2024 (7) TMI 430 - AT - Income Tax

ITAT Delhi favors assessee on transfer pricing adjustment and notional interest on receivables deletion

ITAT Delhi ruled in favor of the assessee on two transfer pricing issues. Regarding TP adjustment for third-party transactions, the tribunal found that ... TP Adjustment - Proportionate adjustment for third-party transactions - HELD THAT:- We find that it is undisputed that AO/TPO has not given effect to the directions of the DRP. In such situation, the request of the ld. DR for the Revenue that the matter may be remitted to the AO/TPO cannot be accepted and he cannot be given a second inning. In our considered opinion, the submission of assessee has cogency and we do not find any infirmity in the same. However, the computational aspect can be checked by the AO only. Hence, for computational purposes, we remit the issue to the file of AO who should check the computational aspect. Notional interest on outstanding receivables - HELD THAT:- The assessee deserves to succeed on account of the fact that in assessee’s own case for AY 2014-15 [2019 (9) TMI 1599 - ITAT DELHI] & 2010-11 [2019 (10) TMI 1589 - ITAT DELHI] the issue is decided in favour of the assessee and Hon’ble Delhi High Court in AY 2014-15 [2021 (10) TMI 751 - DELHI HIGH COURT] left the question open regarding whether transfer pricing adjustment on delayed receivables could apply to a debt free company. Hence, the submission of assessee that the decision of Hon’ble Delhi High Court in assessee’s own case for AY 2014-15 and Tribunal decision in assessee’s own case for AY 2010-11 still applies. We find ourselves in agreement with the submissions of the assessee, since in assessee’s own case, the issue is decided in favour of the assessee. Following the principles of stare decisis we set aside the orders of the authorities below on this issue and addition is deleted. Issues Involved:1. Proportionate adjustment for third-party transactions.2. Notional interest on outstanding receivables.Detailed Analysis:1. Proportionate Adjustment for Third-Party Transactions:Facts:The appellant, primarily a captive service provider to its Associated Enterprises (AEs), also provided services to third-party clients, which constituted only 2% of the total revenue. The appellant did not maintain separate segmental accounts for revenue or costs incurred from third-party clients.Finding by Lower Authorities:During the proceedings before the Dispute Resolution Panel (DRP), the appellant contended that the Transfer Pricing Officer (TPO) had incorrectly calculated the arm's length price (ALP) by excluding third-party revenue without proportionately excluding the related expenses. The DRP directed the TPO to verify and correct the computations after examining the details and allowing the appellant an opportunity to be heard. However, the TPO did not give effect to these directions.Submission of the Appellant:The appellant argued that transfer pricing provisions apply only to transactions with AEs and not with third parties. The TPO accepted that third-party revenue should be excluded while computing the operating margin but ignored the related costs. The appellant provided a detailed computation of the operating margin after excluding proportionate third-party expenses, which resulted in a revised operating margin of 16.77%, within the arm's length range of 16.06% to 24.03%.Judgment:The Tribunal found that the TPO had not given effect to the DRP's directions. It held that the request of the Departmental Representative (DR) to remit the matter back to the TPO could not be accepted, and the computational aspect should be checked by the Assessing Officer (AO). The issue was remitted to the AO for computational purposes.2. Notional Interest on Outstanding Receivables:Finding of Lower Authorities:The TPO recharacterized the outstanding receivables as unsecured loans and imputed notional interest at the rate of LIBOR plus 400 basis points on receivables exceeding a credit period of 60 days. The DRP upheld the TPO's order, which led to an upward adjustment for imputed interest.Submissions of the Appellant:The appellant contended that it is a debt-free company and thus should not incur any notional interest adjustment. It relied on the jurisdictional Tribunal's rulings in its own case for AY 2014-15 and AY 2010-11, where it was held that no transfer pricing adjustment on account of interest on outstanding receivables is required for a debt-free company. The appellant also cited the Supreme Court's dismissal of the Revenue's appeal in the Bechtel India Pvt. Ltd. case, which supported the appellant's position.Submission of the Department:The DR argued that the amendment to Section 92B by the Finance Act 2012, with retrospective effect from 01.04.2002, mandates that interest on receivables is a separate international transaction. The DR cited several judicial precedents supporting the retrospective applicability of the amendment and the requirement to benchmark interest on delayed receivables.Judgment:The Tribunal noted that there are decisions on both sides regarding notional interest on outstanding receivables. However, it found merit in the appellant's argument based on its own case for AY 2014-15 and AY 2010-11, where the issue was decided in favor of the appellant. The Tribunal followed the principle of stare decisis, set aside the orders of the lower authorities on this issue, and deleted the addition.Conclusion:The appellant's appeal was partly allowed for statistical purposes, with the proportionate adjustment for third-party transactions remitted to the AO for computational verification and the notional interest on outstanding receivables deleted based on precedents in the appellant's own cases.Order Pronounced:The judgment was delivered in the open court on June 4, 2024.