Outstanding Receivable: Three Cities- Three (different) Verdicts!

November 07,2017
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Ajit Kumar Jain (Founding Partner, Ajit Kumar Jain & Co. LLP)

Outstanding Receivables have always been a major issue for a businessman from the perspective of recovery. However, the transfer pricing adjustments made on account of outstanding receivables has made the issue more complex. In the last week of October, 2017 three decisions on “Outstanding Receivables” were delivered by three different benches of the ITAT viz. Bangalore (26.10.2017); Mumbai (27.10.2017) and Delhi (30.10.2017). In the ensuing paragraphs I have analyzed the three judgments.

A. Findings in the case of AMD India (TS-840-ITAT-2017(BANG)-TP-AMD India)

  1. In this case Working Capital adjustment was already made and the assessee had argued that no addition should be made on account of interest on receivables because it is not an independent transaction and it should be considered together as per Rule 10A (d).
  1. The Bangalore ITAT held that to the extent of agreed credit period, the sale price to AE or non-AE is inclusive of possible interest on such agreed debt and therefore, for such credit allowed to AE, it cannot be said that this is an independent international transaction. But when extra credit is allowed beyond the agreed credit period, the same is a subsequent independent event and interest for such extra credit period cannot be factored in the price agreed. Only because the agreed price without considering extra credit period is in excess of the arm’s length price, it cannot be said that for such independent subsequent event of allowing extra credit also, the agreed prices takes care and this is not an independent international transaction requiring separate benchmarking.
  1. The ITAT further held that the first requirement is to decide whether there is an independent international transaction or not. If it is found that it is not an independent international transaction, then obviously, no separate benchmarking is required. However, if it is found that it is an independent international transaction then separate bench making has to be done.
  1. The ITAT, on the facts of the case decided that in respect of agreed credit period which is 30 days, there is no independent international transaction because the effect of the credit to that extent is factored in the agreed prices. But for the extra credit period, the effect cannot be factored in the agreed prices because it is not even known at that stage as to how much extra credit will be allowed and therefore, that is an independent international transaction and hence, separate bench making has to be done.

Thus, in this case the ITAT has examined the price setting mechanism of the taxpayer with reference to the credit period and has concluded that the normal credit period is factored into the price. However, the ITAT has considered it as a separate international transaction and the benefit of working capital adjustment already made, has not been allowed to the taxpayer.



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