In a recent ruling in the case of Techbooks International Private Limited, the Delhi Tax Tribunal proceeded to lay down the formula for making Transfer Pricing adjustment for late realization of sales proceeds.

Formula adopted by TPO

The Transfer Pricing officer noted that the Taxpayer had realized the sales invoices late and carried out Transfer pricing adjustment by applying interest rate of 15% on the late receipts, after allowing for a normal credit period of 60-days.

The Taxpayer protested the adjustment and also pointed out that as  the terms of the services agreement provided for a credit period of 150-days.

Tribunal Ruling

The Tribunal upheld in-principle the need for making the TP adjustment for late realization, taking note of the fact that the Finance Act 2012 widened the scope of international transactions to include inter-alia debts arising during the course of the business.

The Tribunal however altered the basis adopted to carry out the adjustment. The Tribunal reasoned that since the sale price of the Taxpayer was arrived on the basis of a 150-day credit period, the adjustment to late realization had to be made on the following basis:

(i) In the first instance, the credit period of the comparables had to be determined and the revenue of comparable companies had to be re-computed based on the 150-day credit period, to bring them on par with the Taxpayer

(ii) The delay in realization by the Taxpayer beyond the contracted 150-day credit period to be taken as another international transaction, and adjustment made therefor

For the purpose of making the adjustment, the Tribunal upheld the use of LIBOR rate in foreign currency relevant to a particular Associated Enterprise

Other Issues

a) Companies following different financial year

The Tribunal also provided an opportunity to the Taxpayer to re-determine the margins of the comparable companies which were rejected for following financial year-end different from fiscal year-end and reporting period of more than 12 months.

b) Selection /Rejection of comparable companies

Companies which had undertaken M&A transactions were held not comparable. Claims for selection / rejection of comparable companies on grounds of high / low turnover were also not entertained.

c) Risk Adjustment

Claim for Risk adjustment by the Tax payer since it was a “captive” service provider was negatived on the basis that it faced a “single-customer” risk and also on finding that the Taxpayer had created a provision for doubtful Advances against Associated concerns.

d) Margin computation

Forex fluctuation and provision for doubtful debts held to be an operating item while bank charges held as a non-operating item for the purpose of margin computation.