TMI Blog2019 (9) TMI 1599X X X X Extracts X X X X X X X X Extracts X X X X ..... TAT HYDERABAD ] has held as in case of a debt free company, there is no requirement for making transfer pricing adjustment on account of the interest on outstanding receivables. We have verified the balance sheet of the assessee and find that the assessee has not borrowed any fund for its business activity and, thus, it being a debt free company, the ratio of the decision of the Tribunal in the case of Pegasystems Worldwide India (P) Ltd Vs ACIT (supra) is squarely applicable on the facts of the case. Accordingly, we delete the transfer pricing adjustment made on account of interest on receivables - Decided in favour of assessee. - ITA No. 7349/Del/2018 - - - Dated:- 16-9-2019 - Shri Amit Shukla, Judicial Member And Shri O.P. Kant, Accountant Member For the Appellant : Shri Porus Kaka, Adv., Shri Divesh Chawla, Adv. For the Respondent by Shri Sanjay I. Bara, CIT(DR). ORDER PER O.P. KANT, A.M.: This appeal by the assessee is directed against final assessment order dated 26/09/2018 passed by the Deputy Commissioner of Income Tax, Circle 16(2), New Delhi (hereinafter will be referred as the Assessing Officer ) for assessment year 2014-15, pursuant to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns supernormal profits as compared to the Appellant. 7. On the facts and in the circumstances of the case, the learned TPO/AO have erred in including ICRA Online Limited in the final set of comparables for benchmarking the international transaction of provision of R I services, even though The same has already been rejected by the learned TPO in the transfer pricing order on account of it being functionally not comparable and earns supernormal profits as compared to the Appellant. 8. On the facts and in the circumstances of the case, the learned TPO/AO have erred in not granting benefit of second proviso to Section 92C(2) of the Act while computing the arm s length margin for benchmarking the international transaction of provision of IT support services, pursuant to which the transfer pricing adjustment made on account of this international transaction should be deleted. 9. On the facts and in the circumstances of the case, the learned TPO/AO/Hon ble DRP have erred by not considering gains/losses arising out of foreign exchange fluctuations as operating in nature while computing the operating margins of the assessee as well as comparable companies while benchmarki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal is without prejudice to and independent of one another. The Appellant craves leave to add, alter, amend or delete the above grounds of appeal at or before the time of hearing of the appeal, so as to enable the Hon ble Income Tax Appellate Tribunal to decide this appeal according to law. 3. Briefly stated facts of the case are that the assessee (McKinsey India), is a subsidiary of McKinsey Holding Inc. , which in turn is a wholly-owned subsidiary of McKinsey and Company Inc. (McKinsey). The assessee is engaged in providing Research and Information (R I) services to its Associated Enterprises (AEs). The assessee also provides Information Technology (IT) support services to its AEs which include IT infrastructure support, IT application support, maintenance of IT systems etc. For the year under consideration, the assessee filed return of income on 20/11/2014, declaring total income of ₹ 59,99,58,860/-. The case of the assessee was selected for scrutiny and notice under section 143(2) of the Income Tax Act, 1961 (in short the Act ) was issued and complied with. The Assessing Officer noticed international transactions carried out by the assessee and refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by accessing various Internetbased database such as Bloomberg , Reuters , One Source , Dow Jones , dialogue and data stream etc. The learned counsel referred to the profile of the assessee reproduced by the learned TPO on Page 1 to 11 of his order. The assessee has characterized itself as a routine contract research and information IT enabled service provider, operating in a low-risk or risk mitigated environment. With regard to research and information services, the assessee benchmarked the transaction selecting Transaction Net Margin Method (TNMM) as most appropriate method with Profit Level Indicator (PLI) of operating profit/operating cost (OP/OC). The assessee computed its PLI at 15.39% for research and information services segment. Further, the PLI (OP/OC) was calculated at 14.55% excluding the foreign exchange gain/loss as non-operating item. The assessee selected 10 comparable companies and computed their average margin (OP/OC) at 12.03%. According to the assessee, the average margin of the comparable being lower than the margin of the assessee, the International transaction of provision of research and information was at arm s length. The learned TPO finally sele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd submitted that the company is mainly in the advisory and thus, it is functionally similar to the assessee, who is also advising to its Associated Enterprises on management issues. 4.6 We have heard the rival submissions and perused the relevant material on record. The facts in brief mentioned above have not been disputed. Only issue which has been disputed before us is in respect of adjustment on provision for Research and Information Transaction is exclusion of the company M/s Aditya Birla Capital Advisor P. Ltd from set of comparables. On perusal of the profit and loss account of the company available on page 22 and notes to the account available on page 28, it is undisputed that the company M/s Aditya Birla Capital Advisors Pvt. Ltd. has earned revenue from providing management services. Further, from the annual report of the company, it is also evident that the company has been engaged in advising and managing venture capital funds. The activity of advising investment management is quite distinct from the services provided by the assessee under the transaction of research and information services. Further, we find that the Tribunal in ITA No. 154/Del/2016 for assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Private Limited. The relevant part of the decision is reproduced as under: 39. The revenue urged that a stringent application of the comparability test was unnecessary as was also provisioned in Chapter-6 of United Nations Practical Manual on Transfer Pricing, Edition 2013, and some flexibility in conducting this comparison was urged to be allowed. However, from the above analysis, in the present appeals, even if due consideration is given to a certain level of dissimilarity between the Assessee and the comparable companies, it can be observed that the nature of services provided by the abovementioned comparable companies do not demonstrate even a degree of similarity with the services rendered by the Assessee that would be sufficient to qualify under rule 10B(2) of the Income Tax Rules, since, as established above, the Assessee s services under its R I segment are in the nature of services provided by a KPO and they are functionally dissimilar from the comparable companies, in terms of their services as well as their risk profiles. Relevantly reading what was highlighted in Rampgree (supra) that while using TNMM, the search for comparables may be broadened by including compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to page 119 and 120 of the paper book, which contain details of money received corresponding to invoices raised on Associated Enterprises. He submitted that in most of the cases, payment has been received in advance. He submitted that when the period for which amount of advance enjoyed by the assessee is seen vis- -vis the amount receivable beyond 60 days, the assessee has received more advance rather than outstanding receivable beyond 60 days. He referred to financial statements of the assessee available on page 128 to 157 of the paper book and submitted that assessee is a debt free company and not borrowed any funds for its business activity. The learned counsel in support of the contention that in case of a debt free company, notional interest on outstanding receivables is not required to bring to tax, relied on the decision of the Hyderabad bench of the Tribunal in the case of Pegasystems Worldwide India (P) Ltd Vs ACIT (2018) 64 taxmann.com 470 (Hyd). 5.5 The learned Sr. Counsel also relied on the decision of the Hon ble Delhi High Court in the case of Kusum Healthcare Private Limited (supra), wherein it is held that effect of delayed receivables get subsumed in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outstanding amount gets adjusted in working capital adjustments and another separate addition is not required under the TP provisions. Thus, it was contended that the outstanding amounts are not to be considered for adjustment. 17.3. We have considered the issue and examined the rival contentions. In the case of Evonik Degussa India P. Ltd., in ITA No. 7653/Mum/2011, it was already held the TP adjustment cannot be made on hypothetical and notional basis, until and unless there is some material on record that there has been under charging of real income. Thus on the facts and circumstances of the case, we are of the opinion that addition on account of notional interest relating to alleged delayed payment in collection of receivables from the AEs is uncalled for on the facts of the present case. Even though DRP tried to distinguish the above decision on facts, as seen from the facts in both the cases, we are of the opinion that the above decision will equally apply to Assessee's case. Assessee has outstanding service charges receivables and as seen from the order of TPO, the outstanding is only from 31-07-2009. There seems to be no such delay in earlier months. Assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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