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Facts
The assessee, ERM India Private Limited, appealed an order that made an upward adjustment of Rs. 75,65,322 concerning business receivables from Associated Enterprises (AEs) due to delay in payment. The TPO initially proposed an adjustment of Rs. 1,80,07,955, which was later reduced by the DRP. The core issue is whether interest on delayed receivables from AEs is warranted as a separate international transaction.
Held
The Tribunal held that the working capital adjustment, in this case, subsumes the impact of interest on receivables. Given that the assessee is a debt-free company and its working capital margin (18.03%) is significantly higher than comparable entities (7.60%), no adjustment for interest on delayed receivables is sustainable for this assessment year. The issue of TDS credit was disposed of with a direction to the AO.
Key Issues
Whether interest on delayed receivables from Associated Enterprises (AEs) constitutes a separate international transaction and warrants an adjustment, and whether the assessee is entitled to full TDS credit.
Sections Cited
Sec 92B, Sec 143(3), Sec 144C(13), Sec 144B, Sec 253(1)(d), Sec 244A, Sec 243D, Sec 270A, Rule 10B(1)
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Income Tax Appellate Tribunal, DELHI BENCH “I”NEW DELHI
Before: SHRIYOGESH KUMAR US & SHRISANJAY AWASTHI
सुनवाईक�तारीख/ Date of hearing: 24.12.2025 07.01.2026 उ�ोषणाक�तारीख/Pronouncement on आदेश /O R D E R PER SANJAY AWASTHI, ACCOUNTANT MEMBER:
This appeal arises from order dated 28.09.2024 passed by Assessment Unit of the Income Tax Department, u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (hereafter “the Act”).
In this matter the main point of contention is an upward adjustment of Rs.75,65,322/- which has been made on account of business receivables from Associated Enterprises (AE) and the delay thereon. In principle, the Ld. TPO has held such outstanding balances from the AEs as separate InternationalTransactions.The Ld. TPO relied on the amendment 1 Explanation (1)(c) to Section 92B of the Act which has been inserted by Finance Act, 2012 with retrospective effect from 01.04.2002, to include interest on delayed receivables for the purposes of benchmarking.
Thereafter, the Ld. TPO has worked out an amount of Rs.1,80,07,955/- @ 15.25%. However, the Ld. DRP directed that this quantum should be reduced in line with LIBOR plus 400 basis points after giving a grace of 60 days on the entire quantum of delay in receiving payments against invoices raised by the assessee. The impugned amount resulted thereon.
1.1 The assessee is aggrieved with the impugned order and has approached the ITAT with the following grounds: -
“Appeal under section 253(1)(d) of the Income Tax Act, 1961 (hereinafter referred to as the "Act"), against the order dated 28th September 2024, passed by the Assessment Unit of Income Tax Department under Section 143(3) read with Section 144C(13) & 144B of the Act. A. GENERAL GROUND: 1. That on the facts and circumstances of the case and in law, the Assessing Officer ("AO") has erred in assessing the total income of the Appellant under 143(3) read with Section 144C(13) & 144B of the Act. of the Act, for assessment year ("AY") 2021-22 at INR 10,30,99,092 as against declared income of INR 9,41,14,830 by the Appellant. B. TRANSFER PRICING GROUNDS: 2. That on the facts and circumstances of the case and in law, the AO/TPO/DRP erred in making a transfer pricing adjustment of INR 75,65,322 to the income of the Appellant considering debit balance of receivables from Associated Enterprise ('AE') as a separate international transaction. In doing so, the AO/ TPO/ DRP erred in presuming the same as an unsecured interest-free loan granted by the Appellant to its AE. 2.1. That on the facts and circumstances of the case and in law, the AO/TPO/DRP erred in not appreciating that the Appellant did 2 not charge any interest from third-party customers either on outstanding receivables, which represents an arm's length scenario. 2.2. That on the facts and circumstances of the case and in law, the AO/TPO/DRP erred in not appreciating that no interest was paid by the Appellant on account of delay in payment of outstanding payables to AEs. Therefore, no such notional interest is warranted for outstanding receivables by the Appellant from its AEs; 2.3. That on the facts and circumstances of the case and in law, the AO/TPO/DRP have erred in not appreciating that once the primary transaction of provision/ receipt of consultancy services is held to be at arm's length price, then the inter-company receivables arising there from (being consequential and closely linked to the main transaction) also conform to the arm's length principle; 2.4. That on the facts and circumstances of the case and in law, the Hon'ble DRP erred in ignoring the TNMM analysis submitted to demonstrate that higher margins were earned by the Appellant and vis-a-vis third-party comparable companies even after undertaking the working capital adjustment. 2.5. That on the facts and circumstances of the case and in law, the AO/TPO/DRP erred in ignoring the fact that the Hon'ble Income-tax Appellate Tribunal in assessee's own case in with same fact pattern, has held that working capital adjustment subsumes the impact of interest on receivables and as such no separate benchmark for it has to be made. 2.6. That on the facts and circumstances of the case and in law, the AO/TPO/DRP erred in alleging that funds carrying interest cost were utilized by the Appellant to grant extra credit period to AEs. This is grossly incorrect given that the Appellant is a debt-free company. 2.7. That on the facts and circumstances of the case and in law, the AO/TPO/DRP erred in arbitrarily assuming a credit period of 60 days in computing the alleged delay in realization of receivables, without appreciating the commercial factors related to Appellant's business, warranting a longer credit period. C. OTHER GROUNDS: 3. That on the facts and circumstances of the case and in law the AO erred in not granting the credit of entire TDS amounting to INR 2,96,77,034 as claimed by Appellant in its return of Income ignoring the fact that Ld. ADDL/JCIT in the subject Assessment Year has allowed complete TDS credit and resulting in short grant of TDS credit of INR 42,76,437 to the Appellant. 3
4. That on the facts and circumstances of the case and in law the AO has erred in not grating due interest u/s 244A under the Act.
5. That on the facts and circumstances of the case and in law the AO has erred in levying interest u/s 243D under the Act.
6. That on the facts and circumstances of the case and in law, the AO erred in initiating penalty proceedings under section 270A of the Act.” 1.2 The Ld. AR pointed out that effectively the transfer pricing ground was ground no.2 and for the sake of convenience that may be taken up first and thereafter the ground pertaining to alleged denial of TDS credit (GOA 3) could be taken up for necessary directions to the Assessing Authority. Lastly, grounds 4, 5 & 6 have been requested to be treated as consequential on the amounts surviving after the present adjudication.
The Ld. AR argued with the help of a paper book running into 415 pages, which incidentally also contains ITAT’s Order in assessee’s own case for AY 2016-17. The Ld. AR also read out from written submissions, which for the sake of convenience may be extracted with respect to the relevant portions pertaining to transfer pricing: -
“1.1 ERM India, incorporated on 19th May 1995, is a subsidiary of ERM Asia Pacific Holdings Ltd. The company is engaged in providing consultancy in five broad practice areas related to environmental, health, safety, risk and social concerns which are (a) contaminated site management, (b) impact assessment and planning, (c) performance, assurance and risk management, (d) transaction services and sustainability, (e) climate change. 1.2 During AY 2021-22 the Appellant benchmarked the international transactions at entity level under TNMM, the net level margins earned by the Appellant was computed at 18.03 percent, which is higher than arm’s length margin i.e. the mean of the comparable set of 4 comparable companies computed at 4.82 percent. 4
1.3 Ld. TPO accepted the arm’s length nature of all the principal international transactions of the Appellant relating to the consultancy operations. However, the Ld. TPO challenged the delay in receipt of outstanding receivable balances from AEs. 1.4 While doing so, Ld. TPO re-characterized the outstanding balance of receivables as an arrangement between appellant and its AEs to grant long term interest free unsecured credit and imputed notional interest at 15.25 per cent (SBI PLR @ 12.25% plus 300 basis points) and calculated an adjustment of INR 1,80,07,955 as interest on outstanding receivables. 1.5 Aggrieved by the order of Ld. TPO, the Appellant preferred to file objections before the Hon’ble DRP. The Hon’ble DRP directed to increase the credit period from 30 days to 60 days and directed Ld. TPO to compute interest @4.465% (i.e. LIBOR + 400 basis point). After giving effect to Hon’ble DRP’s directions the transfer pricing adjustment was reduced to INR 75,65,322. 2 Ground No 2 - Interest on Outstanding Receivables Key contention of ERM • Principal transaction has been accepted to be at ALP by the Ld. TPO - The net cost-plus margin earned by the Appellant was more than the comparable companies (both unadjusted and working capital adjusted) • Working capital adjustment undertaken by the Appellant and submitted with the Ld. TPO and Hon’ble DRP, subsumes the impact of outstanding balances. The Appellant has earned a higher margin of 18.03% vis-a-vis a working capital adjusted mean margin of 7.60% earned by the comparable companies. • The Appellant entered into substantial third-party transactions which forms 67.83% of the revenue. The revenue split between related and non-related parties is tabulated below: AE Service Revenue 246,669,998 32.17% Non-AE Service Revenue 520,043,261 67.83% Total Service Revenue 766,713,259 100%
Your Honors attention is invited to the fact that the Appellant had similar/ greater delays in Non-AE transactions, - However no interest is charged by the Appellant with respect to outstanding receivables from non- AEs. • In light of Rule 10B(1), Ld. TPO ought to have considered third party overdue as comparable uncontrolled transaction. Since no interest has been charged from Non AEs as well, the alleged over-dues for services to AEs should be considered as arm’s length and no interest on such outstanding amount be levied. • Ld. TPO failed to appreciate that the Appellant is a debt free Company. Thereby, it cannot be inferred that any funds carrying interest borrowed by the Appellant was utilized to grant extra credit period to its AE. Judicial precedents relied upon: The matter is squarely covered by the Appellant’s own case in AY 2016-17 (ITA No. 513/Del/2021) wherein your Honors held as follows: • Below mentioned comparative table highlights that the facts and circumstances for AY 2021-22 are identical to AY 2016-17 which was adjudicated favorably by Hon’ble Tribunal in Appellant’s own case (ITA No. 513/Del/2021).
Sr. No. Particulars FY 2015-16 FY 2020-21 (AY 2016-17) (AY 2021-22) 1 Margin earned on principal 11% 18.03% transaction (NCP) 2. Comparable companies 9.57% 4.82% unadjusted margin 3. Comparable companies working 7.51% 7.60% capital adjusted margin 4. Transfer pricing adjustment on Nil Nil principal transactions 5. Transfer pricing adjustment on 1,84,01,592 75,65,322 outstanding receivables 6. Whether Appellant charged No No interest on outstanding receivables from Non-AEs 7. Whether Appellant is a debt-free Yes Yes company
• The Appellant submits that its contentions are supported by Hon’ble Tribunal’s order for AY 2016-17 (ITA No. 513 Del 2021) in its own case. The relevant extract has been reproduced below: 11. From the above, it is, therefore, clear that when once the working capital adjustment is given, it subsumes the interest on receivables and no separate benchmark for it has to be made. Respectfully following the view taken by the Hon’ble jurisdictional High Court in the case of Kusum Healthcare (supra), we hold that the addition made on account of interest on receivables cannot be sustained.
2.1 The Ld. AR relied on the order in assessee’s own case for AY 2016- 17 [ITA No.513/Del/2021] in which this issue was decided in favour of the assessee at para 11. It was pointed out that the Coordinate Bench had relied on the case of Kusum Healthcare Pvt. Limited (398 ITR 66 (Del)) to hold that the addition made on account of interest on delayed receivables was not sustainable for the year under consideration. It was also pointed out that the working capital adjustments of the assessee were compared to the independent comparable companies and it was revealed that the working capital adjusted margin for the assessee was 18.03% as compared to 7.60% earned by the independent comparable companies. It was the submission that the working capital adjusted margin also considers late realizations on outstanding amounts and in this case the margin earned was adequate to cover for any loss of revenue on that account. It was the further submission that the third-party transactions were 67.83% of the revenue and consequently the Associated Enterprises revenue was only 32.17%. It was pointed out by the Ld. AR that delay in receiving the billed amounts was a common phenomenon across the board and it was not the case that the AEs were enjoying a greater tenure in paying the billed amount as compared to the non-AE entities. The Ld.AR further mentioned that the assessee was not charging any interest from either AE entities or the non-AE entities.
2.2 Regarding the issue of alleged faulty grant of TDS benefit, it was the submission that even in the case for AY 2016-17 the same issue had arisen and the Coordinate Bench had directed the AO to verify and grant the credit of TDS as per law. A similar direction was requested in this matter also.
The Ld. DR, on the other hand, argued that in the Kusum Healthcare case (supra) it was held that in that case the TPO had not considered the reasons for delay in collection of monies for supplies made due to whichever factors and there was no investigation on a case to case basis. It was the further submission that since this was not done by the TPO there hence, the Hon’ble Court was constrained to pass orders in favour of the assessee. The Ld. DR read out paras 10 & 11 from this order and argued that the TPO must be asked to examine the delayed receivables in light of discussion in para 10 of the Kusum Healthcare (supra) order. It was also argued that on similar facts in the case of Avaya India Private Limited in order dated 26.11.2024 it was the clear-cut finding in paras 14 to 18 that such delayed receivables deserve to be investigated and the assessee should have factored in delayed receivables on its profitability. This particular order of the Coordinate Bench was in favour of the Revenue and against the Assessee. The Ld. DR also placed on record the case of Jubilant Pharmova Limited in order dated 05.03.2024. The Ld. DR read out paras 30 & 31 to emphasize the point that once the TPO has not examined the delayed receivables from the point of view of discerning a clear pattern with respect to AE’s and non-AE’s then the matter deserved to be remanded back to the TPO for embarking on this exercise. The Ld. DR concluded his arguments by stating that a combined reading of the two Coordinate Bench orders and paras 10 & 11 of the Kusum Healthcare case (supra), the matter needed to be remanded back to the file of Ld. TPO for examining the delayed receivables and working out the pattern over a period of few past years and also between AE’s and non-AE’s.
3.1 Regarding the TDS issue the Ld. DR was agreeable to necessary directions being given to the Ld. AO.
We have heard the rival submissions and have gone through the documents before us. Regarding the TP issue, we find that a Coordinate Bench of the ITAT has already adjudicated in favour of the assessee for AY 2016-17, by following the judgment in the case of Kusum Healthcare (supra). Normally this would clinch the issue in favour of the assessee.
However, since the Ld. DR has pointed out the determining paragraphs in the Kusum Healthcare case (supra) and the two other ITAT cases relied upon by him (supra),we feel that it is necessary to discuss the issue in the light of all these orders before us. While we would agree that just as in the Kusum Healthcare case (supra) the TPO has confined himself to the year under consideration and has not even, if we may add, attempted to work out any pattern of remarkable difference between an AE and a non AE transaction,we also find that after giving this observation in para 10, the Hon’ble High Court has proceeded ahead to direct deletion of the adjustment on these very same grounds. The facts of the case before us are remarkably similar to that case. Furthermore, the clinching fact in favour of the assessee would be that the working capital adjusted mean margin of 7.60% of the independent comparable entities is much worse than the assessee’s higher margin of 18.03%. This indicates that the delay in receivables has been adequately taken into consideration by the assessee and on this ground alone no upward adjustment by the TPO would be possible. We may discuss this issue also in the light of the case of Nokia Solutions & Networks India (P) Limited vs. ACIT in [2024] (160 taxmann.com 729 (Del)-Trib.). In this case in paras 39, 40, 41 & 42 the case of Kusum Healthcare (supra) has been applied therein to remand the matter back to the TPO for a detailed investigation into the reasons for delay and to investigate any pattern thereon visible over a period of time. It is felt that this particular case of the Coordinate Bench would have been an able guide on the facts of this case had it not been the fact that the working capital adjusted margin was much higher in the assessee’s case as compared to the independent comparable entities. To this extent a review of judicial literature presents two cases for consideration as under: - i. The case of TCI-GO Vacation India (P) Ltd. vs. ACIT [2024] 159 taxmann.com 710 (Del) and Trib.In this case again following the Kusum Healthcare case (supra) it has been held that the working capital adjustment takes into account the impact of outstanding receivables and no further adjustment is required if margin of the assessee is higher than the working capital adjusted margin of comparables [para 6 therein]. ii. In the case of PCIT vs. Inductis India (P) Limited [2023] 157 taxmann.com 87 (Del), the Hon’ble Delhi High Court has held that once the assessee was a debt free company then the question of receiving any interest on receivables did not arise and accordingly any adjustment made by the TPO on such outstanding receivables was liable to be deleted [para 6.6 thereon].In this case, the Ld. AR has also placed on record the accounts of the assessee in the paper book and it is clear from an examination of pages 16 & 77 that the assessee is a debt free company and thus, adequately covered by the judgment in this particular case (supra).
4.1 Accordingly, in light of discussion above, it is held that at least for this year no adjustment can be made on account of interest on delayed receivables considering that the assessee is a debt free company and its working capital margin of 18.03% was significantly higher than such margin of 7.60% earned by the comparable entities. The assessee gets relief accordingly.
Regarding the issue of TDS, the matter is disposed of with a direction to the Ld. AO to give credit for TDS as per law.
In the result, this appeal is partly allowed.
Order pronounced in the open court on 07.01.2026