receivables:
The assessee objected to the re-characterization of trade receivables as unsecured loans. The Tribunal upheld the DRP's decision, noting that the re-characterization was justified based on the facts and circumstances of the case.

5. Common Policy of Not Charging Interest:
The assessee maintained a policy of not charging interest on delayed payments from both AEs and third parties. The Tribunal acknowledged this policy but emphasized that the arm's length principle must be applied, and interest on receivables must be benchmarked separately.

6. Set-off for Receivables Cleared in Less than 30 Days:
The Tribunal directed that while computing the adjustment, the AO should set off receivables cleared by AEs in less than 30 days or received in advance, as ordered by the DRP.

7. Determination of Arm's Length Price:
The assessee argued against the use of the Comparable Uncontrolled Price (CUP) method for determining the arm's length price. The Tribunal upheld the use of the CUP method, noting that the LIBOR rate plus a reasonable mark-up was appropriate for benchmarking interest on receivables.

8. Ad-hoc Determination of 60 Days Credit Period:
The Tribunal found the DRP's determination of a 60-day credit period to be reasonable, despite the assessee's argument that it was ad-hoc and lacked comparability analysis. The Tribunal directed the AO to follow the DRP's directions while computing the adjustment.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to compute the adjustment on receivables after considering the set-off for receivables cleared in less than 30 days or received in advance, and upheld the use of LIBOR plus a reasonable mark-up for determining the arm's length price on receivables. The appeal was partly allowed.

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