ITAT upheld TP adjustment for outstanding debtors beyond agreed period

Bharti Airtel Services Ltd. Vs DCIT (ITAT Delhi)

In the present case the service agreement clearly says that the amount of payment is to be made by the associated enterprises to the assessee within 15 days. Such payment was not made within that period but beyond that. The learned assessing officer held that the amount of outstanding bills beyond a specified period of 15 days is a separate international transaction giving certain benefit of extended credit to the associated enterprise. Such is the finding of the learned CIT – A also. We have carefully gone through the service agreement produced before us at page number 335 of the paper book. According to that, clause 3 shows services charge and payments as well as the method of providing invoices in making payment. It provides that the company shall raise invoices on the recipient on the first day of every subsequent month for the services fee, and the recipient shall pay the services for within 15 days of receipt of the invoice by the company. It further provides that the service costs shall constitute full consideration for the company for the providing of services to the recipient. This agreement clause clearly shows that if the payment is beyond 15 days, it does not include the cost of service for withholding the payment beyond 15 days by the associated enterprises. This shows that in the service cost, the cost of outstanding which remains overdue is not factored. Hence, We do not find any infirmity in the order of the ld CIT A. The working capital adjustment was denied to the assessee in absence of any reliable data provided by the assessee. Even before us same is not provided. Therefore it is apparent that in the present case working capital adjustment was not factored into by determining the arm’s-length price of the international transaction of provision of the services. Therefore, outstanding debtors beyond an agreed period is a separate international transaction of providing funds to its associated enterprise for which the assessee must have been compensated in the form of interest at LIBOR + 300 BPS as held by CIT (A) .

Coming to the various decisions relied upon by the learned authorised representative we find that they are on different facts. The decision of the honourable Delhi High Court in ITA number 765/2016 dated 24^th appeal 2017 in case of Kusum healthcare private limited (supra), para number eight clearly shows that assessee has undertaken working capital adjustment for the comparable companies selected in its transfer pricing report which has not been disputed by the learned transfer pricing officer and therefore the differential impact of working capital of the assessee vis-à-vis is comparable had already been factored in pricing profitability and therefore the honourable High Court held that adjustment proposed by the learned TPO deleted by the ITAT is proper. In the present case there is no working capital adjustment made by the assessee as well as granted by the learned TPO. The facts in the present case are distinguishable. Further same are the facts in case of Bechtel India where working capital adjustment was already granted. In case of 91 taxmann.com 443 Motherson Sumi Infotech and design Limited non charging of interest was due to business and commercial reasons and no interest was also charged against outstanding beyond a specified period from non-related parties. No such commercial or business reasons were shown before us. The facts of the other decisions cited before us are also distinguishable. Therefore, reliance on them is rejected.

FULL TEXT OF THE ITAT JUDGEMENT

1. This appeal is filed by Bharti Airtel services Ltd (the appellant/assessee) against the order of the learned Commissioner Of Income Tax (Appeals) – 44, New Delhi dated 10 August 2016 for assessment year 2011 – 12.

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