DCIT Vs Coca Cola India Inc. (ITAT Delhi)
Transfer Pricing Adjustment Deleted for Debt-Free Entity; Revenue Appeal Partly Allowed: ITAT Delhi
The Revenue appealed against the order of the Commissioner of Income-tax (Appeals) for Assessment Year 2002-03, while the assessee filed cross objections supporting the appellate order. The assessee, a branch office in India of a foreign company, provided consultancy and support services to its Associated Enterprises (AEs), charging a 5% mark-up on specified costs while recovering certain third-party expenses on a reimbursement basis without any mark-up. During the transfer pricing proceedings, the TPO observed that reimbursements from AEs were received after substantial delays of about 537 days, resulting in significant sundry debtors. Treating the extended credit period as locking up the assessee’s working capital, the TPO computed a working capital adjustment by adjusting the operating margins of comparable companies and determined a transfer pricing adjustment.
Before the CIT(A), the assessee contended that it was a debt-free entity whose working capital requirements were fully met by its Head Office and that it did not incur borrowing costs. The assessee also challenged the inclusion of reimbursement expenses in the cost base and relied on judicial precedents regarding adjustments for interest on receivables. The CIT(A) rejected the challenge relating to inclusion of reimbursement costs, noting that the assessee itself had treated such reimbursements as part of total cost in its transfer pricing documentation. However, following the decision in Bechtel India Private Limited, which had been upheld by the Delhi High Court and the Supreme Court, the CIT(A) directed the AO/TPO to delete the transfer pricing adjustment after verifying that the assessee was a debt-free company on the basis of its audit report.
