TaxTMI 
TaxTMI 
2021 (2) TMI 896
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....oresaid activities (including insurance and reinsurance companies). 4. Assessee electronically filed its return of income for A.Y. 2013-14 declaring total income at Rs. 24,54,19,872/-. The case was selected for scrutiny and notice u/s 143(2) and 142(1) of the Act was issued and served on the assessee. On pursuing the details filed by the assessee, AO noticed that assessee had entered into international transaction with its Associated Enterprises (AEs). He therefore, in accordance with the provision of Section 92CA of the I.T. Act referred the matter to the TPO for determining the Arm's Length Price (ALP) of the international transactions. Thereafter, the TPO vide order dated 18.10.2016 passed u/s 92CA(3) suggested upward adjustment in ALP by Rs. 51,15,652/- on account of net interest chargeable on delayed receivables. Based on the recommendation of the TPO, addition of Rs. 51,15,652/- was made to the income of the assessee in the draft assessment order dated 29.12.2016 passed u/s 143(3) r.w.s 144C of the I.T. Act, 1961 and the total income proposed to be assessed at Rs. 25,05,35,524/-. 5. Aggrieved by the draft assessment order passed by the AO, assessee approached DRP and ra....
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....considering working capital adjusted margins of comparable companies for adjusting the difference in receivable days of the appellant and the comparable companies. • Re-characterising outstanding receivables as loan advanced to AE and attributing notional interest thereon, thereby not appreciating that re-characterizing a transaction is not permitted in Transfer Pricing • Not appreciating that interest on receivables is not 'international transaction as per the provision of Section 92B of the Act. The primary transaction is of provision of Information Technology enabled services, which is duly benchmarked and interest on receivables is only incidental to the same. 4. The learned TPO/AO/Hon'ble DRP have erred, in law and in facts, in following no criteria or reasoning for choosing Comparable Uncontrolled Price Method ("CUP") as the most appropriate method to benchmark the outstanding receivables and rejecting the other five methods. Further learned DRP/TPO/AO have erred in applying the CUP. 5. The learned TPO/AO/ Hon'ble DRP have erred, in law and in facts of the case, in making a TP adjustment for inter-company receivables realization....
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....e receivables from the assessee's AEs which arose on account of international transaction pertaining to provision of IT enabled services were akin to extending of an unsecured loan by the assessee and should, accordingly, carry an interest cost to be charged from the AEs for delay in payment beyond the stipulated date. The TPO thereafter, benchmarked the international transactions using CUP method on the delayed payment made by its AEs using LIBOR plus 400 basis points and computed interest at the rate of 4.45% and thereby made an upward adjustment of Rs. 51,15,652/- to the total income of the assessee. 8. Before us, Learned AR reiterated the submissions made before the lower authorities and further submitted that working capital adjustments had made by the assessee in TP study report. Learned AR submitted that in its TP documentation the outstanding receivables arising from inter-company service transactions were duly benchmarked by the assessee by undertaking working capital adjustment, wherein the difference in the working capital deployed by the assessee and comparables were adjusted and already factored into. In support of her contention that working capital adjustments ....
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....o adjustment made to international transaction on account of charging interest on delayed receipts of receivable from AE's by treaty it as unsecured loan. 11. Before us, Learned AR has pointed to the fact that in the TP study report, the outstanding receivable arising from intercompany service transactions have been duly benchmarked by undertaking working capital adjustment. We find that Hon'ble Delhi High Court in the case of Kusum Healthcare Pvt. Ltd. (supra) has observed that when the assessee has already factored in the impact of the receivables in the working capital adjustment and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and recharacterized the transaction which was clearly impermissible in law. To arrive at the aforesaid conclusion, Hon'ble High Court also referred to the decision of Delhi High Court in the case of CIT V. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi). The relevant observation of the High Court are as under: 8. "Aggrieved by the said order, the Assessee filed an appeal before the ITAT. By the impugned order dated....
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.... will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studied. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way. 11. The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction. This was clearly impermissible in law as explained by this Court in CIT v. EKL Appliances Ltd. (2012) 345ITR ....