2022 (12) TMI 799 - AT - Income Tax

TP Adjustment - upward adjustment in imputing notional interest on the outstanding overdue receivables from Associated Enterprises (AEs) - AR submitted that the assessee has adopted Transaction Net Margin Method (TNMM) and therefore the interest on outstanding receivables is subsumed in the Arm s Length Price (ALP) charged to the AEs - HELD THAT - As find from working of assessee s own case for the A.Y.2017-18 2022 (9) TMI 587 - ITAT VISAKHAPATNAM the assessee s margin is significantly higher than the operating margin of the comparable companies. There may be a delay in the collection of receivables even beyond the agreed time limits due to a variety of factors which has to be decided on a case to case basis. When TNM method is considered as the most appropriate method, which was also not disputed by Revenue, the net margin thereunder would take care of such notional interest cost. As further explained by Ld.AR that the impact of the delay in collection of receivables would have a bearing on the working capital of the assessee. We find that these working capital adjustments on the ALP has been already factored in its pricing / profitability vis- -vis that of its comparables. We therefore are of the considered view that any further adjustment to the margin of the assessee on the outstanding receivables cannot be justified and no separate upward adjustment on outstanding export receivables is required and therefore we direct the AO to delete the upward adjustment made towards overdue receivables from AE. We therefore allow this ground raised by the assessee. Adjustment towards corporate guarantee - Addition of commission on the gross guarantee given to AE - HELD THAT - As relying on assessee own case 2022 (9) TMI 587 - ITAT VISAKHAPATNAM following the ratio laid down in the case of CIT vs. Everest Kanto Ltd 2015 (5) TMI 395 - BOMBAY HIGH COURT . We are of the considered view that the corporate guarantee commission is an international transaction and should be charged @ 0.50% on the corporate guarantee amount utilized, by the AE. We therefore allow the grounds raised by the assessee. Disallowance under section 14A r.w.r. 8D - As argued the assessee has not earned any exempt income warranting the disallowance u/s. 14A - AR pleaded that the assessee s holding shares is merely to retain the controlling interest and no income has been received by the assessee during the impugned assessment year - HELD THAT - As relying on assessee own case 2022 (9) TMI 587 - ITAT VISAKHAPATNAM assessee has not earned any exempt income during the relevant assessment year mandating the invoking of provisions of section 14A - As in CIT vs. Chettinad Logistics (P.) Ltd 2017 (4) TMI 298 - MADRAS HIGH COURT has dismissed the SLP 2018 (7) TMI 567 - SC ORDER of the Revenue and held that section 14A can only be triggered if assessee claims any expenditure against an income which does not form part of the total income under the Act. The Hon ble Supreme Court further observed that Rule 8D only provides for a method to determine the amount of expenditure incurred in relation to income which does not form part of the total income of the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Adjustment towards interest on overdue receivables.
2. Adjustment towards corporate guarantee.
3. Disallowance under section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Adjustment towards interest on overdue receivables:
The main issue raised by the assessee was the upward adjustment in imputing notional interest on the outstanding overdue receivables from Associated Enterprises (AEs). The assessee argued that the interest on outstanding receivables is subsumed in the Arm's Length Price (ALP) charged to the AEs under the Transaction Net Margin Method (TNMM). The assessee's operating margin was significantly higher than that of comparable companies, implying compensation for the cost of delayed receivables through higher operating margins. The assessee also contended that no interest was charged on outstanding receivables to either AE or Non-AE parties. Various judicial precedents were cited to support the argument that transfer pricing adjustments cannot be made on a hypothetical and notional basis without material evidence of undercharging real income. The Departmental Representative (DR) countered that deferred receivables constitute an international transaction as per section 92B of the Act and argued that notional interest cannot be subsumed in the TNMM. The Tribunal, following its earlier decision in the assessee's own case for A.Y. 2017-18, held that when TNMM is considered the most appropriate method, the net margin would take care of such notional interest cost. Therefore, no separate upward adjustment on outstanding export receivables is required, and this ground raised by the assessee was allowed.

2. Adjustment towards corporate guarantee:
The issue raised was the adjustments made by the TPO/DRP in the corporate guarantee commission on the gross guarantee given to AE. The assessee argued that extending a corporate guarantee cannot be considered an international transaction as it does not fall within the purview of "capital financing" under section 92B of the Act. The assessee also contended that no cost was incurred in providing the corporate guarantee and thus no commission should be charged. The DRP/TPO/AO had partially sustained the adjustment, reducing it to 1% of the actual loan utilized by AE. The Tribunal, following its earlier decision in the assessee's own case for A.Y. 2017-18 and the ratio laid down by the Bombay High Court in CIT vs. Everest Kanto Ltd, held that the corporate guarantee commission is an international transaction and should be charged at 0.50% on the amount utilized by the AE. This ground raised by the assessee was allowed.

3. Disallowance under section 14A of the Income Tax Act:
The issue was the disallowance made under section 14A of the Act r.w.r 8D. The assessee argued that no exempt income was earned during the assessment year, and thus the provisions of section 14A should not be applicable. The Tribunal, following its earlier decision in the assessee's own case for A.Y. 2017-18 and the judgment of the Hon'ble Supreme Court in CIT vs. Chettinad Logistics P. Ltd, held that section 14A can only be triggered if the assessee claims any expenditure against an income that does not form part of the total income under the Act. Since the assessee did not earn any exempt income, the provisions of section 14A were not applicable, and this ground raised by the assessee was allowed.

Conclusion:
The appeal of the assessee was allowed on all grounds. The Tribunal directed the deletion of the upward adjustment made towards overdue receivables from AE, restricted the corporate guarantee commission to 0.50% on the amount utilized by the AE, and held that the disallowance under section 14A was not applicable in the absence of exempt income.