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Facts
The assessee, M/s. D.E. Shaw India Pvt. Ltd., engaged in Software Development Services (SDS) and ITES, filed an appeal against an assessment order for A.Y. 2020-21. The appeal had a 66-day technical delay, for which condonation was sought. The primary grievance was a Transfer Pricing adjustment of Rs. 1,69,05,538/- by the Ld. TPO/AO for notional interest on delayed trade receivables, despite the Ld. TPO accepting the assessee's margins for primary international transactions.
Held
The Tribunal condoned the 66-day delay, acknowledging it was technical due to rectification of defects and the original filing was within time. Regarding the Transfer Pricing adjustment, the Tribunal, relying on precedents, held that no separate adjustment for interest on receivables is warranted if a working capital adjustment has already been granted and the assessee's profit margin remains at arm's length. The Ld. AO was directed to delete the addition if the assessee's profit margin is still more than the arm's length margin of the comparables after giving effect to the working capital adjustment. Other corporate tax adjustment grounds were dismissed as not pressed.
Key Issues
Whether the 66-day delay in filing the appeal should be condoned. Whether a separate Transfer Pricing adjustment for notional interest on outstanding trade receivables is justified when working capital adjustments have already been made and the primary transaction's arm's length price has been accepted.
Sections Cited
143(3), 144C(13), 144B, 144C(5), 92CA(3), 143(1), 154, 250, 115O, 115P, 234A, 234C, 270A, 92B, Rule 10B(1)(e)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, Hyderabad ‘A’ Bench, Hyderabad
Before: SHRI RAVISH SOOD & SHRI MADHUSUDAN SAWDIA
(निर्धारण वर्ा/Assessment Year:2020-21) M/s. D.E. Shaw India Pvt. Dy. Commissioner of Income Vs. Ltd., Hyderabad. Tax, PAN:AAACD7214J Circle 8(1), Hyderabad. (Appellant) (Respondent) निर्धाररती द्वधरध/Assessee by: Shri S.P. Chidambaram, Adv. रधजस् व द्वधरध/Revenue by: Ms. U. Mini Chandran, SR-DR सुिवधई की तधरीख/Date of hearing: 01/09/2025 घोर्णध की तधरीख/Pronouncement: 12/09/2025 आदेश/ORDER PER MADHUSUDAN SAWDIA, A.M.: This appeal is filed by M/s. D E Shaw India Pvt. Ltd. (“the assessee”), feeling aggrieved by the assessment order passed by the Learned Assessing Officer (“Ld. AO”) u/s. 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (“the Act”) dated 27.06.2024 for the A.Y. 2020-21.
At the outset, it is seen that there is a delay of 66 days in filing of the present appeal, for which the assessee has filed condonation petition explaining the reasons for delay in filing of the appeal. As per record, the appeal was required to be filed on or before 26.08.2024. The assessee had originally filed the appeal on 23.08.2024, i.e., within the prescribed time limit. However, the Registry returned the appeal pointing out certain defects. The assessee removed the defects and re-filed the appeal on 05.11.2024, which resulted in a technical delay of 66 days.
The Learned Authorised Representative (“Ld. AR”) submitted that the assessee had duly filed the appeal within the limitation period on 23.08.2024. The delay arose only because the appeal papers were returned by the Registry due to minor defects and were re-filed after rectification. He contended that there was no deliberate or wilful default on the part of the assessee and the delay was purely procedural. He further submitted that since the assessee had already exercised its right of appeal within time, the subsequent delay deserves to be condoned in the interest of justice.
Per contra, the Learned Departmental Representative (“Ld. DR”) fairly submitted that she has no serious objection to the condonation of delay in the present case, considering that the assessee had originally filed the appeal before the due date.
We have considered the rival submissions and perused the material available on record. It is an admitted fact that the assessee filed the appeal on 23.08.2024, i.e., within the limitation period of 26.08.2024. The appeal was returned due to certain defects, which were later rectified, and the appeal was re-filed on 05.11.2024. Thus, the delay of 66 days is only technical in nature and has occurred due to rectification of defects pointed out by the Registry. We have also taken note of the submission of the Ld. AR that there was no deliberate or wilful default on the part of the assessee and that the assessee had taken steps within time to exercise its right of appeal. The Ld. DR also has not objected to the condonation. In these circumstances, we are satisfied that sufficient cause exists for condoning the delay. Accordingly, the delay of 66 days in filing of the appeal is condoned and the appeal is admitted for adjudication on merits. The assessee has raised the following grounds of appeal : 6.
The facts of the case are that, the assessee is a company engaged in the business of providing Software Development Services (“SDS”) and Information Technology Enabled Services (ITES), filed its Return of Income (“ROI”) for A.Y. 2020-21 declaring total income at Rs.98,52,22,230/- on 07.01.2021. The case of the assessee was selected for complete scrutiny under CASS and in view of the international transactions involved during the year under consideration, for determination of Arm’s Length Price (“ALP”), the case was referred to Learned Transfer Pricing Officer (“Ld. TPO”).
The Ld. TPO vide his order dated 31.03.2023 suggested upward adjustment of Rs.1,69,05,538/- on account of interest on trade receivables. Accordingly, the Ld. AO passed the draft assessment order on 28.09.2023.
8. Aggrieved with the draft assessment order passed by the Ld. AO, the assessee preferred objection before the Ld. DRP. In pursuance to the directions of Ld. DRP dated 30.05.2024, the Ld. AO finalized the assessment on 27.06.2024 by making total addition of Rs.1,69,05,538/- on account of interest on trade receivables.
Aggrieved with the final assessment order of Ld. AO, the assessee is in appeal before us. At the outset, the Ld. AR submitted that the grounds of appeal of the assessee are divided under two broad heads i.e. one relating to transfer pricing adjustments and the other relating to corporate tax adjustments. He clarified that ground nos.2 to 17 of the appeal pertain to transfer pricing, whereas ground nos.18 to 25 relate to corporate tax matters. The Ld. AR further submitted that, the ground no.1 of the assessee of the assessee is general in nature and the assessee is not pressing ground nos. 18 to 25 related to corporate tax adjustment. Accordingly, ground nos. 1 and 18 to 25 of the appeal of the assessee are dismissed being not pressed.
10. As regard to ground nos. 2 to 17 related to the transfer pricing adjustment, the Ld. AR contended that if the assessee’s claim regarding non-requirement of separate benchmarking of outstanding trade receivables is accepted, then no further adjudication would be necessary on other transfer pricing issues. With regard to assessee’s claim regarding non-requirement of separate benchmarking of outstanding trade receivables, the Ld. AR advanced three-fold arguments. In his first argument, the Ld. AR submitted that the assessee is engaged in two segments, namely SDS and ITES, earning segmental margins of around 20% in both the segments. The Ld.
TPO, though rejecting the assessee’s TP documentation and carrying out his own search process, finally accepted the margins of 20% and did not propose any adjustment in respect of the primary international transactions for provision of services. He argued that, once the margins of the assessee in its core business have been accepted at arm’s length, no secondary adjustment on account of alleged interest on receivables is justified. In support of his submission, he relied on the decisions of the coordinate bench of the Tribunal in Kusum Healthcare Pvt. Ltd. v. ACIT [62 taxmann.com 79, dated 31.03.2015] and Gimpex Pvt. Ltd. v. ACIT [124 taxmann.com 618, dated 28.12.2020].
11. In his second argument, the Ld. AR submitted that the assessee’s first prayer was to allow working capital adjustment while calculating the profit margin. The second prayer was that if a working capital adjustment is granted while calculating profit margin, then no separate adjustment on account of interest on receivables is required, since such impact is already subsumed in the working capital adjustment. Reliance was placed on the judgment of the Hon’ble Delhi High Court in Pr. CIT v. Kusum Healthcare Pvt. Ltd. (ITA No.765/2016, dated 25.04.2017).
12. Lastly, it was submitted that the assessee is a debt-free company and therefore there is no cost of borrowed funds.
Consequently, there is no justification to make a notional adjustment for interest on receivables. Accordingly, the Ld. AR prayed for deletion of the addition of Rs.1,69,05,538/- made by the Ld. AO/TPO.
13. Per contra, the Ld. DR supported the order of the Ld. AO/TPO.
She submitted that after the insertion of the Explanation to section 92B by the Finance Act, 2012 with retrospective effect from 01.04.2002, outstanding trade receivables are to be treated as a separate international transaction. Therefore, separate benchmarking of receivables is legally required. Accordingly, there is no infirmity in the order of Ld. AO / TPO.
We have carefully considered the rival submissions and perused the material available on record. As far as the first argument is concerned, the Ld. AR has submitted that the assessee is engaged in two segments, namely SDS and ITES, earning segmental margins of around 20% in both the segments. The Ld. TPO, though rejecting the assessee’s TP documentation and carrying out his own search process, finally accepted the margins of 20% and did not propose any adjustment in respect of the primary international transactions for provision of services. He argued that, once the margins of the assessee in its core business have been accepted at arm’s length, no secondary adjustment on account of alleged interest on receivables is justified. In this context, we have gone through the decisions of the coordinate bench of the Tribunal in Kusum Healthcare Pvt. Ltd. v. ACIT (supra) wherein at para nos.7 to 17 of its order, the Tribunal has held as under :
“ 7. We have heard rival submissions and perused the material on record. An uncontrolled entity will expect to earn a market rate of return on its working capital investment independent of the functions 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 profitability. In this regard, the reliance is placed on the following rulings wherein the need to undertake working capital adjustment has been appreciated by the Hon’ble Tribunals :
• Mercer Consulting India Pvt. Ltd. [TS-170-ITAT-2014(DEL)] • Mentor Graphics (Noida) Private Limited [109 ITD 101] • Egain communication (P) Ltd. [ITA No. 1685/PN/2007] • Sony India (Pvt.) ltd. [2011-TII-43-ITAT-DEL-TP] • Capgemini India Private Limited [TS-45-ITAT-2013(Mum)-TP]
In view of the above, a working 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 comparables, then additional imputation of interest on the outstanding receivables is not warranted.
9. 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 (OP/TC) Working capital adjusted margins of comparables (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 vis-a-vis its comparables has already been factored in the pricing/profitability of the assessee which is more
than that working capital adjusted margin of the comparables. Hence, any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified.
In this regard, we would also like to place reliance on the judgement of Micro ink Ltd [TS-216-ITAT-2013(Ahd)-TP] wherein the ITAT upheld the above principle and deleted the adjustment on account of alleged excess credit period allowed to AE. The Hon'ble ITAT observed the following in the judgment:
"Para 20 - The only other ALP adjustment in appeal before us is with respect to what the authorities below have treated as, excess credit period allowed to Micro USA. This adjustment must be deleted for the short reason that it was part of the arrangement that specified credit period was allowed and thus the cost of funds blocked in the credit period was inbuilt in the sale price. "
Accordingly, keeping in view the above factual position as well the judicial precedence, any separate adjustment on the pretext of outstanding receivables while accepting the comparables and transfer price of underlying transaction i.e. sale of goods by application of TNMM is unjustified. In this regard, the recent ruling of Hon’ble Delhi High Court in case of Sony Ericsson Mobile Communication India Pvt. Ltd. and several other connected matters [TS-96-HC-2015(DEL)-TP], where the Hon’ble jurisdictional HC while concluding the judgment held as under :
"(v) Where the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction,"
The above principle was also clarified by the Hon'ble Jurisdictional High Court by way of an example which is reproduced below:
“At Para 93: An example given below would make it clear:
Particulars Case 1 Case 2 Sales 1000 1000 Purchase Price 600 500 Gross Margin 400 (40%) 500 Marketing Sale 50 150 Promotion Overhead expense 300 300 Net profit 50(5%) 50(5%)
The above illustrations draw a distinction between two distributors having different marketing functions. In case 2, a distributor having significant marketing functions incurs substantial expenditure on AMP, three times more than in case 1, but the purchase price being lower, the Indian AE gets adequately compensated and, therefore, no transfer pricing adjustment is required. In case we treat the AMP expenses in case 2 as Rs.501-, i.e. identical as case 1 and AMP of Rs. 1001- as a separate transaction, the position in case 2 would be:
Particulars Case 2 Sales 1,000
Purchase Price 500 Gross Margin 500 (50%) Overhead expenses 300 Marketing expenses 50 Net Profit 150 (50%) It is obvious that this would not be the correct way and method to compute the arm's length price. The purchase price adjustments/set off would be mandated to arrive at the arm's length price, if the AMP expenses are segregated as an independent international transaction .....”
14. As mentioned earlier, the differential impact of working capital of the assessee vis-a-vis its comparables has already been factored in the pricing/ profitability of the assessee and therefore, any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified.
15. Further, the principle of aggregation is a well-established rule in the transfer pricing analysis. This principle seeks to combine all functionally similar transactions wherein arm's length price can be determined for a number of transactions taken together. The said principle is enshrined in the transfer pricing regulation itself and has also been advocated by the OECD Guidelines.
In this regard, reliance is placed upon the recent ruling of Hon'ble Delhi High Court in case of Sony Ericsson Mobile Communication India Pvt. Ltd and several other connected matters (Supra) in respect of aggregation of closely linked transactions. The relevant portion of the judgment is reproduced below :-
"In case the tested party is engaged in single line of business, there is no bar or prohibition from applying the TNM Method on entity level basis. The focus of this method is on net profit amount in proportion to the appropriate base or the PLI. In fact, when transactions are inter-connected, combined consideration may be the most reliable means of determining the arm's length price. There are often situations where closely linked and connected transactions cannot be evaluated adequately on separate basis...... "
"Where the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction. "
17. From the above analysis, it is clear that assessee had earned significantly higher margin than the comparable companies (which have been accepted by the TPO) which more than compensates for the credit period extended to the AEs. Thus, the approach by the assessee of aggregating the international transactions pertaining to sale of goods to AE and receivables arising from such transactions which is undoubtedly inextricable connected is in accordance with established TP principles as well as ratio laid down by the Hon’ble jurisdictional High Court in the case of Sony Ericson Mobile Communication India Pvt. Ltd. (supra0. For the aforesaid reasons, we allow the appeal of the assessee. It ordered accordingly.”
On perusal of above, we find that the Tribunal has held that if after giving effect to the adjustment on account of interest on trade receivables to the profit margin of the assessee and the comparables, the profit margin of the assessee is still more than the arm’s length margin of the comparables, then no separate addition on account of interest on receivables is warranted. Therefore, respectfully following the decision of the Tribunal, we direct the Ld. AO to give effect to the adjustment on account of interest on trade receivables to the profit margin of the assessee and the comparables and after giving such effect, if the profit margin of the assessee is still more than the arm’s length margin of the comparables, then the Ld. AO is directed to delete the addition on account of interest on receivables.
16. On the second argument, the assessee’s first prayer was to allow working capital adjustment while calculating the profit margin and the second prayer of the assessee was that if a working capital adjustment is granted while calculating profit margin, then no separate adjustment on account of interest on receivables is required, since such impact is already subsumed in the working capital adjustment. In this context, we have gone through the judgment of the Hon’ble Delhi High Court in Pr. CIT v. Kusum Healthcare Pvt. Ltd. (supra) wherein at para nos.7 to 12 of its order, the Hon'ble High Court has held as under :
On perusal of above, we find that the Hon’ble Delhi High Court in Pr. CIT v. Kusum Healthcare Pvt. Ltd. (supra) has categorically held that where working capital adjustment is granted while computing profit margins, there is no occasion to again benchmark interest on receivables separately. Although the High Court was not directly deciding the methodology of working capital adjustment, the principle laid down clearly supports the assessee’s case. Respectfully following the same, we direct the Ld. AO/TPO to give effect to the working capital adjustment while computing margins and, thereafter, not to make any separate benchmarking adjustment towards interest on outstanding receivables.
As regards the last argument of the assessee that it is a debt- free company, we observe that once the issue is already decided in assessee’s favour on the basis of the second argument, this contention becomes academic and does not require independent adjudication. Accordingly, the Ld. AO shall give effect to this order in terms of our above directions.
In the result, the appeal of the assessee is partly allowed for statistical purposes.