2024 (12) TMI 709 - HC - Income Tax

Transfer Pricing Officer failed to examine deferred payments under Section 92B properly, inadequate analysis upheld

The Delhi HC upheld the Tribunal's decision regarding transfer pricing adjustments on deferred payments. The court found that the Transfer Pricing Officer ... TP Adjustment - asserted deferral of payments would fall within the ambit of clause (c) of Explanation (i) placed at the end of Section 92B or not? - HELD THAT:- We note that in Kusum Health Care [2017 (4) TMI 1254 - DELHI HIGH COURT] apart from the aspect of deferred payments ultimately transforming into a pattern, the Court had also taken a note of those deferred payments having an impact on the working capital of the assessee. As we go through the order framed by Transfer Pricing Officer TPO in these two appeals, the authority has clearly failed to examine or answer the issue of international transactions bearing in mind Explanation (i)(c) of Section 92B of the Income Tax Act, 1961 Act in the aforesaid light. In any case and in light of the factual findings which stand mirrored we find no justification to interfere with the ultimate view expressed by the Tribunal. Issues:1. Interpretation of deferred payments under Explanation (i)(c) of Section 92B of the Income Tax Act, 1961.2. Examination of the practice of deferred payments by the assessee.3. Analysis of deferred payments as an international transaction.4. Application of ejusdem generis principle to deferred payments.Issue 1: Interpretation of Deferred Payments:The High Court considered whether the deferral of payments falls within the scope of clause (c) of Explanation (i) of Section 92B of the Income Tax Act, 1961. The Court emphasized the need for a thorough investigation by the Transfer Pricing Officer to determine if delayed collection of monies for supplies made to foreign associated enterprises constitutes an international transaction. The impact on the working capital of the assessee and the need for a pattern analysis over time were highlighted. The Court also pointed out that a mere delay in collection beyond the agreed limit does not automatically characterize a transaction as international. The judgment referenced the case of PCIT vs Kusum Health Care Pvt. Ltd. to support the need for a detailed inquiry before concluding on the nature of deferred payments.Issue 2: Examination of Assessee's Practice:The Court acknowledged the appellant's argument that the practice of deferred payments had been consistently followed by the assessee from Assessment Years 2010-11 to 2017-18. However, the Court noted that the appeals in question pertained to the first year of operation, necessitating an examination of whether the data available for the relevant Assessment Year indicated a practice of deferred payments. The Court highlighted the importance of analyzing the available information to determine if the transactions could be classified under clause (c) of Explanation (i) to Section 92B of the Act.Issue 3: Deferred Payments as International Transaction:The respondent contended that providing a short-term deferral of payment may not fall within clause (c) of the Act. Reference was made to the Supreme Court's decision in Bombay Steam Navigation Co. Ltd. vs CIT to argue that deferred payments should be interpreted in conjunction with other services and lending facilities. The Court granted liberty to the appellants to submit additional material and scheduled a further hearing to allow for additional arguments.Issue 4: Application of Ejusdem Generis Principle:The Court examined a chart presented by the appellant to demonstrate a pattern of deferred payment systems followed by the respondent-assessee. The details in the chart showed adjustments made in various Assessment Years, indicating a consistent practice of deferred payments. However, the Tribunal's decision, which rested on Kusum Health Care and factual findings related to outstanding receivables, was upheld by the Court. The Court found no justification to interfere with the Tribunal's view and dismissed the appeals while leaving the question of law open for future consideration in appropriate proceedings.