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TMI Blog2025 (5) TMI 1586X X X X Extracts X X X X X X X X Extracts X X X X ..... rn was selected for scrutiny under CASS for international transactions involving intangible property, and the case was also flagged under the Transfer Pricing (TP) risk parameter. 3. During assessment proceedings, the Assessing Officer (AO) made a reference under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO) for determination of the Arm's Length Price (ALP) of the international transactions reported in Form 3CEB. The TPO, vide order dated 18.10.2023 passed under section 92CA(3), proposed an upward adjustment of Rs. 23,22,513/- to the total income of the assessee in respect of notional interest on outstanding receivables from Associated Enterprises (AEs) amounting to Rs. 72,70,00,000/- as on 31.03.2021, treating the same as an independent international transaction. 4. The AO, following the TPO's order and in conformity with the draft order issued under section 144C(1) dated 26.12.2023, added Rs. 23,22,513/- to the returned income of the assessee and determined the assessed income at Rs. 1,69,14,02,520/-. The assessee filed objections against the proposed variation before the Hon'ble DRP on 19.01.2024. 5. The DRP, after considering the objections of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in law, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in proposing to tax hypothetical income and not real income. 1.5. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in computing notional interest on outstanding receivables from AEs ignoring the fact that the Appellant has not charged any interest on trade receivables both from AEs as well as from Non-AEs. 1.6. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in computing notional interest on the outstanding receivables from AEs ignoring the fact that Appellant has not paid any interest on trade payables towards the AEs. 1.7. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in disregarding the fact that working capital adjustment takes into account the impact of outstanding receivables on the profitability and therefore, no further imputation of interest is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee's margin was significantly higher than the adjusted margins of comparable. 10. The AR drew attention to the detailed working capital adjustment computations submitted before the lower authorities and placed on record during the present proceedings at pages 417 to 423 of the paper book. These workings contained year-wise and entitywise reconciliations for financial years 2018-19 to 2020-21, capturing average receivables, payables, and inventory for the assessee and the comparable. It was submitted that the adjustment process duly quantified the differences in credit terms and effectively neutralized the impact of receivables on margins. 11. In this context, the AR submitted that the finding of the Hon'ble DRP-stating that "working capital scenario has not been duly explained in terms of monthly trade vs. non-trade payables / receivables and capital position of own concern / comparables and hence there is no question of subsuming of interest on receivables in any working capital"-is factually incorrect. It was contended that the working capital adjustments had been meticulously computed and substantiated with contemporaneous data, and no discrepancy or deficiency in methodol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, inserted by the Finance Act, 2012 with retrospective effect from 1st April 2002. 17. The DR highlighted that the TPO had applied the CUP method by benchmarking interest rates based on Bloomberg database, taking into account the currency of receivables (USD, GBP and EURO), and determined the arm's length interest rate to be charged. The DR further submitted that the TPO's benchmarking analysis was duly upheld by the Dispute Resolution Panel (DRP), which found no infirmity in the ALP determination. 18. The DR also drew our specific attention to the observations recorded by the TPO at page nos. 4 to 9 of the TPO's order, wherein it was pointed out that the assessee's claim of subsuming the interest effect within the working capital adjustment was flawed. The TPO categorically observed, and the DR reiterated, that the working capital adjustment undertaken by the assessee was based on the financial data of the tested party for FY 2020-21, whereas adjustments were being made to the comparables for FYs 2018-19 and 2019-20. According to the DR, this violated the cardinal principle of comparability under Rule 10B(4), which requires contemporaneous data to be used for adjustments. The D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded and contrary to established practice. 21. The learned AR placed reliance on following decisions to substantiate the plea that once the tested party's margins are found to be at arm's length under the TNMM, and adequate working capital adjustment is made, there is no scope for a further separate adjustment on account of notional interest on delayed receivables from AEs: 1. Kusum Healthcare Pvt. Ltd. v. Pr. CIT [(2017) 399 ITR 407 (Delhi HC)] 2. Phoenix Lamps Ltd. v. DCIT [ITA Nos. 71 & 72 of 2024, Allahabad HC] 3. Effective Teleservices Pvt. Ltd. v. DCIT [ITA No. 355/Ahd/2020, ITAT Ahmedabad] 4. Brake Parts India Pvt. Ltd. v. ACIT [ITA No. 2221/Del/2022, ITAT Delhi] 5. Gates India Pvt. Ltd. v. ACIT [ITA No. 2379/Del/2022, ITAT Delhi] 6. Inductis India Pvt. Ltd. v. Pr. CIT [ITA 175/2019, Delhi HC] 7. Intas Pharmaceuticals Ltd. v. ACIT [ITA Nos. 400/Ahd/2018 & ors., ITAT Ahmedabad] 22. We have carefully perused the final assessment order, the order passed by the TPO under section 92CA(3), and the directions issued by the DRP under section 144C(5) of the Act. We have also duly considered the elaborate submissions advanced by the learned AR for the assessee and the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -2.35% Median 6.28% 35th Percentile 5.23% 65th Percentile 7.33% 27. The working capital adjusted operating profit over operating cost (OP/OC) of the assessee, for the year under consideration, has been computed at 16.46%, as detailed below: Operating Revenue (OR) Rs. 10,595,354,134/- Operating Cost (OC) Rs. 09,098,038,711/- Operating profit (OP) Rs. 01,497,315,423/- Net Cost Plus Margin 16.46% 28. The adjusted margin is significantly higher than the interquartile range of working capital adjusted margins of the comparables (ranging between 5.23% and 7.33%), clearly establishing that the assessee's international transactions are at arm's length. 29. It is a settled position in transfer pricing jurisprudence that a working capital adjustment takes into account the impact of outstanding receivables on the profitability of the company, either by enabling a higher sale price or resulting in lower cost of goods sold, both of which improve operational performance. It is for this reason that the TNMM analysis does not isolate receivables for a separate benchmarking but ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year data for comparables. However, Rule 10B(4) permits the use of multiple-year data for comparables, especially where such data reveals broader economic trends. The assessee's approach of using multi-year data for comparables and current year data for the tested party is therefore consistent with both statutory rules and accepted transfer pricing practice. Interest Rate Appropriateness 32. The TPO has applied notional interest rate (as detailed in Annexure A to the order) to compute the interest on delayed receivables. However, it is an undisputed fact on record that the assessee has not charged any interest to AEs or non-AEs, nor paid any interest on outstanding payables. This indicates a uniform commercial policy rather than any financial accommodation extended to AEs. Moreover, the charge of notional interest can only arise where there exists a real income, which is absent in the present case. Courts have consistently held that hypothetical income is not taxable under the scheme of the Act. In the absence of actual financing, merely imputing interest on commercial receivables, which are already considered in pricing analysis under TNMM, is not permissible. Comparable-Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, the foundational assumption that the AEs enjoyed a financial benefit due to deferment does not hold ground. Where there is no disparity in the treatment of AEs and non-AEs and where the entire transaction has already been benchmarked under TNMM, courts have consistently held that no separate adjustment for notional interest is permissible. 37. Having applied the above seven evaluative criteria to the facts of the case, we find that the assessee's margin, after incorporating the working capital adjustment, is at arm's length. The benchmarking analysis carried out by the assessee is in accordance with the legal framework laid down under Rule 10B of the Income-tax Rules, 1962 and is also consistent with the OECD Transfer Pricing Guidelines. The computation of the working capital adjustment is supported by detailed documentation and an appropriate methodology, as reflected in the records. The Revenue, on the other hand, has failed to discharge the burden of proving that any financing transaction existed between the assessee and its AEs, or that any quantifiable benefit accrued to the AEs on account of delayed realization of receivables. 38. The assessee placed reliance on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the extended credit period is already subsumed in the working capital adjustment. In view of the consistent judicial position and in light of the facts of the case, we find merit in the assessee's plea. These grounds are therefore allowed. 40. Grounds 1.5 to 1.7 concern the assessee's submission that no interest was charged on receivables from either AEs or non-AEs and that the working capital adjustment already neutralizes the impact of any delay in realization. This contention is substantiated by factual workings placed on record and no contrary evidence has been brought by the Revenue to show that the assessee conferred any undue benefit on AEs by way of differential credit terms. In the absence of any real income element or discriminatory policy, these grounds also deserve to be allowed. 41. Grounds 1.8 to 1.10 raise the assessee's challenge on the basis that benchmarking interest on receivables in isolation violates the principle of aggregation under TNMM and fails to consider netting off outstanding payables. We agree that TNMM, being a profit-based method, evaluates the net profitability of a transaction set, and segregating one element i.e., receivables, distorts the ove ..... 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