Impact Of Working Capital Adjustment On Outstanding Trade Receivable Must Be Verified Before Making ALP Adjustment Qua Notional Interest: Ahmedabad ITAT

The Ahmedabad ITAT remitted the issue of transfer pricing adjustment regarding interest on overdue trade receivables in case of entity engaged in manufacturing of pharmaceutical products, while emphasizing that no further adjustment is warranted on outstanding receivables from AEs once working capital adjustment is already factored in. The credit period means the time period provided to the AEs/Non-AEs to clear their outstanding dues towards the export proceeds. The dispute over trade receivables from AEs arises when as per the Department, the Assessee company provides more credit period to AEs as compared to Non-AEs. Most of the time Department considers this extra credit period as ALP (Arm's length price) adjustment and points that the Assessee should charge notional interest for the same. The Bench comprising Suchitra Kamble (Judicial Member) and Waseem Ahmed (Accountant Member) observed that “working capital adjustment given by the assessee company while fixing the sale price and which has an impact of outstanding trade receivable on profitability while having sale proceeds realisation which is incidental to transaction of sale of finished goods as per the submission of the AR appears to be not verified by the AO/TPO”. (Para 6) The brief facts were that the assessee company is engaged in the business of manufacturing of pharmaceutical products. As the assessee has entered into international transactions covered under Section 92CA, a reference was made to Transfer Pricing Officer (TPO), who made total upward adjustment of Rs.1,08,78,100/- as well as Rs.4,66,36,157/- on account of determining the Arm's Length Price (ALP) of the International Transaction of advancing loan/advance and receivables to the Associated Enterprises (AEs). The adjustment of Rs.1,08,78,100/- was in respect of interest rate i.e. 3.71% to total sales to AE for 19 days excess credit period. The Assessee argued that the Department had erred in confirming upward adjustment made towards charging of notional interest for 19 days excess credit period for realization of export sale proceeds of finished pharmaceutical products from AEs (199 days average credit period to AEs as compared to average credit period of 180 days in case of receivables from non-AEs). It was also argued on behalf of Assessee also argued that working capital adjustment was factored while fixing sale price and hence it takes into account the impact of outstanding trade receivable on profitability. The Bench found that working capital adjustment given by the assessee company while fixing the sale price and which has an impact of outstanding trade receivable on profitability while having sale proceeds realisation which is incidental to transaction of sale of finished goods, appears to be not verified by the AO/TPO. In fact, the Bench observed that the international transaction of export of finished goods which was benchmarked using Transaction Net Margin Method with profit indicator of operating profit by operating cost, wherein assessee company's margin was 48.31% as compared to comparable entities having margin of 17.71% has to be looked into the export profit margin and this aspect needs to be verified. Hence, while deleting the upward adjustment in respect of interest on loans and advances to overseas AEs, the ITAT remanded the matter back to TPO to verify the quantum of working capital adjustment vis a vis credit period made available to non-AEs. Counsel for Assessee: Sr. Advocate S.N. Soparkar and Parin Shah Counsel for Revenue: Dr. Darsi Suman Ratnam Case Title: Intas Pharmaceuticals Limited vs ACIT Case Number: ITA No 1787/Ahd/2017 Click here to read/ download the Order

Impact Of Working Capital Adjustment On Outstanding Trade Receivable Must Be Verified Before Making ALP Adjustment Qua Notional Interest: Ahmedabad ITAT

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Impact Of Working Capital Adjustment On Outstanding Trade Receivable Must Be Verified Before Making ALP Adjustment Qua Notional Interest: Ahmedabad ITAT

Pankaj Bajpai

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Pankaj Bajpai

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