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TMI Blog2015 (6) TMI 175X X X X Extracts X X X X X X X X Extracts X X X X ..... n entities borrow loans from overseas whereas the position is totally reverse in the present case and the A.O. had correctly applied SBI PLR based interest rate." 3. The assessee is engaged in providing the software development and allied services to its group companies. During the course of proceedings before the Transfer Pricing Officer, it was observed that the assessee provided a credit period of 60 days to all its A.Es. While examining the details in this regard, Transfer Pricing Officer observed that the assessee has provided additional credit period beyond 60 days mutually agreed for sale transaction without charging any interest on the same. The assessee was asked as to why the interest be not charged in computation of arm's length price in respect of such transaction. The assessee filed its submissions and justified that no interest adjustment was required considering the facts of the case and even any adjustment has to be made the same should be through working capital adjustment by adjusting the profits margin of the comparables. The Transfer Pricing Officer turned down the submission of the assessee and made an adjustment of ` 10,87,343, on account of the arm's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the LIBOR or other bank rate linked rate is generally taken as a rate for comparable uncontrolled transaction. As has been held in a large number of cases, including in VVF (supra) and Perot Systems (supra), in the cases of arm's length prices of loans and advances, costs of funds have no relevance and it is only the rate applicable for comparable uncontrolled transaction that is to be taken into account. However, even while applying CUP method, one has to bear in mind the fact that in terms of Rule lOB (1) computation of ALP under the CUP method is a three step process which requires that (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; lii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market: (ii) The adjusted price arrived at under sub-clause (ii) is taken to be an arms length price in respect of the property transferred or services proved in the interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations, as the monies are given for strengthening assessee's marketing apparatus in US and to keep alive its biggest exports customer. There is a difference in the nature of transaction and there is also a difference in the nature of the enterprises, including their inter se commercial relationship, entering into this transaction. The differences are so fundamental that these differences, to use the phraseology employed in Rule 10B(l)(a)(ii), "could materially affect the price in the open market". On account of these peculiar factors, the application of LIBOR plus rate or, for that purpose, any bank rate will be inappropriate to this case." 6. We further note that the number of other cases, the Tribunal has taken a similar view. Accordingly, to maintain the rule of consistency, we do not find any error or illegality in the order of the learned CIT(A). Accordingly, the grounds raised by the Revenue are dismissed. 7. In the result, Revenue's appeal is dismissed. We now proceed to dispose of the assessee's cross objection being C.O. no. 282/Mum./2012, which is arising out of the appeal in ITA no.7757/Mum./2012, filed by the Revenue. The grounds raised in this cross objection ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re Pvt. Ltd. (supra), held that instead of making a separate adjustment on account of credit provided to the A.E. only working capital adjustment for the operating margin of the comparable company has to be worked out. Thus, the learned counsel submitted that only the differential impact of working capital has to be taken into account. 10. On the other hand, the learned Departmental Representative has submitted that insofar as the credit period provided by the assessee in terms of the agreement between the parties and as per the terms of the sale, the same may be considered as part of the international transaction of the sale. However, the assessee has given extra credit period over and above 60 days which is given to the A.Es, the same has to be treated as a separate international transaction because it was not agreed between the parties at the time of sale but it is a post facto decision of allowing the credit to the A.E. The learned Departmental Representative has further contended that the assessee has not produced any evidence to show that the extension of the credit period is as per the terms of the sale between the parties. It has not been provided in the invoice of sale tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expression international transaction as per explanation. Therefore, in view of the expanded meaning of the international transaction as contemplated under clause (i) (e) of explanation to section 92B(1), the delay in realization of dues from the AE in comparison to non-AE would certainly falls in the ambit of international transaction. However, this transaction of allowing the credit period to AE on realization of sale proceeds is not an independent international transaction but it is a closely linked or continuous transaction along with sale transaction to the AE. The credit period allowed to the party depends upon various factors which also includes the price charged by the assessee from purchaser. Therefore, the credit period extended by the assessee to the AE cannot be examined independently but has to be considered along with the main international transaction being sale to the AE. As per Rule 10A(d) if a number of transactions are closely linked or continuous in nature and arising from a continuous transactions of supply of amenity or services the transactions is treated as closely linked transactions for the purpose of transfer pricing and, therefore, the aggregate and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... UP available in the shape of the credit allowed by the assessee to non AE. When the assessee is not making any difference for not charging the interest from AE as well as non-AE then the only difference between the two can be considered is the average period allowed along with outstanding amount. If the average period multiplied by the outstanding amount of the AE is at arm's length in comparison to the average period of realization and multiplied by the outstanding from non AEs then no adjustment can be made being the transaction is at arm's length. The third aspect of the issue is that the arm's length interest for making the adjustment. Both the TPO and DRP has taken into consideration the lending rates, however, this is not a transaction of loan or advance to the AE but it is only an excess period allowed for realization of sales proceeds from the AE. Therefore, the arm's length interest in any case would be the average cost of the total fund available to the assessee and not the rate at which a loan is available. Accordingly, we direct the Assessing Officer/TPO to re-do the exercise of determination of ALP in terms of above observation." 12. Thus, it is clear that the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... working adjustment appropriately takes into account the outstanding receivable. Therefore, the assessee has undertaken a working capital adjustment to reflect these differences by adjusting for differences in working capital and thereby, profitability of each comparable company. Accordingly, while calculating the working capital adjusted, operating margin on costs of the comparable companies, the impact of outstanding receivables on the profitability has been taken into account. If the pricing/ profitability of the assessee are more than the working capital adjusted margin of the comparables, then additional imputation of interest on the outstanding receivables is not warranted. 9. The assessee had undertaken a working capital adjustment for the comparable companies selected in its transfer pricing report which was also submitted with the Ld. TPO. A snapshot of the result is provided below: Segment Name Appellant's Margin (OP/TC) Working capital adjusted margins of comparables (OP/TC) Manufacturing Activity 46.33% 11.84% Trading Activity 17.44% 8.36% &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X
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