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2020 (3) TMI 1192 - AT - Income TaxArm’s Length adjustment in respect of outstanding receivables - argument of the AR that the receivables are not independent transactions separate from the transaction of sale; that receivables are merely an offshoot of commercial transactions and cannot be viewed on standalone basis - HELD THAT:- There is no denial of the fact that operating profit margin earned by the assessee from the services rendered to AEs is 45.88% and the same is significantly higher than the working capital adjusted results for comparables at 22.07%. Working capital adjustment is an adjustment for the opportunity cost of capital for investments made in working capital, which require capital and operating assets and an uncontrolled entity is expected to earn a market rate of return on that required capital independent of the services that it provides. The amount of capital required to support the services is dependent upon the level of inventory, debtors and creditors measured at a particular percentage of the total cost and had impact on the profits from investing at different levels of working capital due to the differences in the cash collection cycle which imply differences in credits granted to the customers which activity is similar to an additional service for which the markets would pay. In Kusum Healthcare Private Ltd. [2017 (4) TMI 1254 - DELHI HIGH COURT] held that working capital adjustment takes into account the impact of outstanding receivables on the profitability. Not in dispute that the assessee is a debt free company as is reflected in the profit and loss account wherein the interest charges are only ₹ 30,278/-. It is, therefore, clear that the assessee does not have any interest where borrowed funds were utilized for extending any kind of loan to its AEs, so that transfer pricing adjustment could be made. In the case of BC Management Services Pvt. Ltd. [2017 (12) TMI 255 - DELHI HIGH COURT] held that notional income on account of delayed payment cannot be treated as part of income and be made subject matter of adjustment. It is, therefore, clear that re-characterisation of the outstanding receivables as loan is impermissible unless the transactions are found to be substantially at variance with the stated form. There is no denial of the fact that in the assessment year 2012-13, this question of adjustment on account of receivables was dealt by the CIT(A) and by referring to the decision of Hon’ble jurisdictional High Court in the case of Kusum Healthcare Private Ltd.(supra), deleted the entire adjustment suggested by ld. TPO on account of interest on outstanding receivables. We, agree with the submission of the ld. AR that because the ld. CIT(A) did not have the benefit of decision of Hon’ble jurisdictional High Court in the case of Kusum Healthcare Pvt. Ltd. (supra), the issue was held otherwise for the assessment year 2009-10. Addition made on account of arm’s length price adjustment in respect of outstanding receivables cannot be sustained and we, therefore, while allowing grounds Nos. 1 to 3, direct the ld. Assessing Officer to delete the addition. Disallowance u/s. 14A read with Rule 8D - HELD THAT:- On a reading of the order in [2019 (7) TMI 1590 - ITAT DELHI]for assessment year 2011-12 in assessee’s own case, we find that this issue stands covered and in the absence of any reason to show why the view taken by the Tribunal in assessee’s own case on identical facts and circumstances should not be followed, we find that mechanical application of Rule 8D is not tenable and the addition made on this account has to be deleted.
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