No Notional Interest Can Be Levied On Delayed Receivables From AEs/ Non-AEs If Taxpayer Is Debt Free Company, Reiterates Delhi H[gh Court

Section 92B of the Income Tax Act lays down the method for computing the income arising from international transactions or specified domestic transactions.

Explaining on the issue of interest on outstanding receivables on account of debt due to AEs, the Division Bench comprising Justice Yashwant Varma and Justice Ravinder Dudeja reiterated that “the entire focus of AO was on just one assessment year and the figure of receivables in relation to that assessment year 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”.

Facts of the case:

The Revenue Department had approached the High Court challenging the order of the ITAT where it was held that the asserted deferral of payments by the AEs to the Assessee would not fall within the ambit of clause (c) of Explanation (i) placed at the end of Section 92B of the Income Tax Act.

Observations of the High Court:

The Bench clarified that the inclusion in the Explanation to Section 92B of the Act of the expression “receivables” does not mean that de hors the context every item of “receivables” appearing in the accounts of an entity, which may have dealings with foreign associated enterprises would automatically be characterised as an international transaction.

There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case-to-case basis, added the Bench.

The Bench also stated that 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-à-vis the receivables for the supplies made to an associated enterprise, the arrangement reflects an international transaction intended to benefit the associated enterprise in some way.

The Bench found that the Assessing Officer focused entirely on just one assessment year, and the figure of receivables in relation to that assessment year can hardly reflect a pattern that would justify a Transfer Pricing Officer 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 based on outstanding receivables would have distorted the picture and recharacterized the transaction, added the Bench.

Relying on the decision of Kusum Healthcare, the Bench noted that the taxpayer is undisputedly a debt free company and no interest was charged from third parties/non-AEs.

Thus, when outstanding receivables is not a separate international transaction, delay in realization of sale proceeds is incidental to the sale transaction, and no notional interest can be levied by treating the same as unsecured loan, added the Bench.

Hence, the High Court dismissed Revenue's appeal.

Counsel for Appellant/ Revenue: Advocates Vipul Agrawal, Gibran Naushad and Sakashi Shairwal

Counsel for Respondent/ Assessee: Advocates Neeraj Jain, Aniket D. Agrawal & Abhishek Singhvi

Case Title: PCIT vs Global Logic India

Citation: 2024 LiveLaw (Del) 976

Case Number: ITA No 845/2018

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