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Issues: (i) Whether any transfer pricing adjustment could be made on account of alleged interest on delayed receivables from associated enterprises where the assessee was a debt-free company and had higher working capital adjusted margins than comparables. (ii) Whether the Assessing Officer was required to grant credit for tax deducted at source as per law.
Issue (i): Whether any transfer pricing adjustment could be made on account of alleged interest on delayed receivables from associated enterprises where the assessee was a debt-free company and had higher working capital adjusted margins than comparables.
Analysis: The international transactions relating to the consultancy business had been accepted at arm's length. The disputed adjustment arose only from outstanding receivables treated as a separate international transaction under the transfer pricing framework. The assessee had higher working capital adjusted margins than the comparable companies, indicating that the effect of receivables was already captured in the profitability analysis. The assessee was also a debt-free company, so no borrowed funds carrying interest cost could be said to have been deployed for extending credit to associated enterprises. In these circumstances, and in view of the established transfer pricing principle that working capital adjustment subsumes the impact of receivables, a separate notional interest adjustment was not justified.
Conclusion: The transfer pricing adjustment on account of interest on delayed receivables was deleted in favour of the assessee.
Issue (ii): Whether the Assessing Officer was required to grant credit for tax deducted at source as per law.
Analysis: The issue was not finally adjudicated on merits by determining the exact credit amount in the order. The Tribunal directed the Assessing Officer to verify and allow the TDS credit in accordance with law.
Conclusion: The matter was restored for grant of TDS credit as per law in favour of the assessee.
Final Conclusion: The appeal succeeded on the transfer pricing issue and obtained consequential relief on TDS credit, resulting in partial relief to the assessee.
Ratio Decidendi: Where the assessee is a debt-free company and its working capital adjusted margin is higher than that of comparables, no separate transfer pricing adjustment can be made for alleged notional interest on delayed receivables.
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