The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that no transfer pricing adjustment can be made on account of delayed realization of receivables from Associated Enterprises (AEs) where the taxpayer is a debt-free entity and bears no borrowing cost.

The bench of Vimal Kumar (Judicial Member) and S.Rifaur Rahman (Accountant Member) has dismissed the department’s challenge against the order of the Commissioner of Income Tax (Appeals), which had deleted the transfer pricing adjustment made by the Transfer Pricing Officer (TPO) after finding that the taxpayer had no external borrowings and its working capital requirements were entirely funded by its foreign head office.

The case pertained to Assessment Year 2002-03. The taxpayer, the Indian branch of a foreign company, provided consultancy and business support services to its Associated Enterprises in India, including accounting, technical assistance, marketing support, business development, compliance, and distribution-related services.

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For these services, it charged a cost-plus markup of 5%. It also recovered certain third-party expenses from its Associated Enterprises without any markup. During the assessment proceedings, the TPO observed that the taxpayer had allowed an unusually long credit period—approximately 537 days—for recovery of amounts due from its Associated Enterprises.

According to the TPO, this resulted in substantial working capital being locked up in receivables, thereby requiring a transfer pricing adjustment. Applying a working capital adjustment to comparable companies, the TPO proposed an upward adjustment of approximately ₹13.97 crore to the taxpayer’s income.

The department argued that by extending an interest-free credit period to its Associated Enterprises, the taxpayer had foregone an opportunity to earn income from the funds blocked in receivables.

It contended that the prolonged delay in receiving payments justified a working capital adjustment under the transfer pricing provisions and challenged the Commissioner (Appeals)’ decision deleting the adjustment.

The taxpayer argued that it was a debt-free entity whose working capital requirements were entirely financed by its foreign head office. Since it had no external borrowings and incurred no interest expenditure, there was no opportunity cost arising from delayed realization of receivables.

It further relied on judicial precedents, particularly the decisions in the Bechtel India litigation, where courts had held that no adjustment for delayed receivables was warranted when the taxpayer did not incur any borrowing costs.

The Tribunal agreed with the taxpayer and observed that the entire premise of the TPO’s adjustment rested on the assumption that the taxpayer had suffered an opportunity cost because of delayed collections.

However, the Tribunal noted that the taxpayer’s balance sheet reflected no borrowings whatsoever, and all working capital needs were met by its head office. Since the taxpayer did not incur any borrowing costs or interest expenditure, there was no basis for assuming any financial disadvantage arising from the delayed realization of receivables.

The Bench also observed that the extension of credit to Associated Enterprises formed part of the group’s business policy and did not result in any opportunity loss to the group as a whole.

Relying on the Delhi High Court-approved decision in Bechtel India, the Tribunal held that transfer pricing adjustments based solely on delayed receivables cannot be sustained in the case of a debt-free taxpayer. Consequently, it upheld the deletion of the transfer pricing adjustment.

On the issue relating to interest under Section 234D of the Income Tax Act, the taxpayer conceded that the matter was consequential in nature.

Accepting this submission, the Tribunal allowed the Revenue’s ground on this limited issue, leaving the computation to be carried out in accordance with law.

The Delhi ITAT dismissed the Revenue’s appeal on the transfer pricing issue, thereby confirming that no working capital adjustment was warranted for delayed receivables where the taxpayer was debt-free and had no borrowing costs. The appeal was partly allowed only to the limited extent of the issue relating to Section 234D interest. The taxpayer’s cross-objections were dismissed as infructuous after the Tribunal upheld the Commissioner (Appeals)’ order on the principal transfer pricing dispute.

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