No TP adjustment if amount received in advance was far outweighed amount received late from AE: HC

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No TP adjustment if amount received in advance

Case Details: PCIT v. Mckinsey Knowledge Centre India (P.) Ltd. - [2021] 131 taxmann.com 253 (Delhi)

Judiciary and Counsel Details

    • Manmohan and Navin Chawla, JJ.
    • Ruchir Bhatia, Adv. for the Appellant. Porus Kaka, Sr. Adv. Harpreet Singh Ajmani and Divesh Chawla, Adv. for the Respondent.

Facts of the Case

The instant appeal was filed by the revenue challenging that the order of ITAT. It was submitted that the ITAT had erred in deleting transfer pricing adjustments made on account of interest on receivables. Revenue submitted that the ITAT had failed to appreciate that deferred payment or receivable or any other debt arising during the course of business money was held to be an ‘international transaction’ within the meaning of Section 92B(1).
The assessee contended that Transfer Pricing Officer (TPO), while making the adjustment on account of the delay in receiving the outstanding, had only considered invoices/receivables paid beyond sixty days for making a notional interest adjustment. He ignored payments/receivables made in advance.
Thus, after noting the statement showing the assessee had received more in advance than outstanding, the tribunal held that assessee was a debt-free company and TP adjustment was required.

High Court Held

The Delhi High Court held that under no transfer pricing norm, principle, or evaluation of any “benefit” could 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.
A perusal of the paper book has revealed that most of the invoices/receivables had been paid significantly in advance. When the period for which the amounts of receivables received in advance enjoyed by the assessee was seen vis-a-vis the amount receivable beyond sixty days, it was apparent that the assessee had received significantly more advance rather than outstanding receivable beyond sixty days.
Accordingly, the notional interest relating to alleged delayed payments in collecting receivables from the AEs was uncalled for as, in fact, there were no outstanding receivables as the amount received in advance far outweighed the amount received late.

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