2023 (9) TMI 202 - AT - Income Tax

Disallowance of employees contribution to PF - HELD THAT - Issue covered against the assessee in the case of Checkmate Services P. Ltd. 2022 (10) TMI 617 - SUPREME COURT . TP Adjustment - notional interest on the excess credit period allowed to outstanding receivables of associate enterprise (AE) - whether any upward adjustment of interest on outstanding receivables of AE s exceeding their credit period is warranted in terms of section 92C? - HELD THAT - As what can be derived from the above is that in view of Hon ble Delhi High Court decision in the case of Kusum Health P. Ltd. 2017 (4) TMI 1254 - DELHI HIGH COURT the position of law on the issue is that where working capital adjustment takes into account the impact of outstanding receivables no further adjustment is required of interest on outstanding receivables of AE s beyond the agreed credit period if the margin of the assessee is comparable to that of external comparables. In the present case, the Ld.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.

Summary

Issues Involved:
1. Addition on account of upward adjustment of Rs 40,93,878 in relation to outstanding receivables from AE.
2. Disallowance of employee's contribution to PF amounting to Rs. 2,52,246 under section 36(1)(va) of the Act.

Summary:

Issue 1: Addition on account of upward adjustment of Rs 40,93,878 in relation to outstanding receivables from AE

The assessee contested the addition of Rs. 40,93,878 made by the AO/TPO, which was upheld by the CIT(A). The TPO noted substantial delays in the receipt of outstanding receivables from the AE compared to the payment of outstanding payables, leading to the conclusion that the assessee had denied itself funds by parking them at the AE's disposal. The TPO applied the CUP method for determining the arm's length price (ALP) of the outstanding receivables and proposed an adjustment for interest, which was added to the assessee's income. The assessee argued that the CIT(A) wrongly relied on the ITAT decision in Ameriprise India P. Ltd. Vs ACIT, which was not approved by the Hon'ble Delhi High Court. The assessee cited various judicial decisions, including the Hon'ble Delhi High Court's decision in Kusum Healthcare P. Ltd., which held that working capital adjustment of net margins takes care of the impact of outstanding receivables, and no further adjustment is required if the margins are comparable after working capital adjustment. The ITAT agreed with the assessee, noting that the CIT(A) had wrongly applied the decision in Ameriprise India P. Ltd. and held that the adjustment made on account of interest on outstanding receivables was unwarranted and unjustified. Therefore, the addition was directed to be deleted.

Issue 2: Disallowance of employee's contribution to PF amounting to Rs. 2,52,246 under section 36(1)(va) of the Act

The assessee conceded that the disallowance of Rs. 2,52,246 for employee's contribution to PF was covered against them by the decision of the Hon'ble apex court in Checkmate Services P. Ltd. Vs. CIT. Consequently, this ground of appeal was dismissed.

Conclusion:

Ground of appeal No. 2-2.1 was dismissed, while Ground of appeal No. 1-1.4 was allowed, resulting in the appeal being allowed in favor of the assessee.

Order Pronounced:

The order was pronounced in the Court on 17th April, 2023 at Ahmedabad.