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Judgment
PER VIKAS AWASTHY, JM:
This appeal by the assessee is directed against the Assessment Order dated 29.03.2021 passed u/s.143(3) r.w.s. 144C(13) and 144C(13) r.w.s. 143(3A) & 143 (3B) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'), for AY 2016-17.
The appeal is time barred by 81 days. The assessee has filed an application citing reasons causing delay in filing of appeal. After perusal of the same, we are satisfied that delay in filing of appeal is not intentional, the delay has been caused for the reasons stated in application which appears to be bonafide. Thus, delay of 81 days in filing of appeal is condoned and appeal is admitted for decision on merits.
The brief facts of the case as emanating from records are: The assessee is a subsidiary of McKinsey Holding Inc., USA. The assessee is engaged in providing research and information to its Associated Enterprises (AE). The assessee is also providing Information Technology Support Service (ITES) to its AEs in the nature of resolution of infrastructure issue including IT infrastructure support, IT application support, maintenance of IT system etc. The IT support services are used for resolving internal IT problems faced by McKinsey group entities. The assessee filed its return of income for AY 2016-17 declaring income of income INR 70,82,05,260/-. During the period relevant to assessment year under appeal, the assessee entered into following international transaction:-
| S.No | Nature of Transaction | Method | Amount (INR) |
| 1. | Provision of support service | TNMM | 4,151,568,543 |
| 2. | Availing of support service | CUP | 26,251,238 |
| 3. | Reimbursement of expenses of AEs | Other method | 103,656,654 |
A reference was made to Transfer Pricing Officer (TPO) to determine Arm’s Length Price (ALP) of aforesaid international transactions undertaken by the assessee. The TPO while benchmarking the international transactions also benchmarked ‘interest on receivables’. The TPO observed that as per service agreement, timeline for inter company accounts payable is 60 days, whereas, on examination of financials it emanates that the payments for invoices raised by the assessee are not received within the stipulated time of 60 days allowed by the assessee to the AEs. Hence, the TPO separately benchmarked interest on outstanding receivables at LIBOR plus 400 basis rate and made adjustment of Rs.45,62,418/-. Accordingly, the AO vide draft assessment order dated 18.12.2019 made addition of transfer pricing adjustments made by the TPO vide order dated 30.10.2019. The assessee filed objections before the Dispute Resolution Panel (DRP) inter alia assailing addition made on account of benchmarking of notional interest on receivables from the AEs. The DRP dismissed the objections filed by the assessee with regard to interest on outstanding receivables. The AO vide impugned assessment order gave effect to the DRP directions, inter alia making addition of Rs.6,16,85,832/- on account of transfer pricing adjustment. Hence, the present appeal by the assessee.
The assessee in appeal before the Tribunal has assailed the assessment order on following grounds:-
“Transfer pricing grounds:
2.On the facts and in the circumstances of the case, the learned AO has erred in making a transfer pricing adjustment of INR 6,16,85,832 to the total income of the Appellant in respect of international transactions.
3.On the facts and in the circumstances of the case, the learned AO has erred in making reference to an incorrect order dated 13 November 2020 while incorporating the transfer pricing adjustment pursuant to giving effect to Hon'ble DRP directions in the case of the Appellant which has resulted in incorporating an incorrect amount of INR 6,16,85,832 as transfer pricing adjustment in the final assessment order dated 29 March 2021.
4.On the facts and in the circumstances of the case, the learned AO has erred in not referring to Correct order dated 10 December 2020 passed by the learned TPO in the case of the Appellant wherein the transfer pricing adjustment was revised from INR 7,58,30,073 to INR 45,62,418 (with respect to notional interest on outstanding receivables) pursuant to giving effect to Hon'ble DRP directions in the case of the Appellant.
5.Without prejudice to the above, on the facts and in the circumstances of the case, the learned AO / TPO / Hon'ble DRP have erred in holding inter-company receivables arising from support services provided by the Appellant to its Associated Enterprises ("AEs') as a separate international transaction under section 92B of the Act.
6.Without prejudice to the above, on the facts and in the circumstances of the case, the learned AO / TPO / Hon'ble DRP have erred in not appreciating that the provision of support services (from which the inter-company receivables have arisen) were benchmarked by undertaking working capital adjustment by the Appellant which takes into account the difference in credit terms of the Appellant vis-à-vis the comparable companies.
7.Without prejudice to the above, on the facts and in the circumstances of the case, the learned AO / TPO / Hon'ble DRP have erred in not considering the fact that the Appellant is a debt free company where the Appellant does not incur any finance charges and accordingly, there is no requirement to make such notional interest adjustment.
8.Without prejudice to the above, on the facts and in the circumstances of the case, the learned AO / TPO / Hon'ble DRP have erred in not considering the weighted average period of recovery to determine whether or not an adjustment ought to be made in respect of notional interest on outstanding AE receivables arising from provision of services.
Corporate tax grounds:
9.On the facts and in the circumstances of the case, the learned AO has failed to grant deduction under section 80G of the Act amounting to INR 27.54,728 in respect of donations made to the charitable organization, while computing the total income of the assessee.
10.On the facts and in the circumstances of the case, the learned AO has erred in considering an incorrect amount of book profit at INR 62,45,62,253 as against the correct book profit of INR 58,09,47,088 as reported in the return of income.”
Shri Porus Kaka, appearing on behalf of the assessee at the outset submits that the assessee has raised an additional ground of appeal challenging validity of assessment order on the ground of limitation vide application dated 31.03.2023. On instruction from the assessee he is not pressing the application for admission of said additional ground.
In light of the statement made by the ld. Counsel for the assessee at Bar, the application dated 31.03.2023 for admission of additional ground of appeal is dismissed as not pressed.
The ld. Counsel for the assessee submits that the substantive issue for consideration in the present appeal is raised in grounds no. 5 to 7, assailing the adjustment in respect of interest on inter company receivables arising from provision of support services. The ld. Counsel submits that the issue raised by the assessee in grounds no. 5 to 7 of appeal is squarely covered by the decision of Hon’ble Delhi High Court in assessee’s own case for AY 2014-15 titled PCIT vs. McKinsey Knowledge Centre Pvt. Ltd. reported as 131 taxmann.com 253 (Delhi). The ld. Counsel submits that while adjudicating the appeal filed by the Revenue. The Hon’ble High Court in respect of interest on delayed receivables has held that transfer pricing adjustment cannot be made in a one-sided manner by considering only delayed receipts ignoring invoices on which payments were received in advance (within the credit period). Consequently, no notional computation of interest on delayed receivables without factoring in receivables realized in advance can be imputed. No adjustment can be made beyond agreed and accepted credit period of 60 days. He submits that the issue raised in the present appeal with respect to notional interest on the alleged delayed payment of receivables is identical to the one decided by the Tribunal in AY 2014-15 in favour of the assessee and upheld by the Hon’ble High Court.
The ld. Counsel for the assessee referring to the details of realization in respect of invoices raised during the FY ended on 31.03.2016 at page 26 of the paper book submits that the assessee received payments on a weighted average basis within 58 days. Keeping in view the fact that 60 days period has been provided by the assessee within which the AEs were required to make the payment no adjustment on account of interest on receivables can be sustained. As the receivables are realized within the accepted period of 60 days.
In respect of ground no. 3 and 4 of appeal, the ld. Counsel for the assessee submits that without prejudice to his submissions on ground no. 5 to 7, the TPO had proposed adjustment on account of receivables Rs.45,62,418/-. Apart from adjustment on receivables the TPO had also made adjustment on account of provision of support services Rs.7,12,67,655/-. The assessee filed objections before the DRP against the transfer pricing adjustments. The DRP deleted the TP addition made in respect of provision of support services and rejected the assessee’s objections qua interest on receivables i.e. Rs.45,62,418/-. The only Transfer Pricing adjustment that survived was of Rs.45,62,418/-. However, the AO while passing the final assessment order made addition of Rs.6,16,85,832/-. The ld. Counsel thus, prayed for direction to the AO to verity and rectify the mistake.
The ld. Counsel for the assessee in respect of corporate tax ground submitted that in ground no 9 of appeal, the assessee has assailed rejection of deduction u/s.80G Rs.27,54,728/- claimed by the assessee. The ld. Counsel submits that the assessee had made donation to the charitable organization approved for allowing benefit of section 80G of the Act, the assessee has claimed the same in its return of income. The AO in the assessment order has not raised any objection on the assessee’s eligibility in claiming deduction u/s.80G of the Act. However, in the computation of income the AO has not granted the benefit of deduction u/s. 80G of the Act amounting to Rs. 27,54,728/- The ld. Counsel submits that this appears to be a clerical error and prays for direction to the AO to grant deduction u/s.80G of the Act.
In respect of ground no. 10 of appeal, the ld. Counsel submits that the assessee in its return of income stated that the MAT applicable was Rs.58.09 crores approximately. However, while drawing computation pursuant to the final assessment order, the AO altered the MAT applicable to Rs.62.45 crores. He further referred to intimation issued u/s.143(1) of the Act at page 33 of the paper book, where the AO has accepted deemed total income u/s.115JB of the Act at Rs.58.09 crores.
Per contra, Shri Dharm Veer Singh representing the department vehemently defended the impugned order and prayed for dismissing appeal of the assessee. The ld. DR vehemently stated that the facts in the impugned assessment year are distinguishable from the facts in the case of assessee for AY 2014-15. The ld. DR placed on record copy of TPO order dated 10.10.2017 for AY 2014-15, to highlight the difference in the facts. The ld. DR pointed that in AY 2014-15, there were multiple instances where the assessee had received payments from the AEs even prior to the date of issuance of invoice. Hence, the Hon’ble High Court in the said facts held that there can be no notional computation of interest on delayed receivables ignoring receivables received in advance. He asserted that in the assessment year under appeal there is not even a single instance where the assessee has received advance payment against the invoices. The payments are either received within the stipulated time of 60 days or beyond 60 days. The ld. DR to supplement his oral submissions furnished written submissions, the relevant extract of the same is reproduced herein below:-
“2.1It is evident from the details of invoices raised and payment received as given in a table in para 57 of the T.P. order for AY 2014-15 that there were multiple instances when the Assessee had received trade amount in advance i.e. prior to date of raising invoices. There were only 6 ( Six) instances of trade receivable from AE remaining outstanding beyond due date/allowable credit period of 60 days. As against the same, there were 16 instances, when the assessee had received amount in advance (as trade advance) from its AE. Further, the amount received as trading advance was many times higher than the trade receivable remaining outstanding beyond allowable credit period of 60 days. When the trade receivable from AE remains outstanding beyond the allowable credit period, the AE receives benefit from the Assessee. However, when the assessee receives amount in advance from its AE, the assessee receives benefit from its AE. Hence, in the A.Y. 2014-15, the benefit received by the Assessee from its AE by way of receipt of trade advance was much higher than the benefit extended by the Assessee to its AE by way of delayed realisation of trade receivables. This peculiar fact formed the basis for allowing relief to the assessee by the Hon'ble High Court as evident from the observations of Hon'ble High Court reproduced below:
“…. 12. This Court is also of the opinion that under no transfer pricing norm, principle or evaluation of any "benefit" can there be a one-sided adjustment taking into account delayed invoices while at the same time ignoring invoices/payment received in advance. Consequently, factually there can be no notional computation of 'delayed receivables' only ignoring the receivables received in advance.
13.A perusal of paper book reveals that most of the invoices/receivables had been paid significantly in advance. When the period for which the amounts of receivables received in advanced enjoyed by the respondent is seen vis-a-vis the amount receivable beyond sixty days, it is apparent that the respondent has received significantly more advance rather than outstanding receivable beyond sixty days.
14.Consequently, on the facts and circumstances of the case, the notional interest relating to alleged delayed payments in collecting receivables from the AEs is uncalled for as in fact, there are no outstanding receivables as the amount received in advance far outweigh the amount received late...." (Emphasis Supplied)
Further, as evident from para 9 of the Hon'ble H.C.'s judgement, the assessee had also taken plea that weighted average period of recovery days worked out to negative twenty-two days. This situation of negative average arose only because in A.Y. 2014-15, the assessee had received more amount in advance than the amount remaining outstanding beyond allowable credit period. In that year, the Hon'ble High Court had allowed relief to the assessee on the ground that the assessee had received significantly more advance rather than outstanding receivable beyond sixty days and there were no outstanding receivables as the amount received in advance far outweigh the amount received late. There is no ration emerging from above judgment to that effect that weighted average of recovery days is required to be taken in each and every case of T.P. adjustment on account of interest on delayed receivable even when there is no trade advance received. In fact, in cases involving instances where part of the trading amount is received as an advance, the TPO itself allows set off for the same by reducing the interest benefit received by the assessee on account of such advance from the interest charged on trading amount realized beyond allowed credit period. This is done by assigning negative value to the recovery days when amount is received in advance vis-à-vis positive value assigned to recovery days beyond allowable credit period. Since for the purpose of calculation of interest, amount is required to be multiplied with the number of days with help of a formula, assigning negative and positive values in above manner in cases involving both the delayed realisation of trade amount and receipt of trade advance has same effect as working out weighted average of recovery days.
2.2In present assessment year, the facts are distinguishable as there are no trade advances received by the assessee from its A as evident from para 34 of Page 55 onwards of the T.P. Order. As against the same, there are 23 invoices which have been realised after the credit period of 60 days allowed as per the agreement/sale invoice. The delay beyond 60 days is as high as 108 days for few invoices. Thus, in present assessment year, while delay in realisation of trade receivable by the assessee has benefitted the AE, there is not benefit received by the assessee from its AE on account of receipt of any trade advance. Hence, question of set off of these benefits does not arise.
Further, as on 31.03.2016, total trade receivables outstanding with respect to A.Es stand at Rs.133.38Crores as against trade payables to AEs merely at 12.04 Crores. (Kindly refer to Related Party disclosures in Note 22 of Financial Statements at Page 21 of Factual Paper Book filed by the Assessee.). Whereas in A.Y. 2014-15, the assessee had clearly made a submission before Hon'ble High Court that there were no outstanding receivables (Para 7 of Judgement) and Hon'ble High Court too had taken note of the same in Para 14 of its judgement (Reproduced above) while allowing relief to the Assessee. This aspect distinguishes facts of the present appeal from those in A. Y. 2014-15.
In view of the above distinguishable facts, the ratio of above-mentioned decision of the Hon'ble High Court can not be applied to the case of the assessee for the instant assessment year.
2.3Further, it needs to be taken note of that in respect of those trade receivables, which are realised within the allowable credit period (60 days in the present case, neither Assessee can be considered as benefiting the AE, nor AE can be considered as passing on any benefit to the Assessee. This is because of the fact that realisation of payment within 60 days is as per terms of the agreement between the parties and such payment cannot be considered as giving benefit to any of the parties. In other words, the question of one party passing on benefit to other party will arise only when payment® is received either after the allowable credit period or before the date of sale/invoice (i.e. as advance).
Under the Transfer Pricing laws, the concept of determination of arm's length price is basically in a way quantification of benefit passed by the assessee to its A.E. Therefore, the trade receivables which are realised within the credit period can not be considered combinedly with delayed trade receivables for finding out weighed average period of delay. In other words, the recovery period of invoices realised within 60 days can not be used to find average recovery period along with invoices realised beyond 60 days as it such averaging would lead to absurd results.
2.4In view of the above discussion, plea of the assessee to use weighted average period of recovery to work out T.P. adjustment on account of interest on delayed realisation of trade receivable deserve to be rejected in light of above discussed facts of the instant appeal.”
We have heard the submissions made by rival sides and have examined the orders of authorities below. The primary issue raised by the assessee in appeal is in ground no. 5 to 7 of the appeal assailing transfer pricing adjustment in respect of ‘notional interest on receivables’ arising from support services provided by the assessee to its AEs. It is pertinent to mention here that there are no transactions with Non-AEs. Undisputedly, as per the service agreement between the assessee and AE stipulated time line for collection of receivables is 60 days. The TPO after examining the details furnished by the assessee with respect to due date for collection and actual date of collection of the receivables from the AEs came to the conclusion that the assessee has allowed more than 60 days time on multiple occasions for collection of receivables from the AEs. The TPO computed interest at LIBOR plus 400 basis points on the outstanding receivables beyond 60 days till the actual date of collection and accordingly made transfer pricing adjustment of Rs.45,62,418/-. The contention of the assessee is that the TPO has considered only the receivables collected beyond 60 days and no benefit has been given by the TPO in respect of outstanding receivables that have been collected in advance i.e. within the credit period of 60 days allowed by the assessee. The ld. Counsel for the assessee has placed reliance on the decision of Hon’ble Delhi High Court in the assessee’s own case for AY 2014-15, wherein, the addition made on receivables was deleted by the Tribunal. The Revenue carried the issue in appeal before the Hon’ble Delhi High Court. The Hon’ble High Court dismissed appeal of the Department inter alia holding as under:-:-
“12.This Court is also of the opinion that under no transfer pricing norm, principle or evaluation of any "benefit" can there be a one-sided adjustment taking into account delayed invoices while at the same time ignoring invoices/payment received in advance. Consequently, factually there can be no notional computation of 'delayed receivables' only ignoring the receivables received in advance.
13.A perusal of paper book reveals that most of the invoices/receivables had been paid significantly in advance. When the period for which the amounts of receivables received in advanced enjoyed by the respondent is seen vis-a-vis the amount receivable beyond sixty days, it is apparent that the respondent has received significantly more advance rather than outstanding receivable beyond sixty days.
14.Consequently, on the facts and circumstances of the case, the notional interest relating to alleged delayed payments in collecting receivables from the AEs is uncalled for as in fact, there are no outstanding receivables as the amount received in advance far outweigh the amount received late.”
The Hon’ble High Court observed that no transfer pricing norm, principal or evaluation of any benefit can be given on one sided adjustment considering only delayed invoices without considering payment received in advance. After considering the fact that the assessee had received advance payment (payment received prior to issuance of invoices) from AEs, the order of the Tribunal was upheld in deleting the adjustment. It is pertinent to mention here that in AY 2014-15, the weighted average collection time for outstanding receivables was (-)22 days.
In the impugned assessment year, after examining statement of collection of receivables, we find that the receivables have either been collected within the period of 60 days i.e. the timeline provided by the assessee to its AEs or beyond 60 days. There are no instances, where the assessee has received payment before the issuance of invoice as were the instances in AY 2014-15. Nevertheless, there are multiple instances where the receivables are collected shortly after issuance of invoices i.e. the payments were received from the AEs almost instantly after issuance of the invoice. The ld. Counsel for the assessee stated that the weighted average collection period of receivables in the impugned assessment year is 58 days. The ld. Counsel for the assessee has argued that, applying the ratio laid down by the Hon’ble High Court in AY 2014-15 in assessee’s own case, no TP adjustment is warranted in respect of receivables from AEs.
We find merit in the submissions of the ld. Counsel for the assessee. The facts in the impugned assessment year may not be identical to the facts of the case in AY 2014-15, but the principle enunciated by the Hon’ble High Court that one-sided adjustment cannot be made i.e. by only considering delayed payments ignoring the receipts in advance would equally apply in the present case. The assessee may not have received payments in advance i.e. payments received prior to issuance of invoices but the assessee has received payments in substantial cases much prior to the period allowed by the assessee for making the payments. Though, the AEs had liberty to make payments upto 60 days but the payments were made by the AEs within a period of few days from the date of invoice. Thus, the weighted average of entire payments received i.e. weighted average of payments received before 60 days time and beyond 60 days time would be a fair indicator of the outstanding receivables on which notional interest can be imputed for making transfer pricing adjustment.
Thus, in light of our above findings the TP adjustment of Rs.45,62,418/- would not survive. For the limited purpose of verification of weighted average collection period, the issue is restored to AO. The assessee succeeds on ground no. 5 to 8 of appeal.
In respect of issues raised by the assessee, in ground of appeal no. 3, 4, 9 and 10, we find that the assessee has already filed rectification petition u/s.154 of the Act dated 27.04.2021 before the AO, the said petition is stated to be still pending for final disposal. The AO is directed to dispose of said rectification application of the assessee expeditiously, preferably within a period of three months from the date of receipt of this order. Accordingly, ground of appeal no. 3, 4, 9 & 10 are allowed for statistical purpose.
In the result, appeal of the assessee is partly allowed in the terms aforesaid.
Order pronounced in the open court on Tuesday the 21st day of April, 2026.