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TMI Blog2020 (3) TMI 1192X X X X Extracts X X X X X X X X Extracts X X X X ..... ferent 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of provision of Information Technology Services and related services (e-sourcing services), Ld. Assessing Officer referred the determination of Arm s Length Prices (ALP) of international transaction to the ld. TPO u/s. 92CA(1) of the Income-tax Act ( the Act ). Learned TPO did not draw any adverse inference in respect of the pricing of the international transactions but proposed to make an upward adjustment of income of the assessee on account of outstanding receivables. Ld. TPO re-characterized the debit balances, i.e., outstanding receivables in excess of 45 days as loans advanced to AE and applying an adhoc interest rate of 17.77%, proposed an addition of ₹ 69,73,350/-. 3. Ld. Assessing Officer further found that the assessee had claimed dividend income of ₹ 2,44,356/- and while invoking the provisions of section 14A read with Rules 8D of the Rules, disallowed a sum of ₹ 26,223/-. Ld. Assessing Officer, therefore, made an addition of ₹ 69,73,350/- on account of Arm s Length adjustment in respect of outstanding receivables and a sum of ₹ 26,223/- by invoking section 14A read with Rule 8D of the Rules. 4. Challenging the same, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orking capital adjusted results for comparables, i.e., 22.07% and therefore, the working capital adjustment if appropriately taken into account, the return that was earned by assessee would adequately compensate it for outstanding receivables and since the pricing profitability of the assessee is more than the working capital adjusted, the arm s length adjustment on the outstanding receivables is not warranted. 9. Ld. AR while drawing our attention to the statement on the company s credit policy submitted that the assessee follows uniform policy of not charging any interest on outstanding receivables both from AEs and non-AEs and therefore, a comparison of the case of AEs and Non-AEs clearly suggests that according to such credit policy, no adjustment is warranted on the outstanding receivables. 10. The next limb of arguments of ld. AR is that the assessee is a debt free company as it has neither received any interest from any creditors nor paid interest to any debtor, as is reflected in the profit and loss account showing a surplus of ₹ 9.6 crores with a meagre interest charge of ₹ 30,278/- and therefore, in view of the decision of Hon ble Delhi High Court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns it performs or products it provides. However, the amount of capital required to support these functions varies greatly, because the level of inventories, debtors and creditors varies. High levels of working capital create costs either in the form of incurred interest or in the form of opportunity costs. Working capital yields a return resulting from a) higher sales price or b) lower cost of goods sold which would have a positive impact on the operational result. Higher sales prices acts as a return for the longer credit period granted to customers. Similarly in return for longer credit period granted, a firm should be willing to pay higher purchase price which adds to the cost of goods sold. Therefore, high levels accounts receivable and inventory tend to overstate the operating results while high levels of accounts payable tend to understate them thereby necessitating appropriate adjustment. The appropriate adjustments need to be considered to bring parity in the working capital investment of the assessee and the comparables rather than looking at the receivable independently. Such working capital adjustment takes into account the impact of outstanding receivables on the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 'any other transaction having a bearing on the profits, income, losses as employed in sec. 92B defining international transaction would encompass such interest from sale as the non-receipt of due interest would have the effect on profits or income. This contention also does not merit acceptance because when 'sale and 'lending money have been specifically included in definition of 'international transaction u/s 92B, then the expression 'any other transaction used in the later part of this provision will exclude all the items separately covered. In this view of the matter, it becomes manifest that there can be no separate international transaction of interest income which is part of the transaction of sale. Once ALP is determined in respect of the sale transaction, it would be deemed to be covering all the elements and consequences of the transaction of sale. Having determined ALP in a sale transaction, it cannot be accepted that separate adjustment de hors such determination is required in respect of interest. 18. Similar view is taken in Nimbus Communication in ITA No. 6597/Mum/2009 and Bharti Airtel Limited vs. ACIT (ITA No. 5816/Del/2012. It ..... X X X X Extracts X X X X X X X X Extracts X X X X
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