2017 (10) TMI 1615 - AT - Income Tax

TP Adjustment - Addition on account of interest on receivables because it is not an independent transaction and it should be considered together as per Rule 10A (d) - TPO has allowed interest free period of 30 days as agreed to in terms of the agreement with AE - credit agreed was 180 days but actual credit allowed - HELD THAT - We examine the applicability and ratio of the judgment rendered in the case of CIT vs. Kusum Health care Pvt. Ltd. 2017 (4) TMI 1254 - DELHI HIGH COURT - As per the facts of this case it is seen that in that case also the credit agreed was 180 days but actual credit allowed was more as in the present case and such receivables were treated as a separate international transaction. The tribunal in that case noted that differential impact of working capital of the assessee vis a vis its comparables had already been factored in the pricing/profitability and therefore any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified. The revenue filed appeal before Hon ble Delhi High Court. The Hon ble Delhi High Court followed its own earlier judgment rendered in the case of CIT vs. EKL Appliances Ltd. 2012 (4) TMI 346 - DELHI HIGH COURT . To the extent of agreed credit period the sale price to AE or non AE is inclusive of possible interest on such agreed debt and therefore for such credit allowed to AE it cannot be said that this is an independent international transaction. But when extra credit is allowed beyond the agreed credit period the same is a subsequent independent event and interest for such extra credit period cannot be factored in the price agreed. Only because the agreed price without considering extra credit period is in excess of the ALP it cannot be said and held that for such independent subsequent event of allowing extra credit also the agreed prices takes care and this is not an independent international transaction requiring separate benchmarking. In transfer pricing analysis the purpose is not to compare profit of the tested party with that of the comparables but the purpose is to compare the prices charged by the tested party with the prices charged by the comparables although when TNMM is adopted as MAM the process of such price comparison is by comparing profits of tested party with that of the comparables and therefore if the profit of the tested party is equal or above the profit of comparables even after taking into account the effect of working capital adjustment and the ALP is less that the price charged by the tested party it cannot be said that the extra credit allowed is not an independent international transaction and not required to be separately benchmarked. In our considered opinion the first requirement is this that it has to be first decided that whether it is an independent international transaction or not and if it is found that it is not so then obviously no separate benchmarking is required but if it is found that it is an independent international transaction then separate bench making has to be done and TP adjustment is to be made as per law irrespective of whether any TP adjustment is required to be made in respect of main transaction of sale. We first decide this aspect as to whether this is an independent international transaction or not. In our considered opinion in respect of agreed credit period which is 30 days in the present case there is no independent international transaction because the effect of the credit to that extent is factored in the agreed prices. But for extra credit the effect of the credit to that extent cannot be factored in the agreed prices because it is not even known at that stage as to how extra credit will be allowed and therefore that is an independent international transaction and hence separate bench making has to be done and TP adjustment is to be made as per law.This is worth noting that by allowing extra credit in excess of agreed period of 30 days profit shifting is there because if credit period is more prices go up which is not done in the present case since the prices are determined on the basis of 30 days credit period. Having decided this aspect now we decide the rate of interest for such benchmarking. We find that this aspect is covered by the tribunal order rendered in the case of M/s Goldstar Jewellery Ltd. 2015 (2) TMI 58 - ITAT MUMBAI - This was held in this case that extra credit allowed can be considered as an independent international transaction and the same be compared with internal CUP being average cost of the total funds available to the assessee. Respectfully following this tribunal order we direct the A. O. to find out the cost of the total funds available to the assessee and the same should be adopted as internal CUP for benchmarking of this independent international transaction i.e. allowing extra credit in addition to agreed credit period of 30 days.

Summary

Issues Involved:
1. Validity of the reference to Transfer Pricing Officer (TPO) by the Assessing Officer (AO).
2. Transfer Pricing (TP) adjustment of Rs. 14,42,77,085/-.
3. Rejection of comparables and TP analysis for software development services.
4. Adoption of inappropriate filters and comparables.
5. Adjustments for enterprise and transactional level differences.
6. TP adjustment on account of interest on receivables.
7. Non-allowance of +/-5% range benefit under section 92C(2).
8. Levy of interest under section 234B.

Detailed Analysis:

1. Validity of Reference to TPO:
The assessee contended that the AO erred in referring the matter to the TPO for determining the arm's length price without demonstrating the necessity and expediency of such a reference. The Dispute Resolution Panel (DRP) confirmed the AO’s action. The tribunal did not specifically address this issue in the judgment.

2. Transfer Pricing Adjustment of Rs. 14,42,77,085/-:
The assessee argued that the lower authorities erred in making a TP adjustment without demonstrating a motive for tax evasion and without proper computation under Chapter X. The tribunal did not specifically address this issue in the judgment.

3. Rejection of Comparables and TP Analysis for Software Development Services:
The assessee challenged the rejection of comparables selected and the TP analysis undertaken on grounds such as not adopting profits before depreciation, interest, and taxes as the profit level indicator, and not considering weighted average margins. The tribunal did not specifically address this issue in the judgment.

4. Adoption of Inappropriate Filters and Comparables:
The assessee argued that the authorities adopted inappropriate filters like a one-sided turnover filter and included companies that were not comparable in terms of functions, risks, assets, size, turnover, and margins. The tribunal did not specifically address this issue in the judgment.

5. Adjustments for Enterprise and Transactional Level Differences:
The assessee contended that proper adjustments for differences between the appellant and comparable companies were not made, including working capital adjustments and depreciation adjustments. The tribunal did not specifically address this issue in the judgment.

6. TP Adjustment on Account of Interest on Receivables:
The primary issue argued by the assessee was the TP adjustment of Rs. 932,96,476/- on account of interest on receivables. The assessee argued that working capital adjustment was already made, and no additional adjustment should be made for interest on receivables, citing various tribunal orders and a Delhi High Court judgment in the case of CIT vs. Kusum Health Care Pvt. Ltd. The tribunal noted that the Delhi High Court judgment was not directly applicable as it was not the jurisdictional High Court and considered other tribunal orders.

The tribunal concluded that allowing extra credit beyond the agreed period of 30 days constitutes an independent international transaction requiring separate benchmarking. The tribunal directed the AO to benchmark this transaction using the average cost of the total funds available to the assessee as the internal Comparable Uncontrolled Price (CUP).

7. Non-Allowance of +/-5% Range Benefit:
The assessee argued that the authorities erred in not allowing the benefit of the +/-5% range prescribed under section 92C(2). The tribunal did not specifically address this issue in the judgment.

8. Levy of Interest under Section 234B:
The assessee contested the levy of interest under section 234B amounting to Rs. 2,58,30,639/-, arguing that it was not leviable and the computed amount was excessive. The tribunal did not specifically address this issue in the judgment.

Conclusion:
The tribunal partly allowed the appeal for statistical purposes, directing the AO to benchmark the independent international transaction of allowing extra credit using the average cost of the total funds available to the assessee. Other issues raised by the assessee were not specifically addressed in the judgment.