Interest on unpaid AE receivables and transfer-pricing: whether it's a separate international transaction u/s92B; adjustment deleted.

The dominant issue was whether interest on outstanding receivables from an AE constitutes a separate international transaction warranting a TP adjustment. Applying the binding ratio of HC that mere inclusion of "receivables" in the Explanation to s.92B does not automatically characterise every receivable as an international transaction, the Tribunal held that such characterisation must be context-specific. It further held that where the assessee has already accounted for receivables through working-capital adjustment in benchmarking against comparables, an additional interest adjustment would distort profitability and impermissibly recharacterise the transaction. Consequently, the TP adjustment/addition on interest on AE receivables was deleted and the appeal was allowed.

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Issues:
Computing interest on receivables from AE by way of Transfer Pricing Adjustment.

Analysis:
The appeal concerns the computation of interest amounting to Rs.5,68,919/- on receivables from AE through Transfer Pricing Adjustment. The assessee argued that notional interest should not be added to the receivables as the company is debt-free, conducts 100% business with the AE, and has not paid or received any interest from third parties. The assessee cited various case laws to support this argument. On the contrary, the Departmental Representative relied on lower authorities' orders and referred to the Tribunal's decision in the case of Bechtel India Pvt. Ltd. vs ACIT.

Upon careful consideration, the Tribunal referred to the case of Alcatel Lucent India Limited, where a similar issue was discussed. The Tribunal highlighted that the working capital adjustment considers the impact of outstanding receivables, and no further adjustment is necessary if the assessee's margin is higher than the adjusted margin of comparables. The Tribunal also referenced decisions in the cases of Kusum Healthcare, Ameriprise India (P.) Ltd., and McKinsey Knowledge Centre (P) Ltd. to support its analysis.

The Tribunal noted that the decision of the Hon'ble Delhi High Court in the case of Kusum Healthcare remains the binding precedent on the issue of interest on outstanding receivables. The Tribunal followed this precedent, stating that since the facts are identical and the High Court's decision is still binding, they set aside the lower authorities' orders and decided the issue in favor of the assessee. As a result, the appeal of the assessee was allowed, and the addition made by the Assessing Officer was deleted.

In conclusion, the Tribunal's decision was based on the established position set by the Hon'ble Delhi High Court in the case of Kusum Healthcare, which was followed in subsequent cases. The Tribunal upheld the principle that interest on outstanding receivables should not be added based on notional calculations, especially when the company is debt-free and conducts significant business with the related party. The decision was in line with the binding precedent and resulted in the allowance of the assessee's appeal.

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