The Ahmedabad bench of the Income Tax Appellate Tribunal ( ITAT ) while remitting the issue of transfer pricing adjustment regarding interest on overdue trade receivables held that working capital adjustment on outstanding trade receivables has to be verified while making Arm’s Length Price ( ALP ) adjustment on notional interest.
Intas Pharmaceuticals Limited, the assessee company is engaged in the business of manufacturing pharmaceutical products. The assessee has entered into international transactions covered under Section 92CA, a reference was made to the Transfer Pricing Officer ( TPO ), who made a total upward adjustment of Rs.1,08,78,100/- as well as Rs.4,66,36,157/- on account of determining the Arm’s Length Price (ALP) of the International Transaction of advancing loan/advance and receivables to the Associated Enterprises (AEs). The adjustment of Rs.1,08,78,100/- was in respect of interest rate i.e. 3.71% to total sales to AE for 19 days excess credit period.
The assessee argued that the Department had erred in confirming the upward adjustment made towards charging of notional interest for 19 day excess credit period for the realisation of export sale proceeds of finished pharmaceutical products from AEs ( 199 days average credit period to AEs as compared to average credit period of 180 days in case of receivables from non-AEs ).
It was also argued on behalf of Assessee also argued that working capital adjustment was factored in while fixing the sale price and hence it takes into account the impact of outstanding trade receivable on profitability.
The Tribunal found that the working capital adjustment given by the assessee company while fixing the sale price and which has an impact of outstanding trade receivable on profitability while having sale proceeds realisation which is incidental to the transaction of sale of finished goods, appears to be not verified by the AO/TPO. The credit period means the period provided to the AEs/Non-AEs to clear their outstanding dues towards the export proceeds. The Department considers the extra credit period as an ALP (Arm’s length price) adjustment and points that the Assessee should charge notional interest for the same.
It was viewed that the international transaction of export of finished goods which was benchmarked using the Transaction Net Margin Method with profit indicator of operating profit by operating cost, wherein the assessee company’s margin was 48.31% as compared to comparable entities having a margin of 17.71% has to be looked into the export profit margin and this aspect needs to be verified.
The two-member Bench comprising Suchitra Kamble (Judicial Member) and Waseem Ahmed (Accountant Member) observed that working capital adjustment given by the assessee company while fixing the sale price has an impact on outstanding trade receivable on profitability while having sale proceeds realisation which is incidental to the transaction of sale of finished goods were not verified by the AO/TPO.
While deleting the upward adjustment, the ITAT remanded the matter back to TPO to verify the quantum of working capital adjustment vis a vis credit period made available to non-AEs.
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