Facts of the Case

The present appeal was filed by the Revenue challenging the order dated 11.10.2021 passed by the Income Tax Appellate Tribunal (ITAT) for Assessment Year 2009–10. The dispute primarily revolved around transfer pricing adjustments made by the Transfer Pricing Officer (TPO) in relation to intra-group services and outstanding receivables.

The TPO had made additions on the ground that payments for intra-group services were not justified on the basis of commercial expediency and further treated outstanding receivables as an international transaction requiring benchmarking.

Issues Involved

  1. Whether the ITAT erred in deleting transfer pricing adjustments relating to intra-group services.
  2. Whether payment for intra-group services satisfied the test of commercial expediency.
  3. Whether outstanding receivables constitute an international transaction under Section 92B read with Section 92F(v) of the Income Tax Act, 1961.
  4. Whether interest should be imputed on delayed receivables from Associated Enterprises (AEs).

Petitioner’s Arguments (Revenue)

  • The ITAT wrongly deleted the addition made by the TPO concerning intra-group services.
  • The assessee failed to substantiate commercial expediency of such payments.
  • The TPO had not re-characterized the transaction but had made adjustments based on valid parameters.
  • Outstanding receivables should be treated as an international transaction requiring benchmarking under Rule 10B.

Respondent’s Arguments (Assessee)

  • The agreement for intra-group services was a composite arrangement and could not be split for determining arm’s length price.
  • The TPO exceeded jurisdiction by questioning the commercial benefit derived from services.
  • No interest was charged on delayed payments from AEs as similar treatment was given to non-AEs.
  • The debtor period for non-AEs was equal to or greater than that for AEs, justifying no transfer pricing adjustment.

Court’s Findings / Order

  • The Court observed that the issue of intra-group services was already settled in favour of the assessee in its own case for earlier assessment years (2007–08 & 2008–09).
  • It held that the view taken by the ITAT was plausible and did not warrant interference.
  • On the issue of receivables, the Court upheld the findings of lower authorities that:
    • The assessee had similar or more lenient credit terms for non-AEs.
    • There was no consistent receivable position warranting interest adjustment.
  • The Court concluded that no substantial question of law arose in the appeal.
  • Result: Appeal dismissed.

Important Clarifications

  • The TPO cannot question the commercial expediency or benefit derived from intra-group services once the transaction is at arm’s length.
  • A composite agreement for services should not be artificially split for benchmarking purposes.
  • Outstanding receivables may not automatically qualify for transfer pricing adjustment if parity exists with non-AE transactions.
  • Consistency in credit policy across AE and non-AE transactions is a key factor in deciding TP adjustments.

Sections Involved

  • Section 92B – International Transaction
  • Section 92F(v) – Definition provisions
  • Rule 10B of Income Tax Rules, 1962

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:3774-DB/MMH20092022ITA3422022_190646.pdf

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