TaxTMI 
TaxTMI 
2023 (4) TMI 1153
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....sociated Enterprise ("AE") as a separate international transaction that do not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 ("the Act") In doing so, the Ld. AO/Ld. TPO/ Ld. DRP have grossly erred in: 2.1. re-characterizing overdue receivable amount as a deemed loan and treating it as a separate international transaction; 2.2. not appreciating that working capital adjustment appropriately takes into account the arm's length determination of outstanding receivable. Accordingly, the Ld. AO/ Ld. TPO/ Ld. DR erred in not appreciating that outstanding receivables does not require a separate determination of arm's length standard; 2.3. not appreciating that once the primary transactions are held to be at arm's length price, then the intercompany receivables arising therefrom (being consequential and closely linked to the primary transaction) also conform to the arm's length principle. Accordingly, the Ld. AO/ Ld. TPO/ Ld. DRP have grossly erred in not appreciating the fact that arm's length price determination for outstanding receivables is subsumed within the arm's length price determination of the principal internationa....
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....essee contended that he will be pressing only ground no.2.2 of the above, which is relating to Transfer pricing adjustment with respect to arm's length price determination of outstanding receivables. Hence, other grounds are dismissed as not pressed. 4. Brief facts of the case are that Kronos Solutions India Private Limited Company, incorporated on 5th December 2006, as a subsidiary of Kronos Inc. It is classified as non-govt company and is registered at Registrar of Companies Delhi. It is engaged in providing software services/solutions, provision of back-office support services, which involves application support services, technical service and hosting support. In the case of the assessee, through the current assessment year, the TPO made transfer pricing adjustment with respect to software development services rendered by the assessee. In addition, an adjustment on account of delay in collection of receivables has also been made. The summary of transfer pricing adjustments made as under:- S. No. Nature of International transactions Method period PLI Tested party margin Arm's length margin as per Ld. TPO Adjustment in INR 1 Provision of software development services TN....
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....he Ld. TPO to give effect to the directions passed by the Ld. DR wherein it is amply evident that the principal international transaction of provision of software development services taking into account working capital adjustment has been undertaken on arm's length basis. Thus, the adjustment proposed in draft assessment order with respect to software development services has been deleted (please refer page 172 and 173 of paperbook for order passed by the Ld. TO for giving effect to the Ld. DRP's directions). Consequently, it is submitted that the consequential receivables arising out of principal international transaction of provision of software development services too satisfies arm's length standard and thus separate arm's length determination is not required. In this context, the Appellant places reliance on: * Hon'ble ITAT ruling in the case of Kusum Healthcare Pvt. Ltd (ITA No. 6814/Del/2014) which is also affirmed by the Hon'ble Delhi High Court (Hon'ble HC") (ITA NO. 765/2016). The relevant extract from the Hon'ble HC ruling is reproduced below for the Hon'ble Tribunal's ready reference: "10. The Court is unable to agree with ....
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....of the assessee on the pretext of outstanding receivables is unwarranted to substantiate the contention. The Ld. AR has relied on the decision of Hon'ble High Court in the case of Kusum Healthcare Pvt. Ltd. in ITA No. 6814/Del/2014 wherein it is held as follows:- "11.... With the Appellant having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterized the transaction By respectfully following the above ratio, we also of the view that, once the impact of receivable on working capital is evaluated and the consequent profitability/pricing is compared vis-a-vis the draft comparables, there is no requirement of any further adjustment. [Emphasis Supplied) * Further, Hon'ble Delhi ITAT, in case of Orange Business Services India Solutions Pvt Ltd ITA 252/Del/2022] also placed reliance on the Delhi High Court Judgement in case of Kusum Healthcare (Supra) has held the following: "19. In view of the aforesaid sequence of events, it would be noted that the....
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.... clearly shows that assessee has undertaken working capital adjustment for the comparable companies selected in its transfer pricing report which has not been disputed by the learned transfer pricing officer and therefore the differential impact of working capital of the assessee vis-àvis is comparable had already been factored in pricing profitability and therefore the honourable High Court held that adjustment proposed by the learned TPO deleted by the ITAT is proper. In the present case there is no working capital adjustment made by the assessee as well as granted by the learned TPO. The facts in the present case are distinguishable. Further same are the facts in case of Bechtel India where working capital adjustment was already granted." [Emphasis Supplied] * Furthermore, it is noteworthy that in Bechtel India Pvt. Ltd., the Delhi High Court (ITA 379/2016) while placing reliance upon the order passed by the Hon'ble Delhi High court in the case of Kusum Healthcare (Supra) has affirmed the following findings of Hon'ble ITAT (ITA1478/Del/2015):- "16. In lieu of the discussions and the ratio laid down in the case of Kusum Healthcare Pw. Lid., we direct that ....
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....el/20191 and A. Y. 2016-17 JITA No. 868/Del/2021). Hence, keeping in view, the established position, we hereby deleted the addition made by the Assessing Officer. 10. We find that the ITAT in the above order has duly considered the issue and has found that Kusum Health Care (P) Ltd. rendered by the Hon'ble Delhi High Court still continues to hold the field as precedent. In fact, Hon'ble Delhi High Court in the said case has observed 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 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 analysing the statistics ove....