MILACRON INDIA PRIVATE LIMITED,AHMEDABAD V. THE DY. CIT, CIRCLE-2(1)(1), AHMEDABAD

ITA 2201/AHD/2024

AI Insights

Milacron India Pvt. Ltd. appealed against the assessment order which included an upward adjustment of Rs.23,22,513/- for notional interest on outstanding receivables from AEs, as proposed by the Transfer Pricing Officer (TPO) and upheld by the Dispute Resolution Panel (DRP). The Tribunal examined whether the adjustment was necessary given that the impact of delayed receivables was already considered in the working capital adjustments made during the benchmarking analysis under the Transactional Net Margin Method (TNMM). The Tribunal concluded that the assessee's margins, after appropriate adjustments, were within the arm's length range, and thus, no further adjustment for notional interest was justified.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 361157 (ITAT-AHMEDABAD)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-05-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Assessment Year: 2021-2022
• Other Referred Cases: Kusum Healthcare Pvt. Ltd. v. Pr. CIT, Phoenix Lamps Ltd. v. DCIT, Effective Teleservices Pvt. Ltd. v. DCIT, Brake Parts India Pvt. Ltd. v. ACIT, Gates India Pvt. Ltd. v. ACIT, Inductis India Pvt. Ltd. v. Pr. CIT, Intas Pharmaceuticals Ltd. v. ACIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PRATHVI RAJ MEENA
• Assessee Lawyers: DHINAL SHAH
• Keywords: Transfer pricing; International transaction; Retrospective amendment; Notional interest; Initiation of penalty proceedings; Working capital adjustments
• Section: 143(3); 92B; 10B

Judgement Text

"आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण,अहमदाबाद \bयायपीठ अहमदाबाद \bयायपीठ अहमदाबाद \bयायपीठ अहमदाबाद \bयायपीठ ‘D’ अहमदाबाद। अहमदाबाद। अहमदाबाद। अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, AHMEDABAD ] ] BEFORE S/SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER AND MAKARAND V.MAHADEOKAR, ACCOUNTANT MEMBER ITA No.2201/Ahd/2024 Asstt.Year : 2021-22 Milacron India Pvt.Ltd. Plot No.93/2 & 91/4 Phase-1,GIDC Vatva, Ahmedabad. PAN : AABCC 0881 D Vs The DCIT, Cir.2(1)(1) Ahmedabad. (Applicant) (Responent) Assessee by : Shri Dhinal Shah, AR Revenue by : Shri Prathvi Raj Meena, CIT-DR सुनवाई क तारीख/Date of Hearing : 01/05/2025 घोषणा क तारीख /Date of Pronouncement: 21/05/2025 आदेश आदेश आदेश आदेश/O R D E R PER MAKARAND V.MAHADEOKAR, AM: This appeal filed by the assessee is directed against the assessment order dated 22.10.2024 passed under section 143(3) read with sections 144C(13) and 144B of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for the assessment year 2021–22, pursuant to directions of the Dispute Resolution Panel-2 (“the DRP”), Mumbai, issued under section 144C(5) of the Act vide order dated 02.09.2024. ITA No.2201/Ahd/2024 2 Facts of the case: 2. The assessee is a private limited company engaged in the manufacturing of plastic processing machinery including injection moulding, extrusion equipment, hot runner systems, and temperature controllers. The assessee filed its return of income for the A.Y. 2021–22 on 15.03.2022, declaring a total income of Rs.1,68,90,80,010/-. The return was selected for scrutiny under CASS for international transactions involving intangible property, and the case was also flagged under the Transfer Pricing (TP) risk parameter. 3. During assessment proceedings, the Assessing Officer (AO) made a reference under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO) for determination of the Arm’s Length Price (ALP) of the international transactions reported in Form 3CEB. The TPO, vide order dated 18.10.2023 passed under section 92CA(3), proposed an upward adjustment of Rs.23,22,513/- to the total income of the assessee in respect of notional interest on outstanding receivables from Associated Enterprises (AEs) amounting to Rs.72,70,00,000/- as on 31.03.2021, treating the same as an independent international transaction. 4. The AO, following the TPO’s order and in conformity with the draft order issued under section 144C(1) dated 26.12.2023, added Rs.23,22,513/- to the returned income of the assessee and determined the assessed income at Rs.1,69,14,02,520/-. The assessee filed objections against the proposed variation before the Hon’ble DRP on 19.01.2024. ITA No.2201/Ahd/2024 3 5. The DRP, after considering the objections of the assessee, upheld the action of the TPO. The DRP, inter alia, held that the outstanding receivables constituted an independent international transaction in view of the Explanation to section 92B of the Act, and rejected the assessee’s contention that the effect of delayed realization had already been factored through working capital adjustment. 6. In response to the notices issued during the faceless assessment proceedings under sections 143(2) and 142(1), the assessee had duly filed its submissions, including audited financials and computation of income. In support of its objection before the DRP and during the course of appellate proceedings before us, the assessee placed reliance on the working capital adjustment computation submitted as part of its paper book (especially at pages 417– 423) demonstrating that the impact of outstanding receivables had already been factored into the arm’s length determination through the adjusted margins of comparable. 7. Aggrieved by the final order passed by the AO, the assessee is in appeal before us, raising multiple grounds challenging the upward adjustment of Rs.23,22,513/- and the consequential initiation of penalty under section 270A of the Act. Following are the grounds of appeal: 1. Ground No 1 - Upward adjustment of INR 23,22,513 in respect of notional interest on outstanding receivable. 1.1. On the facts and in the circumstances of the case and in law, the learned AO / Hon' ble DRP has erred in facts and circumstances of the case and in law, while proposing an Upward adjustment of INR 23,22,513 to the total income of the Appellant in respect of notional interest on outstanding receivables from Associated Enterprises ('AEs\"). 1.2. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in not appreciating the fact that outstanding receivable is not an international ITA No.2201/Ahd/2024 4 transaction, per se, under section 92B of the Act but an integral part of the primary transaction of sale of goods to AEs and cannot be seen in isolation. 1.3. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in re-characterizing outstanding receivable as loan / financing transaction. 1.4. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in proposing to tax hypothetical income and not real income. 1.5. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in computing notional interest on outstanding receivables from AEs ignoring the fact that the Appellant has not charged any interest on trade receivables both from AEs as well as from Non-AEs. 1.6. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in computing notional interest on the outstanding receivables from AEs ignoring the fact that Appellant has not paid any interest on trade payables towards the AEs. 1.7. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in disregarding the fact that working capital adjustment takes into account the impact of outstanding receivables on the profitability and therefore, no further imputation of interest is warranted. 1.8. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in disregarding the aggregation of closely linked transactions. 1.9. Without prejudice to above, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in providing erroneous benchmarking analysis to determine the arm's length rate for charging interest on outstanding trade receivable which is full of anomalies. 1.10. Without prejudice to above, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in not netting-off outstanding trade payables while imputing notional interest on the outstanding trade receivable. 2. Ground No 3 - Initiation of penalty proceedings under section 270A of the Act 2.1. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in initiating the penalty proceedings under section 270A of the Act. The Appellant craves leave to add, alter, amend or withdraw any of the above grounds at or before the hearing of the appeal. All the grounds of appeal stated above are without prejudice to each other. ITA No.2201/Ahd/2024 5 8. During the course of hearing before us, the learned Authorised Representative (AR) for the assessee reiterated the facts and challenged the addition of Rs. 23,22,513/- made by the Assessing Officer on account of notional interest on outstanding receivables from Associated Enterprises (AEs), which was proposed by the TPO and confirmed by the DRP. It was submitted that the impugned adjustment is based on an erroneous appreciation of both facts and law. 9. At the outset, the AR submitted that the assessee does not dispute the characterization of outstanding trade receivables from AEs as an international transaction within the meaning of section 92B of the Act. However, the principal contention raised was that the impact of deferment in realization of receivables from AEs had already been factored into the benchmarking analysis carried out by the assessee through appropriate working capital adjustments made to the margins of the comparable companies. The benchmarking exercise was undertaken using the Transactional Net Margin Method (TNMM) with Operating Profit to Operating Cost (OP/OC) as the Profit Level Indicator (PLI), and the assessee’s margin was significantly higher than the adjusted margins of comparable. 10. The AR drew attention to the detailed working capital adjustment computations submitted before the lower authorities and placed on record during the present proceedings at pages 417 to 423 of the paper book. These workings contained year-wise and entity- wise reconciliations for financial years 2018–19 to 2020–21, capturing average receivables, payables, and inventory for the assessee and the comparable. It was submitted that the adjustment process duly ITA No.2201/Ahd/2024 6 quantified the differences in credit terms and effectively neutralized the impact of receivables on margins. 11. In this context, the AR submitted that the finding of the Hon’ble DRP—stating that “working capital scenario has not been duly explained in terms of monthly trade vs. non-trade payables / receivables and capital position of own concern / comparables and hence there is no question of subsuming of interest on receivables in any working capital”—is factually incorrect. It was contended that the working capital adjustments had been meticulously computed and substantiated with contemporaneous data, and no discrepancy or deficiency in methodology had been pointed out by the TPO. 12. The AR further submitted that the assessee had not charged interest on outstanding receivables from either AEs or non-AEs and had similarly not paid any interest on outstanding payables to AEs. Therefore, the TPO’s action of imputing notional interest on receivables, while ignoring the overall working capital position, results in taxation of hypothetical income, contrary to the established principles under the Act. 13. On the DRP’s finding that each international transaction must be benchmarked independently, and that aggregation is not permissible, the AR submitted that while the receivables may constitute a separate international transaction, the appropriate method of evaluating the arm’s length nature is through a holistic adjustment that reflects the commercial substance of the tested party’s operating cycle, which the assessee has already undertaken. The AR further submitted that the benchmarking of international transactions undertaken by the assessee was on an aggregate basis using the TNMM, and that the margins of the assessee were ITA No.2201/Ahd/2024 7 significantly higher than those of comparables even after working capital adjustment. It was emphasized that the working capital adjustment, as computed and placed on record, adequately factored in the time value effect of outstanding receivables. 14. It was, thus, submitted by the AR that the impugned adjustment, being duplicative and based on incorrect factual premises, deserves to be deleted in its entirety. 15. The learned Departmental Representative (DR), strongly relying on the detailed findings recorded in the TPO’s order as placed in the paper book, submitted that the adjustment of Rs.23,22,513/- on account of notional interest on outstanding receivables from AEs is fully justified in law and on facts. It was contended that the TPO, after due analysis of the Transfer Pricing Study Report and the ageing of receivables submitted by the assessee, had concluded that there was substantial delay in the realization of sale proceeds from AEs beyond the stipulated credit period of 150 days. The DR submitted that in such circumstances, the deferment in receipt of funds amounts to provision of credit or financing facility to the AEs, which constitutes an international transaction within the meaning of section 92B(1), read with Explanation (c) to clause (i) of section 92B of the Act, inserted by the Finance Act, 2012 with retrospective effect from 1st April 2002. 17. The DR highlighted that the TPO had applied the CUP method by benchmarking interest rates based on Bloomberg database, taking into account the currency of receivables (USD, GBP and EURO), and determined the arm’s length interest rate to be charged. The DR further submitted that the TPO’s benchmarking analysis was duly ITA No.2201/Ahd/2024 8 upheld by the Dispute Resolution Panel (DRP), which found no infirmity in the ALP determination. 18. The DR also drew our specific attention to the observations recorded by the TPO at page nos. 4 to 9 of the TPO’s order, wherein it was pointed out that the assessee’s claim of subsuming the interest effect within the working capital adjustment was flawed. The TPO categorically observed, and the DR reiterated, that the working capital adjustment undertaken by the assessee was based on the financial data of the tested party for FY 2020–21, whereas adjustments were being made to the comparables for FYs 2018–19 and 2019–20. According to the DR, this violated the cardinal principle of comparability under Rule 10B(4), which requires contemporaneous data to be used for adjustments. The DR submitted that due to this fundamental inconsistency, the working capital adjustment claimed by the assessee was distorted and the resultant computation lacked reliability, which was rightly rejected by the TPO and the DRP. 19. Additionally, the DR emphasized that the assessee failed to demonstrate that the delay in realization had no financial impact or that the AEs did not derive any benefit from the deferment. In the absence of any evidence that the funds remained idle or unused, the presumption of benefit accruing to the AEs could not be dislodged. Hence, the non-charging of commensurate interest on such delay rendered the international transaction to be not at arm’s length. The DR thus submitted that the impugned adjustment is in conformity with the statutory mandate of Chapter X and does not warrant any interference. 20. The learned AR specifically rebutted the TPO’s observation as pointed out by the DR and as relied upon by the DRP, that the ITA No.2201/Ahd/2024 9 assessee had used financial data of the tested party for FY 2020–21 while applying working capital adjustment to the comparables for FYs 2018–19 and 2019–20. The TPO had characterized such application as erroneous, stating that adjustment should have been computed using data of the same year for both the tested party and the comparables. The DRP, without independently examining the working, echoed the finding that such mismatch renders the working capital adjustment flawed and factually incorrect. In response, the AR submitted that this finding stems from a fundamental misunderstanding of the standard benchmarking procedure prescribed under Rule 10B(4) of the Income-tax Rules, 1962, and the OECD Transfer Pricing Guidelines. It was emphasized that, under the TNMM, working capital adjustment is applied to the margins of the comparables to bring them at par with the tested party, based on tested party’s actual working capital levels in the relevant financial year. In this context, it is standard practice to use the tested party’s financials for the current year (FY 2020–21) while adjusting the margins of the comparables across the prescribed three-year data window (FYs 2018–19 to 2020–21), as permitted by Rule 10B(4). Accordingly, it was contended that the assessee's methodology is consistent with transfer pricing principles and judicial precedents, and the rejection of the adjustment on this ground is unfounded and contrary to established practice. 21. The learned AR placed reliance on following decisions to substantiate the plea that once the tested party’s margins are found to be at arm’s length under the TNMM, and adequate working capital adjustment is made, there is no scope for a further separate adjustment on account of notional interest on delayed receivables from AEs: ITA No.2201/Ahd/2024 10 1. Kusum Healthcare Pvt. Ltd. v. Pr. CIT [(2017) 399 ITR 407 (Delhi HC)] 2. Phoenix Lamps Ltd. v. DCIT [ITA Nos. 71 & 72 of 2024, Allahabad HC] 3. Effective Teleservices Pvt. Ltd. v. DCIT [ITA No. 355/Ahd/2020, ITAT Ahmedabad] 4. Brake Parts India Pvt. Ltd. v. ACIT [ITA No. 2221/Del/2022, ITAT Delhi] 5. Gates India Pvt. Ltd. v. ACIT [ITA No. 2379/Del/2022, ITAT Delhi] 6. Inductis India Pvt. Ltd. v. Pr. CIT [ITA 175/2019, Delhi HC] 7. Intas Pharmaceuticals Ltd. v. ACIT [ITA Nos. 400/Ahd/2018 & ors., ITAT Ahmedabad] 22. We have carefully perused the final assessment order, the order passed by the TPO under section 92CA(3), and the directions issued by the DRP under section 144C(5) of the Act. We have also duly considered the elaborate submissions advanced by the learned AR for the assessee and the arguments of the learned DR, including reliance placed on the transfer pricing order as annexed to the final assessment. 23. The principal issue before us is the validity of the transfer pricing adjustment of Rs.23,22,513/- made by the TPO and sustained by the DRP on account of notional interest imputed on outstanding trade receivables from Associated Enterprises (AEs). The assessee contends that the adjustment is unwarranted as the working capital impact has already been factored into the benchmarking analysis under the (TNMM). The Revenue, on the other hand, argues that the delay in realization of receivables constitutes a separate international transaction requiring standalone benchmarking. 24. Upon thorough appraisal of the documentary evidence placed on record, including the detailed working capital adjustment computation furnished at pages 417 to 423 of the paper book, and the judicial precedents cited in support, we proceed to evaluate the sustainability of the transfer pricing adjustment made by the TPO in respect of notional interest on outstanding receivables from AEs, in ITA No.2201/Ahd/2024 11 light of the applicable legal principles, OECD Transfer Pricing Guidelines, and Rule 10B of the Income-tax Rules, 1962. Consistency with Rule 10B and OECD Guidelines 25. As per Rule 10B(1)(e)(iii) of the Income-tax Rules, 1962, under TNMM, an appropriate adjustment is to be made to account for material differences between the tested party and comparables that could affect net margins, including differences in working capital. The OECD Transfer Pricing Guidelines also acknowledge that variations in accounts receivable, payable, and inventory levels affect business profits and should be neutralized through working capital adjustments (WCA). 26. In the present case, the assessee has undertaken a detailed WCA by computing average working capital levels. The summary of WAC of comparable companies, as presented by the assessee is tabulated below: Sr. No. Name of Comparable FY 2018- 19 FY 2019-20 FY 2020-21 Weighted Average 1 Polymechplast Machines Ltd. 7.08% 6.71% 8.18% 7.40% 2 Rajoo Engineers Ltd. 9.56% -2.76% 12.22% 7.33% 3 Windsor Machines Ltd. 6.88% -1.78% 9.93% 5.23% 4 Hildon Packaging Machines Pvt. Ltd. 7.98% 1.76% 14.18% 7.37% 5 Shibaura Machine India Pvt. Ltd. 5.38% 2.46% 1.79% 3.56% 6 Ahimsa Industries Ltd. 0.05% -2.00% -6.30% -2.35% Median 6.28% 35th Percentile 5.23% 65th Percentile 7.33% 27. The working capital adjusted operating profit over operating cost (OP/OC) of the assessee, for the year under consideration, has been computed at 16.46%, as detailed below: ITA No.2201/Ahd/2024 12 Operating Revenue (OR) Rs. 10,595,354,134/- Operating Cost (OC) Rs. 09,098,038,711/- Operating profit (OP) Rs. 01,497,315,423/- Net Cost Plus Margin 16.46% 28. The adjusted margin is significantly higher than the interquartile range of working capital adjusted margins of the comparables (ranging between 5.23% and 7.33%), clearly establishing that the assessee’s international transactions are at arm’s length. 29. It is a settled position in transfer pricing jurisprudence that a working capital adjustment takes into account the impact of outstanding receivables on the profitability of the company, either by enabling a higher sale price or resulting in lower cost of goods sold, both of which improve operational performance. It is for this reason that the TNMM analysis does not isolate receivables for a separate benchmarking but rather considers their effect as part of overall capital employed. Thus, the purpose of working capital adjustment is to align the tested party's and comparables’ margins on a net economic basis, after factoring in the burden or benefit arising from differential working capital investment. More specifically, a working capital adjustment captures the economic effect of outstanding receivables, payables, and inventory on the profitability of the business. The comparability analysis should focus on bringing parity in net working capital investment between the assessee and the comparables, not on receivables in isolation. The extent to which the profitability of a comparable company changes after adjustment is a function of its net working capital position—for instance, a comparable with higher net receivables than the tested party will show relatively lower profitability post-adjustment, and vice versa. Accordingly, by comparing the tested party's margin against the working capital adjusted margins of the comparables, the TNMM ITA No.2201/Ahd/2024 13 inherently accounts for differences in credit terms, payment cycles, and inventory holding across the entities. This methodologically obviates the need for a separate adjustment in respect of receivables alone. 30. In light of the above, the benchmarking performed by the assessee is not only in conformity with Rule 10B and the OECD Guidelines but also judicially recognized principles. The allegation that the outstanding receivables represent a separate financing transaction does not hold when the entire impact of working capital is already embedded in the margin comparison. Once comparability is restored through WCA, no further adjustment is legally or economically tenable. Use of Average Balances 31. It is a settled accounting and economic principle that average balances (opening + closing/2) of receivables, payables, and inventories provide a more reliable and representative measure of working capital deployed during the year, compared to year-end balances which may be skewed by seasonal or exceptional fluctuations. The assessee has followed this method, as evident from the tabulated workings at pages 417 to 423 of the paper book. No factual error has been pointed out by the TPO in the method of computation. On the contrary, the TPO’s objection was confined to the alleged use of FY 2020–21 data for the tested party and earlier year data for comparables. However, Rule 10B(4) permits the use of multiple-year data for comparables, especially where such data reveals broader economic trends. The assessee's approach of using multi-year data for comparables and current year data for the tested ITA No.2201/Ahd/2024 14 party is therefore consistent with both statutory rules and accepted transfer pricing practice. Interest Rate Appropriateness 32. The TPO has applied notional interest rate (as detailed in Annexure A to the order) to compute the interest on delayed receivables. However, it is an undisputed fact on record that the assessee has not charged any interest to AEs or non-AEs, nor paid any interest on outstanding payables. This indicates a uniform commercial policy rather than any financial accommodation extended to AEs. Moreover, the charge of notional interest can only arise where there exists a real income, which is absent in the present case. Courts have consistently held that hypothetical income is not taxable under the scheme of the Act. In the absence of actual financing, merely imputing interest on commercial receivables, which are already considered in pricing analysis under TNMM, is not permissible. Comparable-Level Adjustment 33. A critical element of comparability under TNMM is that working capital adjustments should be applied equally to both the tested party and the comparables, to neutralize the effect of differential credit and inventory cycles. In the present case, the assessee has computed working capital adjusted margins for each of the six comparables, based on their respective annual accounts. The resulting adjusted margins were then used to determine the interquartile range. This approach is consistent, uniform, and in accordance with TP jurisprudence. The Revenue has neither alleged nor demonstrated any selective application of WCA. Thus, the benchmarking analysis satisfies the comparability requirement under Rule 10B(1)(e)(iii). ITA No.2201/Ahd/2024 15 Documentation 34. The paper book filed by the assessee contains a comprehensive working capital adjustment computation, spread across pages 417– 423. It includes Calculation of average working capital deployed, Application of interest rates in line with currency denominations (PLR is used), Computation of working capital impact on OP/OC of comparables and Tabulation of adjusted and unadjusted margins. Such extensive and transparent documentation satisfies the standards laid down. The DRP’s observation that no reliable computation was provided is therefore contrary to the material on record. Impact on PLI (Profit Level Indicator) 35. The Profit Level Indicator (PLI), typically expressed as OP/OC, forms the core of comparability analysis under the TNMM. In the present case, the assessee has reported an OP/OC margin of 16.46% after making working capital adjustment, as demonstrated in the computation placed on record. This adjusted margin is not only above the median but also significantly exceeds the interquartile range of the working capital adjusted margins of the comparables, which lies between 5.23% and 7.33%. Once the tested party's margin, post appropriate economic adjustments, lies comfortably within or above the arm’s length range established by the comparables, the international transaction is to be regarded as being at arm’s length, and no further transfer pricing adjustment is warranted. Non-AE Comparability 36. It is relevant to note that the assessee did not charge interest on delayed payments from either AEs or non-AEs. There is no allegation ITA No.2201/Ahd/2024 16 of selective credit policy or preferential treatment to AEs. Therefore, the foundational assumption that the AEs enjoyed a financial benefit due to deferment does not hold ground. Where there is no disparity in the treatment of AEs and non-AEs and where the entire transaction has already been benchmarked under TNMM, courts have consistently held that no separate adjustment for notional interest is permissible. 37. Having applied the above seven evaluative criteria to the facts of the case, we find that the assessee’s margin, after incorporating the working capital adjustment, is at arm’s length. The benchmarking analysis carried out by the assessee is in accordance with the legal framework laid down under Rule 10B of the Income-tax Rules, 1962 and is also consistent with the OECD Transfer Pricing Guidelines. The computation of the working capital adjustment is supported by detailed documentation and an appropriate methodology, as reflected in the records. The Revenue, on the other hand, has failed to discharge the burden of proving that any financing transaction existed between the assessee and its AEs, or that any quantifiable benefit accrued to the AEs on account of delayed realization of receivables. 38. The assessee placed reliance on a series of judicial precedents that support the proposition that no separate adjustment on account of interest for delayed receivables is warranted when the TNMM has been adopted as the most appropriate method, the assessee’s profit margins fall within the arm’s length range, and a working capital adjustment has been granted to account for differences in credit terms. In Kusum Healthcare Pvt. Ltd. (supra), the Hon’ble Delhi High Court categorically held that once a working capital adjustment has been granted to account for delayed receivables, there is no ITA No.2201/Ahd/2024 17 justification for making an additional adjustment for interest, as the delay stands economically neutralized through the adjustment. In Effective Teleservices Pvt. Ltd. (supra), the Co-ordinate Bench echoed a similar view, holding that once the assessee’s transactions have been benchmarked under TNMM and appropriate adjustments for working capital differences have been made, the addition of notional interest on receivables amounts to duplication and cannot be sustained. The Co-ordinate Bench in Intas Pharmaceuticals Ltd. (supra) also held that once a working capital adjustment is provided, the impact of extended credit periods is inherently factored in, and any separate benchmarking of receivables would result in distortion of comparability analysis. These judicial pronouncements, considered collectively, reinforce the legal and economic principle that where working capital adjustment has been duly made, and the assessee’s margin post such adjustment is within or above the arm’s length range, no separate transfer pricing adjustment on account of receivables is warranted, unless there is conclusive evidence of a standalone financing arrangement between the assessee and its AEs. Accordingly, we proceed to adjudicate the grounds of appeal as under - 39. In respect of Grounds 1.1 to 1.4, the core contention of the assessee is that the outstanding receivables from AEs do not represent an independent international transaction necessitating separate benchmarking, particularly when the underlying sale of goods has already been accepted as being at arm’s length under the TNMM. Although the assessee conceded the legal position following the insertion of Explanation (c) to section 92B by the Finance Act, 2012, it was urged that a separate adjustment for receivables results ITA No.2201/Ahd/2024 18 in duplication, since the economic effect of the extended credit period is already subsumed in the working capital adjustment. In view of the consistent judicial position and in light of the facts of the case, we find merit in the assessee’s plea. These grounds are therefore allowed. 40. Grounds 1.5 to 1.7 concern the assessee’s submission that no interest was charged on receivables from either AEs or non-AEs and that the working capital adjustment already neutralizes the impact of any delay in realization. This contention is substantiated by factual workings placed on record and no contrary evidence has been brought by the Revenue to show that the assessee conferred any undue benefit on AEs by way of differential credit terms. In the absence of any real income element or discriminatory policy, these grounds also deserve to be allowed. 41. Grounds 1.8 to 1.10 raise the assessee’s challenge on the basis that benchmarking interest on receivables in isolation violates the principle of aggregation under TNMM and fails to consider netting off outstanding payables. We agree that TNMM, being a profit-based method, evaluates the net profitability of a transaction set, and segregating one element i.e., receivables, distorts the overall comparability. Further, the assessee has rightly pointed out that no netting benefit was considered by the TPO, which would have materially altered the quantum, if at all. These grounds are accordingly allowed. 42. Ground 2.1 pertains to the initiation of penalty proceedings under section 270A. Since the addition giving rise to the alleged under-reporting has now been deleted in full, the very foundation for initiating penalty ceases to survive. Accordingly, this ground is also allowed. ITA No.2201/Ahd/2024 19 43. In view of the foregoing, we hold that the adjustment of Rs.23,22,513/- made on account of notional interest on outstanding receivables is unsustainable both in law and on facts, and the same is accordingly directed to be deleted. 44. In the combined result the appeal of the assessee is allowed. Order pronounced in the Court on 21st May, 2025 at Ahmedabad. Sd/- Sd/- (T.R. SENTHIL KUMAR) JUDICIAL MEMBER (MAKARAND V. MAHADEOKAR) ACCOUNTANT MEMBER Ahmedabad, dated 21/05/2025 "