Alcatel Lucent India Limited Vs ACIT (ITAT Delhi)
The Income Tax Appellate Tribunal (ITAT) heard the assessee’s appeal against the assessment order passed under Sections 143(3) read with 144C of the Income-tax Act, 1961 pursuant to the directions of the Dispute Resolution Panel (DRP). Although multiple grounds were raised, the assessee confined its arguments before the Tribunal to the transfer pricing adjustment relating to notional interest on overdue receivables from its Associated Enterprises (AEs).
The assessee was engaged in the distribution and sale of digital switching equipment, cellular exchange equipment, and also rendered intra-group marketing, technical support and contract software development services. During the relevant year, the Assessing Officer referred the international transactions to the Transfer Pricing Officer (TPO) under Section 92CA(1). The TPO proposed total transfer pricing adjustments of ₹147.39 crore, comprising adjustments relating to software development services, technical support services and interest on receivables.
The assessee challenged the draft assessment order before the Delhi High Court, contending that although it was titled as a draft assessment order, it was in substance a final assessment order and had been passed without providing an opportunity to approach the DRP. The High Court directed that the assessment order be treated as a draft assessment order, granted the assessee thirty days to file objections before the DRP, and ordered withdrawal of the demand notice and penalty initiation notice.
After considering the assessee’s objections, the DRP granted relief by deleting the transfer pricing adjustments relating to software development services and technical support services. However, it sustained the adjustment of ₹12,23,72,160 towards notional interest on outstanding receivables from AEs.
Before the DRP, the assessee submitted that outstanding receivables formed an integral part of the primary international transaction of rendering services and were already reflected in the pricing and profitability analysis. It argued that approximately 90% of its revenue was earned from AEs, and commercially it was prudent not to charge interest from such significant customers. The assessee further contended that it was a debt-free company, did not charge interest from either AEs or non-AEs, and that the impact of receivables had already been factored into the working capital adjustment. It relied upon various judicial precedents, including Kusum Healthcare Pvt. Ltd., and also challenged the application of SBI Prime Lending Rate plus 300 basis points for computing notional interest.
The DRP rejected these submissions. Referring to the retrospective amendment made by the Finance Act, 2012 inserting Explanation (i)(c) to Section 92B, it held that delayed receivables constituted a separate international transaction and upheld the transfer pricing adjustment.
Before the Tribunal, the assessee argued that the DRP had wrongly distinguished the Delhi High Court decision in Principal Commissioner of Income-tax v. Kusum Healthcare Pvt. Ltd. It relied upon subsequent Tribunal decisions which had consistently followed the High Court judgment. The Revenue supported the DRP’s order and relied upon the Tribunal’s decision in Bechtel India Ltd.
The Tribunal examined its earlier decision in Orange Business Services India Solutions (P.) Ltd., which had comprehensively analysed the judicial developments on transfer pricing adjustments relating to outstanding receivables. The Tribunal noted that although certain Tribunal decisions had treated delayed receivables as separate international transactions, the Delhi High Court in Kusum Healthcare had held that the mere inclusion of “receivables” in the Explanation to Section 92B did not automatically make every outstanding receivable an international transaction. The High Court had further held that where the impact of receivables had already been factored into the working capital adjustment while benchmarking the primary international transaction, a separate adjustment for outstanding receivables would distort the arm’s length analysis.
The Tribunal also noted the subsequent developments in McKinsey Knowledge Centre (P.) Ltd., including the review proceedings, and observed that the Delhi High Court had reaffirmed that Kusum Healthcare continued to be the binding precedent on the issue. The Tribunal further observed that the same principle had been consistently followed in subsequent decisions of the Delhi Tribunal, including Global Logic India Ltd. cases.
Following the binding decision of the jurisdictional High Court in Kusum Healthcare, the Tribunal set aside the orders of the lower authorities and deleted the transfer pricing adjustment on outstanding receivables. Consequently, the assessee’s appeal was allowed and the stay application became infructuous.
Cases Discussed
• ERM India (P.) Ltd. v. National e-assessment Centre, New Delhi (Delhi ITAT), [2021] 132 taxmann.com 220
• Global Logic India (P.) Ltd. v. Dy. CIT (Delhi ITAT), [2022] 134 taxmann.com 35
• Global Logic India Ltd. v. ACIT (Delhi ITAT), [2020] 117 taxmann.com 640/185 ITD 795
• Global Logic India Ltd. v. Dy. CIT (Delhi ITAT), [2019] 102 taxmann.com 115
• Principal Commissioner of Income-tax v. Kusum Healthcare Pvt. Ltd. (Delhi High Court), (2018) 99 taxmann.com 431
• Kusum Healthcare (P.) Ltd. v. Asstt. CIT (Delhi ITAT), [2015] 62 taxmann.com 79
• Bechtel India Pvt. Ltd. vs. DCIT, I.T.A. No.1478/Del/2015
• Global Logic India Ltd vs DCIT, 1104/Del/2015
• Kadimi Tool Manufacturing Co (P) Ltd vs DCIT, [2017] 187 taxmann.com 42 (Del-Trib.)
FULL TEXT OF THE ORDER OF ITAT DELHI
