ITAT Delhi deletes transfer pricing adjustment on interest receivables from associated enterprises following coordinate bench decisions

ITAT Delhi ruled in favor of the assessee regarding transfer pricing adjustment on interest receivables from associated enterprises. The tribunal followed its coordinate bench decisions and Delhi HC precedent in Kusum Health Care case, finding no merit in making adjustments for interest on receivables from AEs. With no material change in facts or legal position, the tribunal deleted the addition made by lower authorities for interest receivable adjustments.

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Issues Involved:
1. Validity of the assessment order under Section 143(3) read with Section 144C of the Income Tax Act, 1961.
2. Adjustment to the arm's length price (ALP) of international transactions related to software development services.
3. Adjustment of interest on receivables from associated enterprises (AEs).

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee challenged the assessment order framed by the Assessing Officer (AO) under Section 143(3) read with Section 144C of the Income Tax Act, 1961, arguing that it is "bad in law, violative of principles of natural justice and void ab initio." The AO assessed the income at Rs. 57,96,95,314 against the returned income of Rs. 35,04,84,700.

2. Adjustment to the Arm's Length Price:
The AO made an adjustment of Rs. 18,16,82,680 to the arm's length price (ALP) of the international transactions related to software development services. The assessee contended several errors:
- The AO/TPO computed the operating profit to cost ratio at 9.61% instead of 15.20% (13.17% in AE segment) by erroneously excluding foreign exchange fluctuation income of Rs. 10,51,15,282 as a non-operating item, despite the DRP's specific direction to include it.
- The DRP/TPO included certain companies in the final set of comparables, which the assessee argued were not functionally comparable.
- The AO/TPO did not allow appropriate risk adjustment, asserting that the assessee, being a low-risk-bearing captive service provider, should be compared with independent software development service providers.
- The TPO rejected the assessee's contention regarding risk adjustment due to the absence of robust and reliable data.

3. Adjustment of Interest on Receivables:
The primary issue contested was the adjustment of interest on receivables. The Tribunal noted that this issue had already been adjudicated in the assessee's favor in previous years (A.Y. 2015-16 and A.Y. 2016-17). The Tribunal cited several key points:
- The Tribunal referenced its own decisions in ITA No. 8726/Del/2019 for A.Y. 2015-16 and ITA No. 868/Del/2021 for A.Y. 2016-17, which relied on the Delhi High Court's judgment in Pr. CIT-V vs. Kusum Health Care Pvt. Ltd. and Pr. CIT-1 vs. M/s. Bechtel India Pvt. Ltd.
- The Tribunal held that no adjustment is to be made on account of notional interest on receivables, especially when the taxpayer is a debt-free company.
- The Tribunal emphasized that the delay in receivables does not automatically constitute an international transaction and must be examined in context.
- The Tribunal noted that the assessee had not incurred any interest cost and had similar delays in receivables from unrelated third parties without charging interest.

Conclusion:
The Tribunal directed that the addition made for "adjustment on interest due receivables" be deleted, citing the lack of any material change in the factual matrix and legal proposition. Consequently, the appeal of the assessee was allowed.

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