Padma AnatharamanFact of the Case
Assessee is engaged in the business of exporting pharmaceutical products to its overseas Associated Enterprises (“AEs‟) as well as to third parties. Assessee declared export of manufactured medicines and export of traded medicines as an international transaction. Both transaction benchmarked using TNMM method.
The profitability of the Assessee from its manufacturing and trading segments was benchmarked with the average operating profit margin earned by comparable companies performing similar manufacturing and trading functions. In both sets of transactions, the profit level indicators (PLIs) showed the operating profit margin of the Assessee to be higher than that of the comparable companies. Accordingly, the international transactions were projected by the Assessee as having been undertaken at the arm’s length price (ALP).
TPO proposed an adjustment by way of addition of Rs 1,57,54,943/- to the income of the Assessee which is notional interest on receivables outstanding from AEs over 180 days. The TPO noted that the credit period for the debtors as mentioned in the sale contract with unrelated entities was 180 days. However, in the case of the AEs they were “allowed to linger for long”. The said receivables qua (in the capacity of) the AE was treated as a separate international transaction. Transfer Pricing adjustment as proposed by TPO, incorporated by the AO in draft assessment order.
TPO gave the effect of direction of DRP to apply SBI Basic lending rate plus 150 basis point. AO passed the final assessment order by making an addition of Rs. 93,69,275/- to the income of the Assessee.
Question
Whether imputation of notional interest on delayed AE-receivables is justified and warranted?
Appeal to ITAT
The ITAT noted that the Assessee had undertaken working capital adjustment for the comparable companies selected in its transfer pricing report. It was further noted that “the differential impact of working capital of the Assessee vis-à-vis its comparable had already been factored in the pricing/profitability” which was more than the working capital adjusted margin of the comparable and, therefore, “any further adjustment to the margins of the Assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified.”
Decision of High Court
Revenue went on to the appeal, High 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-à-vis that of its comparable, 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) 345 ITR 241 (Delhi).
Consequently, the Court is unable to find any error in the impugned order of the ITAT giving rise to any substantial question of law for determination. The appeal as filed by revenue is, accordingly, dismissed.
Date of Judgement/Order: 25/04/2017
