Case Law Details

Case Name : Pr. CIT -V Vs Kusum Health Care Pvt. Ltd. (Delhi High Court)
Appeal Number : ITA No. 765/2016
Date of Judgement/Order : 25/04/2017
Related Assessment Year :
Courts : All High Courts (3629) Delhi High Court (1146)

Transfer Pricing : Impact of delayed associated enterprise receivables subsumed in working capital adjustment made by the assessee company. Delhi High Court  confirms ITAT’s deletion of notional interest adjustment on delayed AE-receivables.

Operative Portion of Delhi ITAT Order Kusum Healthcare (P.) Ltd. Vs. ACIT  [2015] 62 taxmann.com 79 (Delhi – Trib.)

In view of the above, a working Capital adjustment appropriately takes into account the outstanding receivable. Therefore, the assessee has undertaken a working capital adjustment to reflect these differences by adjusting for differences in working capital and thereby, profitability of each comparable company. Accordingly, while calculating the working capital adjusted, operating margin on costs of the comparable companies, the impact of outstanding receivables on the profitability has been taken into account. If the pricing/profitability of the assessee are more than the working capital adjusted margin of the comparable, then additional imputation of interest on the outstanding receivables is not warranted.

The assessee had undertaken a working capital adjustment for the comparable companies selected in its transfer pricing report which was also submitted with the Ld. TPO. A snapshot of the result is provided below:

Segment Name Appellant’s Margin (OP/TC) Working capital adjusted margins of comparable (OP/TC)
Manufacturing Activity 46.33% 11.84%
Trading Activity 17.44% 8.36%

The above analysis empirically demonstrates that the differential impact of working capital of the assessee vis-a-vis its com parables has already been factored in the pricing/profitability of the assessee which is more than that working capital adjusted margin of the com parables. Hence, any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified.”

Operative Portion of Delhi High Court Order Pr.CIT vs KUSUM HEALTH CARE PVT. LTD. ITA 765/2016 (Appeal Filed by Revenue against the ITAT Order)

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 de hors the context every item of “receivables” appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterized as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studied. In other words, there has to be a proper inquiry by the TPO by analyzing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way.

The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-à-vis that of its comparables, any further adjustment only on 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).

Consequently, the Court is unable to find any error in the impugned order of the ITAT giving rise to any substantial question of law for determination. The appeal is, accordingly, dismissed.

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