No separate TP adjustment should be made for overdue receivables from an associated enterprise

By | September 24, 2025
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No separate TP adjustment should be made for overdue receivables from an associated enterprise if a working capital adjustment has already been granted under the TNMM.

Issue

Can a separate transfer pricing (TP) adjustment be made by charging notional interest on overdue receivables if the financial impact of these delayed payments is already factored into a working capital adjustment under the Transactional Net Margin Method (TNMM)?

Facts

  • The assessee had delayed receivables from its Associated Enterprise (AE).
  • The Transfer Pricing Officer (TPO) treated this delay as an unsecured loan and made a TP adjustment by charging notional interest at the SBI Prime Lending Rate.
  • The Dispute Resolution Panel (DRP) modified this by arbitrarily changing the rate to LIBOR + 350 basis points.
  • The assessee argued that not only was the interest rate inappropriate, but more fundamentally, a working capital adjustment under TNMM inherently accounts for the cost of carrying receivables. Therefore, a separate interest charge would be a form of double counting.

Decision

The Tribunal remanded the matter back to the TPO for a fresh decision.

  • It found the interest rate applied by the DRP to be ad hoc and without any valid basis.
  • More importantly, the Tribunal affirmed the principle that if a working capital adjustment was already granted, then a separate addition on account of overdue receivables is not required.
  • The TPO was directed to first verify if a working capital adjustment had been made. If so, no separate adjustment for interest on receivables should be carried out.

Key Takeways

  • Working Capital Adjustment is Comprehensive: The impact of outstanding receivables is a key component of a company’s working capital. A proper working capital adjustment under TNMM already neutralizes the financial effect of delayed payments, making a separate interest charge redundant.
  • Avoid Double Taxation: A core principle of transfer pricing is to avoid taxing the same economic item twice. Charging notional interest on receivables while also making a working capital adjustment amounts to a double disallowance.
  • Benchmarking Must Be Rational: The choice of an interest rate benchmark must be appropriate for the currency, tenure, and risk profile of the transaction. Using a phased-out benchmark like LIBOR or a high-risk domestic rate for a foreign transaction is not acceptable.

A duplicate disallowance for the same item made in both the initial intimation and the final assessment order must be deleted by the Assessing Officer.

Issue

What is the correct course of action when a disallowance is made twice for the exact same item—once in the initial processing and again in the final assessment?

Facts

  • A disallowance for the delayed deposit of employees’ contribution to Provident Fund under Section 36(1)(va) was made in the intimation issued under Section 143(1).
  • The same amount was disallowed again in the final assessment order, resulting in a duplicate addition of the same income.

Decision

The Tribunal ruled in favour of the assessee. It was a straightforward decision directing the Assessing Officer to delete the duplicate addition, ensuring that the disallowance was counted only once in the final computation of income.

Key Takeways

  • Rectification of Obvious Errors: The tax system allows for the correction of apparent mistakes on record. A duplicate addition is a clear and obvious error that must be rectified.
  • Taxpayer Vigilance is Key: It’s important for taxpayers to carefully review and compare all communications from the tax department, from the initial intimation to the final order, to identify and challenge such errors promptly.

An Assessing Officer cannot make new adjustments to the book profit in the final assessment order if those adjustments were not first proposed in the draft assessment order.

Issue

Is it procedurally permissible for an Assessing Officer to make a fresh adjustment to a company’s book profit under Section 115JB in the final assessment order if that adjustment was never mentioned in the preceding draft assessment order?

Facts

  • In the draft assessment order, the Assessing Officer (AO) proposed no adjustments to the book profit for the calculation of Minimum Alternate Tax (MAT) under Section 115JB.
  • However, when the final assessment order was passed, the AO included a new adjustment to the book profit that had not been previously proposed.

Decision

The Tribunal ruled in favour of the assessee.

  • It held that the AO cannot make any new adjustment in the final order that was not first included in the draft assessment order. The purpose of the draft order is to inform the assessee of all proposed variations to the returned income.
  • The AO was directed to compute the final tax liability using the book profit as originally claimed by the assessee, without the new adjustment.

Key Takeways

  • Sanctity of the Draft Order: The draft assessment order defines the scope of the issues under consideration. The final order cannot travel beyond the adjustments proposed in the draft order.
  • Principles of Natural Justice: Making a new adjustment in the final order is a violation of natural justice, as it denies the assessee the opportunity to present objections against it before the DRP or the AO. The assessee must be given a fair chance to contest every proposed addition.

A deduction under Section 80G is available for donations made as part of Corporate Social Responsibility (CSR), provided the contribution is not made to two specific government funds.

Issue

Is a company entitled to a deduction under Section 80G for a donation that it has also classified as a Corporate Social Responsibility (CSR) expenditure?

Facts

  • The assessee made contributions to four different charitable trusts and claimed a deduction under Section 80G.
  • The Assessing Officer (AO) disallowed the claim, primarily on the ground that the assessee had shown the payment as CSR expenditure in its return of income.

Decision

The Tribunal ruled in favour of the assessee.

  • It clarified that the restriction on claiming an 80G deduction for CSR expenditure applies only to donations made to the Swachh Bharat Kosh and the Clean Ganga Fund.
  • Since the assessee’s donations were made to other eligible charitable trusts, it was fully entitled to the deduction under Section 80G, regardless of the expenditure also being categorized as CSR.

Key Takeways

  • CSR and 80G Are Not Mutually Exclusive: A donation can be both a CSR expenditure and an eligible deduction under Section 80G. The two are not mutually exclusive.
  • Know the Specific Exceptions: The legal bar on claiming an 80G deduction for CSR spending is very narrow and applies only to contributions made to the Swachh Bharat Kosh and the Clean Ganga Fund. Donations to any other registered and eligible trust remain deductible.
  • Substance Over Classification: The eligibility for a deduction is determined by the nature of the donation and the status of the recipient, not merely by how the donating company classifies the expense in its internal records or returns.
IN THE ITAT BANGALORE BENCH ‘C’
Lowe’s Services India (P.) Ltd.
v.
Deputy Commissioner of Income-tax
Prashant Maharishi, Vice President
and Keshav Dubey, Judicial Member
IT Appeal No. 1734 (Bang.) of 2024
[Assessment year 2020-21]
SEPTEMBER  8, 2025
Chavali Narayan, AR for the Appellant. Dr. Divya K.J., CIT(DR)(ITAT) for the Respondent.
ORDER
Prashant Maharishi, Vice President.- This appeal is filed by Lowe’s Services India Pvt. Ltd. (the assessee/appellant) for the assessment year 2020-21 against the assessment order passed u/s. 143(3) read with section 144C(13) read with section 144C of the Act in pursuance of the directions issued by the Dispute Resolution Panel — 1 (hereinafter referred to as the ” Ld. DRP), Bengaluru dated 07 June 2024 under section 144C(5), of the Income-tax Act, 1961 [the Act] dated 19.7.2024 by the Assessment Unit of the Income Tax Department [ld. AO], wherein the returned income of Rs.78,61,52,120/- filed on 12.2.2021 was assessed at Rs.81,69,44,038/-.
2. The assessee is aggrieved with the same and has preferred the appeal before us on the following grounds of appeal:-
That on the facts and circumstances of the case and in law:
General grounds
1. The impugned orders passed by the Ld. AO/ Transfer Pricing Officer (“Ld. TPO”) and the directions of the Hon’ble DRP are based on incorrect appreciation of facts of the case and incorrect interpretation of law therefore erroneous, bad in law.
2. The Ld. AO/ DRP erred in assessing the total income of the Appellant at INR 81,69,44,040/- as against the returned income of INR 78,61,52,120/-.
Grounds relating to Transfer pricing matters:
3. Adjustment on account of interest on outstanding receivables amounting to INR 1,98,60,669/-.
3.1 The Ld. AO/ TPO/ DRP grossly erred in determining a transfer pricing adjustment on account of the interest on outstanding receivables amounting to INR 1,98,60,669/-.
Without prejudice to our ground of objection 3.1 above, the Ld. AO/TPO/DRP erred in law and in facts:
(a)By not appreciating that the outstanding trade receivables from AEs are arising from provision of software development services (“SWD”) & information technology enabled services — business support services (“ITeS-BSS”) and should be considered as closely linked to the said service transaction and not be tested separately from arm’s length perspective.
(b)By re-characterizing the outstanding receivables as on 31 March 2020 as a loan transaction.
(c)By computing the interest on receivables from AEs till the date of collection instead of restricting the interest till 31 March 2020.
(d)By ignoring that weighted average receivable period of the Appellant is 38 days, which is less than the weighted average receivable period of the final list of comparable of the Ld. TPO post DRP directions i.e., 60 days.
(e)Without prejudice to the above, if outstanding receivables are considered as unsecured loans, benefit must be given of Circular dated 01.04.2020 through which Reserve Bank of India provides for a collection period of 9 months for export receivables which had been extended up to 15 months due to the COVID-19 pandemic.
(f)Without prejudice to the above, Ld. AO/TPO/DRP have erred in law and in facts by imputing a separate addition for interest on delayed collection of receivables by ignoring that the Appellant had already recovered alleged shortfall on account of delayed receivables by way of excess service income received from Its AEs.
Grounds relating to corporate tax matter
4. The Ld. AO has erred in law and in the facts of the case by considering the disallowance of INR 1,32,825/- under Section 36(1)(va) of the Act twice in the assessment order, when the same was already included in the enhanced income as per the intimation order under Section 143(1) processed by the Centralized Processing Centre.
5. The Ld. AO has grossly erred in law and in the facts by considering the incorrect amount of book profit of INR 1,58,55,16,806/- as against book profit claimed in the return of income of INR 1,18,10,19,785/- resulting in incorrect tax liability in the hands of the Appellant.
6. The Ld. AO has erred In non-grant of MAT credit of INR 2,25,79,720/- while arriving at the tax liability in the hands of the Appellant.
7. The Ld. AO has erred in non-grant of credit for the Tax Deducted at Source of INR 2,35,452/- while arriving at the tax liability in the hands of the Appellant.
8. The Ld. AO has erred in law and in the facts of the case in disallowing the deduction of INR 76,48,794/-claimed by the Appellant under Section 80G of the Act.
9. The Ld. AO has erred in levying interest of INR 3,38,11,128/- under Section 234B. The Levy of interest under section 2348 of the Act is consequential in nature.
10. The Ld. AO has erred in levying interest of INR 8,162/-under Section 234C. The Ld. AO ought to have appreciated that interest liability under Section 234C of the Act is to be computed based on the returned income and cannot be increased based on the assessed income as per Section 143(3) r.w.s 144C(13) r.w.s 1448 of the Act.
Grounds relating to other matter :
11. The Ld. AO has erred in law and in fact, in initiating penalty proceedings under Section 270A of the Act
3. The brief facts of the case show that assessee is a private limited company incorporated on 28.6.2013 as a joint venture between LHIC Netherlands and ANSR NC JV Holdings LLC with Lowe’s US, being ultimate parent entity of Lowe’s group. It provides software development services and ITeS business support services to Lowe’s US to help Lowe’s Group further in its transformation to be an Omni-channel retailer with advanced web search, mobile and social systems. The return was picked up for scrutiny and referred to ld. TPO, DCIT, TP 2(1)(1), Bangalore to determine the ALP of the international transaction.
4. Assessee has rendered provision of IT services amounting to Rs.680,90,08,592 and provision of ITeS of Rs.148,98,98,953. The assessee has earned a margin of 16% in IT services and 18% in ITeS. The ld. TPO computed the margin at 17.09% for both the segments. The assessee adopted TNMM as the most appropriate method selecting the PLI of Operating Profit/Operating Cost (OP/OC). It used AceTP and Capitaline Databases for benchmarking its international transaction. The assessee selected 14 comparables for Software Development Services segment and 25 comparables for ITeS segment. As the margin was on par with the comparables, it is stated that international transaction of both these services is at arm’s length.
5. The ld. TPO held that filters used by the assessee out of which some of them are inappropriate and also assessee failed to use the appropriate filters, hence TP Study Report was rejected. The ld. AO carried out fresh search by using computer software and software services and consultancy for Software Development Services segment and ultimately reached at 18 comparables whose 35th percentile margin was 19.91, 65th percentile was 24.93 and median margin was 23.56. Based on this, the ALP was determined at Rs.718,51,88,173 against the price received of Rs.680,90,08,592 resulting into shortfall of Rs.37,61,79,581. With respect to the ITeS segment the TPO selected 17 comparables whose 35th percentile margin was 18.49, 65th percentile was 32.78 and median margin was 23.71. Accordingly on the international transaction of Rs.148,98,98,953, the ALP was computed at Rs.157,41,20,541. Thus shortfall of Rs.8,42,21,588 was arrived at.
6. The ld. TPO also found that there is a delay in outstanding receivable, therefore allowing 30 days credit period, he calculated interest @ 13.62% and computed interest of Rs.4,65,02,032.
7. Accordingly order u/s. 92CA(3) was passed making a total adjustment of Rs.50,69,03,201.
8. Based on this, the ld. AO passed a draft assessment order u/s. 144C(1) on 27.9.2023 wherein the addition of Rs.50,69,03,201 was proposed on account of TP adjustment. A further disallowance u/s. 36(1)(va) was made of Rs.132,825 on account of late payment to Provident Fund [PF]. A further addition of Rs.76,48,794 was made by disallowing deduction u/s. 80G of the Act out of CSR expenditure. Thus, total income was assessed at Rs.130,39,86,570. While computing the total income, the AO took the income processed u/s. 143(1) of the Act of Rs.78,93,01,750 against the returned income of Rs.78,61,52,120.
9. The assessee aggrieved with the same preferred objections before the ld. Dispute Resolution Panel [ld. DRP], who passed the direction on 7.6.2024. Based on this, the ld. TPO gave effect to the said direction vide order dated 8.7.2024 wherein the adjustment of Software Development Services segment and ITeS segment was deleted. Further the interest on delayed receivable adjustment of Rs.4,65,02,032 was determined at Rs.1,98,60,669. This is due to the direction of the ld. DRP to charge interest rate on the basis of LIBOR rate at 5.817% p.a.
10. Based on this, the final assessment order was passed on 19.7.2024 wherein the only Transfer pricing issue of interest on overdue receivable remained with upward TP adjustment of Rs.1,98,60,669, deduction claimed u/s. 80G of Rs.76,48,794 and disallowance u/s. 36(1) (va) of Rs.132,825.
11. Ground Nos.1 & 2 are general in nature. No arguments were advanced and therefore the same are dismissed.
12. Ground No.3 is adjustment on account of interest on outstanding receivables amounting to Rs.1,98,60,669.
13. The ld. AR argued that
1. the TPO has computed the interest till date of collection which should have been restricted upto 31.3.2020. He referred to Annexure-A of the OGE to the DRP directions and submitted that at sl. Nos. 1, 6, 7 to 9, 13, 17, 19, 21, 25 & 27, the ld. TPO has computed interest which is not pertaining to this year.
2. in fact the weighted average period of receivable of the assessee is 38 days only which is less than the weighted average period of 60 days in most of the comparables post-DRP direction and therefore no addition could have been made.
3. that as per ground of objection No.14 the assessee has considered for difference in working capital position of the assessee vis-a-vis the comparable companies. This argument has been rejected as per para 15 of the direction of the DRP. He submitted that if working capital adjustment is granted, there cannot be any separate adjustment on account of overdue interest receivable when TNMM is applied as the most appropriate method.
4. that the ld. DRP has directed that LIBOR+350 Basis Points should be considered for computing notional interest on outstanding receivables. It was submitted that as the amount is due from its AE, 350 Basis Points further added to the LIBOR or the LIBOR itself is not the correct benchmarking. It was submitted that the benchmarking rate adopted by the ld. DRP which was used by the TPO in OGE order is excessive and incorrect.
14. The ld. DR vehemently supported the orders of the ld. DRP. It was submitted that as assessee has not benchmarked this transaction, now assessee cannot question the benchmarking of the same. With respect to LIBOR+350 Basis Points computed by the DRP, the same is appropriate and should be upheld.
15. We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. The brief facts show that interest on delayed receivables computed by the TPO was Rs.4,65,02,032/- by taking the interest rate @ 13.62% p.a. being SBI PLR. The ld. TPO for adopting the above rate has categorically held that if in case the invoices are used in domestic currency i.e., Rupees, the interest rate is supposed to be charged on the basis of average SBI PLR of 13.62% p.a. and if the invoices have been raised in foreign currency, the interest rate is supposed to be charged on the basis of mark-up on prevailing LIBOR rate during the year. Based on this, the ld. TPO pointed out that the invoices are prepared in Rupees adopting 13.62% interest rate.
16. The assessee challenged the same before the DRP wherein at para 17.10 the ld. DRP directed the TPO to adopt LIBOR based rates. The DRP at para 17.10.6 has held that RBI Master Circular on ECB dated 23.6.2019 specifies a cost ceiling of 6 months LIBOR+350 Basis Points where the average maturity period is between 3 & 5 years. The DRP held that as there is no credit rating furnished by the assessee, it directed to take ceiling rate of 6 months LIBOR+350 Basis Points as the most suitable CUP and then adjust it for other risks and costs. Based on this, the TPO passed OGE on 8.7.2024. The TPO computed US $ LIBOR 6 months average at 2.317% and added there a mark-up of 350 Basis Points resulting in the interest rate of 5.817%. We find that the DRP has directed the TPO to charge adhoc rates without any basis. The ld. DRP also did not give any reason that why interest rate as per RBI Master Circular should be adopted AND How It is ALP. LIBOR rates are for the maturity period between 1 week to 12 months. It directed the TPO to apply in case of assessee where in outstanding overdue is for a period of some days. Even RBI has also given guidance to cease the use of LIBOR on 8/7/2021. Therefore, the method adopted by the DRP is adhoc and without any basis and hence deserves to be rejected.
17. It is a case of capital financing between two AE; therefore, it should be benchmarked as loan transaction for a noticeably brief period between two related parties where there is a minimum risk as it is transaction between holding company to subsidiary or a joint venture company. As LIBOR is not appropriate base rates, bills are denominated in us currency, SOFR or any other appropriate rates, may also be adopted.
18. In view of the above facts, we restore the whole issue back to the file of the ld. AO with directions to the assessee to benchmark the outstanding receivable based on currency in which invoices are prepared. Appropriate mark-up thereon or reduction from that interest bank rate would depend upon the risk factors involved in the above transaction which is between the holding company/AE and its subsidiary. The ld. AO thereafter may examine in accordance with the provisions of section 92CA for the determination of ALP of the international transaction and then decided the issue afresh. The assessee is also entitled to raise an issue that if in the international transaction of Software Development Services segment and ITeS segment, working capital adjustment is granted to the assessee, no separate addition is required to be made. Therefore, this aspect is also left to be adjudicated by the ld. AO. In view of these facts, ground No.3 of the appeal is restored back to the file of the ld. AO.
19. Coming to ground No.4, it was submitted that disallowance of Rs.132,825 was a double addition because it was first disallowed u/s. 143(1) and subsequently once again while framing the final assessment order. The ld. DR submitted that the same may be verified.
20. In view of the above facts, we direct the ld. AO that if there is a double addition of Rs.132,825 once in the proceedings u/s. 143(1) of the Act and then in the final assessment order, it deserves to be deleted, we direct to delete the disallowance. Ground No.4 is allowed.
21. Ground No.5 is with respect to the incorrect amount of book profit computed by the AO while computing the income tax liability u/s. 115JB of the Act. It was submitted that book profit computation as per s. 115JB is of Rs.118,10,19,785 against which the ld. AO computed the same at Rs.158,55,16,806.
22. After hearing both the parties, we find that in the draft assessment order we do not find any such computation. We also do not find any direction of the ld. DRP on the same. While looking at the final assessment order, we find that in the tax computation sheet, the deemed income computed u/s. 115JB at sl.No.19 is at Rs.158,55,16,806. First of all, if there is adjustment to the book profit of the assessee, it was not made in the draft assessment order. As the assessee says that the correct book profit is Rs.118,10,19,785, the ld. AO could not have made any adjustment to the book profit in the final assessment order without first putting it into the draft assessment order. As there is no adjustment to the book profit in the draft assessment order, the ld. AO is directed to take the book profit of Rs.118,10,19,785 only for computing the tax liability of the assessee. Accordingly ground No.5 is allowed.
23. As per ground No.6 assessee has a grievance that MAT credit of Rs.2,25,79,720 was not granted to the assessee and further as per ground No.7 credit for TDS of Rs.2,35,452 was denied.
24. After hearing both the parties, we direct the ld. AO to verify the above facts and grant MAT credit as well as credit for TDS in accordance with law.
25. As per ground No.8 assessee has challenged the action of the AO in disallowing deduction of Rs.76,48,794 u/s. 80G of the Act.
26. The brief facts show that during the year, assessee has contributed Rs.1,52,97,588 to 4 different charitable trusts. It claimed deduction u/s. 80G on the same @ 50% amounting to Rs.76,48,794. During the course of assessment proceedings assessee furnished deduction receipt and bank statements, but failed to furnish certificate of exemption u/s. 80G. Therefore a show cause notice was issued. In response to that, assessee submitted copies of the certificate of exemption for FY 2018-19 and submitted that approval granted is one time approval which would be valid till it is withdrawn. The ld. AO held that assessee failed to submit complete documentary evidence and in the return of income assessee has shown it as CSR expenditure. Therefore deduction u/s. 80G of Rs.76,48,794 was disallowed.
27. The assessee filed objections before the ld. DRP which gave a direction that the allowance of deduction u/s. 80G on CSR expenditure wholly defeats the legislative intent behind introducing the CSR expenditure which is share of the burden of the Govt. sector by the corporate sector and accordingly the order of the AO was upheld.
28. Against this, assessee is in appeal before us. Assessee submits that assessee has produced the donation receipt, 80G approval certificates and based on this, it claimed deduction u/s. 80G of the Act. He submits that except Swachh Bharat Abhiyan Kosh and Clean Ganga Fund, assessee is entitled to deduction u/s. 80G of CSR expenditure. For this proposition, he relied on the decision of the coordinate Bench in the case of FNF India (P.) Ltd. v. Asstt. CIT [ 251 (Bangalore – Trib.) and Axis Securities Ltd. v. Pr. CIT 982 (Mumbai – Trib.).
29. The ld. DR vehemently supported the orders of ld. lower authorities.
30. We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. The solitary issue in this ground is that assessee is denied deduction u/s. 80G of the Act of CSR expenditure, donations given to other charitable trusts. It is an admitted fact that donation was not given to Swachh Bharat Abhiyan Kosh and Clean Ganga Fund. If donation is given to these two organisations, then only assessee can be denied deduction u/s. 80G. This issue is squarely covered in favour of assessee by the decision of the coordinate Bench in FNF India (P.) Ltd. (supra) and Axis Securities Ltd. (supra). Accordingly we allow ground No.8 of the assessee and direct the ld. AO to grant donation u/s. 80G of the act amounting to Rs.76,48,794.
31. Ground Nos. 9 & 10 are consequential in nature with respect to chargeability of interest and therefore same are dismissed.
32. In the result, the appeal of the assessee is partly allowed.