The Income Tax Appellate Tribunal (ITAT), New Delhi Bench held that the assessee has been granted the working capital adjustment while computing the arm’s length price of the international transaction of the sale of services, and no separate benchmarking should be done of the outstanding receivable as outstanding receivable are part of the working capital of the assessee.
The assessee, EXL Service.com (India) Pvt. Ltd is engaged in the business of rendering of transaction processing services and internet and voice based customer care service for its worldwide clients. It filed its return of income declaring total income as per normal provision of the computation of the total income and determining book profit under section 115JB.
The issue raised in this case was related to the transfer pricing adjustment in relation to delay in receipt of receivable from associated enterprise. The AO from the perusal of the invoice of details of services rendered to the associated enterprise noted that in certain cases the remittances were received by the appellant after sometime beyond the period agreed between the parties i.e. 90 days.
The TPO concluded that the outstanding receivables are like short- term loans/advances only and they fund the working capital requirement of the associated enterprise for the period. He therefore stated that delay in receipt of receivable is an unsecured loan advance to the associated enterprise, so a separate International Transaction, and imputed notional interest at the rate of 10.84 percentages being the base rate of interest of state bank of India on the period of delay exceeding 90 days.
On the objection before the dispute resolution panel (DRP) the adjustment proposed by the learned transfer pricing officer was upheld however the learned DRP directed the TPO to recompute the interest by imputing the rate of 4.519 percentage being LIBOR +400 basis points.
Accordingly, the transfer pricing officer while giving effect to the direction of the learned dispute resolution panel computed the transfer pricing adjustment on account of interest for the period of delay in receipt of trade receivable from the associated enterprise.
It submitted that the interest cost has already been suitably factored in the sale price as the learned transfer pricing officer has benchmarked its operating profit margin earned from international transactions with the associated enterprises at 14.89% with average working capital adjustment of operating profit margin of comparable companies at 14.29%.
The tribunal consisting of Judicial Member Amit Shukla and Technical Member Prashant Maharishi noted that the assessee has been granted the working capital adjustment while computing the arm’s-length price of the international transaction of the sale of services, according to us no separate benchmarking should be done of the outstanding receivable as outstanding receivable are part of the working capital of the assessee.
It was also observed by the tribunal that the issue is squarely covered in favour of assessee by the decision of the honourable Delhi High Court in case of Principal Commissioner of Income Tax Versus Kusum Healthcare Private Limited.
Therefore, the tribunal directed the transfer pricing officer/ assessing officer to delete the addition of Rs 355509/– in relation to the delay in receipt of receivable from the associated enterprise.
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