TMI Blog2023 (9) TMI 202X X X X Extracts X X X X X X X X Extracts X X X X ..... .CIT(A) has dismissed this plea of the assessee relying on the decision of Ameriprise India P. Ld. [ 2015 (8) TMI 652 - ITAT DELHI] which as we have noted above, has been held to be not good law by the Hon ble Delhi High Court in its consistent decision in Kusum Health P. Ltd. (supra) and Mckinsey Knowledge Centre P. Ltd. [ 2018 (8) TMI 592 - DELHI HIGH COURT] In the facts and circumstances of the present case, as we have noted above, since the assessee has demonstrated that its profit margin calculated after working capital adjustment are within 5% range as compared to adjusted profits of the comparables, we hold that adjustment made on account of interest on outstanding receivables is unwarranted and unjustified. The same is, therefore, directed to be deleted. - SMT. ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER For the Appellant : Shri Dhinal Shah, CA For the Respondent : Shri Atul Pandey, Sr. DR ORDER PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER Present appeal has been filed by the assessee against order passed by the ld. Commissioner of Income Tax (Appeals)-13, Ahmedabad [herein after referred to as Ld.CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made on account of notional interest on the excess credit period allowed to outstanding receivables of associate enterprise (AE) amounting to Rs. 40,93,878/-. The grounds raised with respect to the said addition are in Ground No. 1-1.4. 5. The facts relating to the issue are that the assessee is engaged in the business of providing call centre services and business process outsourcing (BPO) services i.e. IT enabled services. During the impugned year, the assessee had international transactions with its Associate Enterprises (AEs) as under: Name of AE Nature of Transactions Value of International Transactions (Rs.) Etech Inc. USA Provision for call business process services centre and outsourcing 7,85,69,615/- Etech Global Services LLC USA Provision for call business process services centre and outsourcing 12,45,73,956/- Etech Global Services LLC USA Reimbursement of charges broad band 1,83,40,275/- 6. From the perusal of the invoices raised by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of interest on delayed realization of outstanding receivables of AE s following the decision of the ITAT in Ameriprise India P. Ltd. Vs ACIT 62 taxmann.com 237 , which he contended has not found approval of the Hon ble Delhi High Court, having restored the matter back to the ITAT to be reconsidered in the light of its decision in the case of ACIT vs. Kusum Healthcare P. Ltd. (2018) 99 taxmann.com 431 (Delhi). He pointed out that following the decision of the Hon ble High Court in Kusum Health care (supra, the ITAT in several decisions had deleted identical adjustments made on account of interest on delayed outstanding receivables. The basis and reasoning leading to the deletion being that the assessees having demonstrated transactions with AE s to be at arms length bench marking the transactions adopting the Transactional Net Margin Method (TNMM), calculating the margins of comparables by making working capital adjustment, the said adjustment takes care of delays in recoveries and payments of outstanding receivables and payables and therefore no further adjustment of interest is warranted on account of excessive credit period of outstanding receivables. Reliance was placed on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee of the operating margin in its transfer pricing report produced before us at page no.107 and 108 is as under: The ld. counsel for the assessee has pointed out that in various judicial decisions, including that of Hon ble Delhi High Court, it has been held that working capital adjustment of net margins takes care of the impact of outstanding receivables, and no further adjustment on account of overdue receivables is required if the margins of the assessee is comparable with that of the adjusted margins of comparables after working capital adjustment. 12. Our attention was drawn first to the decision of Hon ble Delhi High Court in the case of ACIT vs. Kusum Healthcare P. Ltd. (2018) 99 taxmann.com 431 (Delhi) holding so at para 10 of its order as under: 10. The court is unable to agree with the above submissions. The inclusion in the Explanation to section 92B of the Act of the expression receivables does not mean that dehors the context every item of receivables appearing in the accounts of an entity, which may have dealings with foreign associated enterprises would automatically be characterised as an international transaction. There may be a delay in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO on the principal international transactions, with regard to man-power equipment related, employee related transactions, reimbursement of cost etc. The reason being the net operating margin of the assessee 5 from various services was arrived at 9.36% as against the adjusted margin of 2.70% earned by the comparable companies for assessment year 2012-13. Similarly in assessment year 2013-14 the assessee had shown net operating margin on total cost at 9% from the services rendered to AE as against the un-adjusted margin of 6.82% and working capital adjustment of 4.78% earned by the comparables. The sole adjustment proposed by the TPO is with regard to the outstanding receivables on the delayed payment beyond 15 days from its AE holding it to be in the nature of un-secured loan and thereby proposing adjustment of Rs. 46,07,661/- for assessment year 2012-13, wherein the Assessing Officer has taken SBI PLR rate of 12.60%; whereas in assessment year 2013-14 the Assessing Officer has made adjustment of Rs. 23,98,532/- by taking average LIBOR rate plus 400 basis point which was arrived at 4.37% treating it to be separate international transaction. It is also an un-disputed fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction. This was clearly impermissible in law as explained by this Court in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi). 9. This judgement has also been followed in catena of judgements by the Tribunal, a compilation of which has been filed before us separately. If the working capital adjustment is accepted, then the differential impact of working capital of the Assessee vis- -vis the comparables stands already factored in the pricing/profitability, which herein this appears to have been done and it has been stated that the 7 working capital adjusted margin of the comparables is around 4% whereas assessee s margin is around 9% and thus, no further adjustment is required. Before the Assessing Officer the assessee has up-dated the comparable companies and has filed the working capital adjustment margin which was in response to the show cause notice. From the perusal of the working it is seen that, in assessment year 2012-13 the working capital adjusted on the comparable company was arrived at 4.50% of net profit operating margin as against the net operating margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt in the case of the same assessee, i.e Mckinsey Knowledge Centre P. Ltd on other issues before it, the assessees contention of the decision of the ITAT in Ameriprise (supra) being erroneous was rejected as incorrect. That against this order the taxpayer filed a Review Petition and Hon ble High Court corrected their order holding that the decision of Kusum Health P. Ltd. (supra) held fort. The Tribunal thereafter concluded at para- 15 of its order that the decision of Hon ble Delhi High Court in the case of Kusum Health P. Ltd. (supra) was still binding precedent on the issue of interest on outstanding receivables. The relevant portion of the order of the ITAT is as under: 5. At the outset the ld. AR taken up the Ground No. 3 pertaining to interest on outstanding inter-company receivables. 6. The TPO estimated the delay on estimated average of outstanding receivables of 6 months and calculated interest for 182 days @ 4.31% (LIBOR + 400 basic points). The ld. DRP following the order for the A.Y. 2013-14 directed the TPO to make adjustment on net receivables only after netting the payables entry wise. The assessee before us submitted that the receivables and payables are intr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (245,891,857) 7. Based on the above it was argued that the amount of outstanding payables by the company towards its AEs was over 2.8 times than the amount of outstanding receivables from the AEs. It was also argued that the AEs did not charge any interest from the assessee as well as on the outstanding payables. The ld. AR relied on the decision of the Co-ordinate Bench of ITAT in the case of AVL India P. Ltd. Vs. DCIT 88 taxmann 11 wherein it has been held that in order to determine ALP. Benefit of netting of interest has to be allowed on aggregate amounts receivable and payable from all AEs and not on transaction by transaction basis. The ld. DR relied on the order of the ld. DRP. 8. Heard the arguments of both the parties and perused the material available on record. 9. The issue has been deliberated in a number of cases by the Tribunal. The Delhi Tribunal in case of Kusum Healthcare Pvt. Ltd. vs. ACIT (ITA No. 6814/Del/2014) order dated 31.03.2015 held that the working capital adjustment takes into account impact of outstanding receivables and no further adjustment required if the margin of the assessee is higher than working capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uires to be benchmarked independently is incorrect. 14. Aggrieved the taxpayer (Mckinsey Knowledge) filed Review Petition before the Hon'ble High Court against the order dated 09.08.2018 and the Hon ble High Court vide order dated 16.04.2019 in Review Pet. No. 360/2018 was pleased to recall/correct their order dated 09.08.2018 holding as under: 9. As far as the first argument by the review petitioner i.e. the answer to the question of bringing to tax the interest amounts goes this Court is of the opinion that the fact that the order of 07.02.2018 referred to Kusum Health Care had expressly remitted the matter for consideration to the ITAT supports the assessee s submission. All that the court had stated on 07.02.2018 was that the matter required re- examination by the ITAT in the light of the Kusum Health Care (supra). For these reasons the judgment to the extent it deals with adjustments made by the TPO and regarding interest on delayed receipt of receivables is a clear error. The court also furthermore notes the submissions made with respect to inapplicability to Explanation of Section 92B and its prospective operation. As the order of 07.02.2018 reserved by contentions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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