Transfer pricing adjustments must consider working capital impacts; further adjustments based solely on outstanding receivables distort profitability.

ORDER

PER MAHAVIR SINGH, VP:

This appeal by assessee is arising out of the final assessment order passed by DCIT/ACIT, TP 1(1), Delhi for the Assessment Year 2017-18 u/s 143(3) r.w.s. 143C (13) r.w.s 144B of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide dated 15/07/2022. This order was passed in terms of directions issued by DRP u/s 144C of the Act dated 04/05/2022. The Draft Assessment Order was framed by AO, National Faceless Assessment Centre, Delhi u/s 144C of the Act for Assessment Year 2017-18 dated 26/08/2021 in terms of reference from ACIT, Circle 5(1), Delhi, TPO passed Transfer Pricing Adjustments u/s 92CA of the Act vide order dated 24/01/2021.

3. The first issue in this appeal of assessee as regards to the order of AO passed inconsequence to directions issued by DRP making TP Adjustment of Rs.1,68,25,273/- on account of delay in receiving the trade receivables is a separate international transaction akin to unsecured loan entered by the assessee with its Associate Enterprises(AE) and, accordingly, charged interest @ 5.068% for 93.6 days as being number of days over and above 30 days. For this assessee has raised following grounds No.2 to 2.5 which are exhaustive, argumentative and need not be reproduced.

4. Brief facts are that the assessee company is engaged in the business of design, develop, manufacture, prepare, process, buy, sell, re-sell, import, export, deal in all kinds of brake pads/friction products of passenger cars and other motor vehicles. The assessee filed its return income for the relevant Assessment Year 2017-18 and the same was processed CPC, Banglore u/s 143(1)(a) Act vide intimation dated 02/02/2019. Subsequently, assessee’s case was selected for scrutiny assessment for the reason that the assessee has entered into international transactions with respect of lending or borrowing of money with its AE. The AO noted that the assessee has trade receivables from its AE and accordingly it has entered into the borrowing or lending transaction with its AE and had not charged interest. Accordingly, it under reported its income to the extent of Rs.6,06,24,311/-. Hence, he prepared draft assessment order after referring the matter to TPO. The TPO noted that the assessee has entered into international transaction during the relevant assessment year as per audit report submitted in Form No.3CE. He narrated the transaction in his order passed u/s 92CA(3) of the Act page 2 & 3. The TPO noted that the assessee has declared international transaction of trade receivable of Rs.43,82,38,210/- from its AE Brake Parts Inc. LLC, USA as per form 3CEB. He noted that the assessee’s turn over/sales from this party is Rs.129,46,20,676/- during the year, which comes to 33.85% equivalent to receivables. He noted that the trade receivables are as old as at an average of 123.6 days on account of credit to this party for sale of goods. He noted that no enterprise in an uncontrolled environment would provide such a long credit for sale of goods in international trade. Thus, according to him the Arm’s Length Price (ALP) of interest on this long credit/trade receivable needs to be determined under CUP method. The TPO, thereafter discussing the facts of the case i.e., purchase of raw material, sale of raw materials, sale of goods, trade payable, trade receivables and reimbursement of expenses paid, IT Support charges, freight charges paid noted that the assessee has allowed credit period of trade receivables to the extent of Rs.123.6 days at an average. The TPO relying on the decision of the Delhi High Court in the case of Mckinsey Knowledge Centre India (P) Ltd. vs. PCT [(2018) 96 taxmann.com 237 (Delhi) computed the ALP on interest receivables at Rs.4,63,74,506/-. The TPO noted that the assessee was as