In ERM India Private Limited, Gurugram v. Assessment Unit (DCIT, Circle 7(1), Delhi), the Delhi Bench of the Income Tax Appellate Tribunal examined the validity of a transfer pricing adjustment made on account of alleged interest on delayed realization of receivables from Associated Enterprises for Assessment Year 2021–22.

The Transfer Pricing Officer accepted the arm’s length nature of the principal international transactions benchmarked under TNMM but treated outstanding receivables from AEs as a separate international transaction under Explanation (1)(c) to Section 92B. Notional interest was imputed on such receivables, which was partly modified by the DRP by applying LIBOR plus 400 basis points after allowing a grace period of 60 days, resulting in an adjustment of ₹75.65 lakh.

The Tribunal noted that the assessee’s operating margin of 18.03% was significantly higher than the working-capital-adjusted mean margin of comparable companies at 7.60%. It further observed that the assessee was a debt-free company and did not charge interest on delayed receivables from either AE or non-AE customers. Relying on the Delhi High Court judgment in Kusum Healthcare Pvt. Ltd. and PCIT v. Inductis India Pvt. Ltd., the Tribunal held that once working capital adjustment is granted, the impact of delayed receivables stands subsumed and no separate adjustment for interest on receivables is warranted.

Accordingly, the ITAT deleted the transfer pricing adjustment made on account of notional interest on delayed receivables. The Tribunal also directed the Assessing Officer to verify and grant the correct credit of TDS as per law, while treating other grounds as consequential.
The appeal was thus partly allowed.

Source Link - https://itat.gov.in/public/files/upload/1767777857-za2mfx-1-TO.pdf

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