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TMI Blog2017 (5) TMI 965X X X X Extracts X X X X X X X X Extracts X X X X ..... Also if an invoice is raised during the year and the proceeds are realized within the year, but, beyond the stipulated period of agreement, then, the same will not come within the working capital adjustment because working capital adjustment is made with reference to the opening and closing balances as on 1st April and 31st March. Therefore, respectfully following the decision of Ameriprise India Pvt. Ltd. (2015 (8) TMI 652 - ITAT DELHI) and, again, in the case of Mckinsey Knwledge Centre Pvt. Ltd. [2017 (5) TMI 830 - ITAT DELHI] we reject the assessee’s contention that the interest on delayed payment of receivables get subsumed in the working capital adjustment allowed to the assessee. Also argument that since it was debt free fund company, which finding is not disputed, therefore, no interest could be attributable on the late realization of receivables is to be rejected at the threshold because, as noted earlier, interest on delayed realization of receivables is a separate international transaction and, therefore, requires separate benchmarking. It has nothing to do with the operations of the assessee company being with the debt free funds only. Selecting of ad hoc interest rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low:- "Examination of the balance sheet reveals receivables thereby implying that the payment for the invoices raised by you have not been received within the stipulated time as provided in your service agreement with your AE. In this regard, you are requested to furnish the time period for payment as per your service agreement with your AE. However, to be reasonable and fair to the assessee, instead of charging penal interest, the delayed payments are being treated as unsecured loans advanced to the AEs and it is proposed to charge a normal rate as per the annual average yield of corporate bonds pertaining to credit rating of your AE for the period of delay in receipt of payment beyond the time stipulated in the services agreement. The interest rate has been charged on the basis of prevailing average SBI base rate during the year. You are requested to furnish credit rating of all the AEs for the F.Y. 2010-11 with whom you have under taken aforesaid transactions. You are requested to furnish AE wise and invoice wise details along with the period of delay in receipt of payment as per details below: S.No. Invoice No. Date of nvoice Amount (INR) Date of receipt/payment (INR) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of interest free loan in the garb of delayed receipt of receivables. He observed that these funds could have been otherwise deployed for at least earning interest income. Therefore, the tax payer had incurred cost in connection with a benefit and services provided to the AE by way of delayed receipt of receivable. He pointed out that no payment terms have been specified as per service agreement or the invoice and, therefore, as per prudent estimate payment period of 30 days shall be allowed for payment of sales/service. Any delay beyond the aforesaid period would be benchmarked accordingly. The ld. TPO did not accept the assessee's contention that receivable transaction should be benchmarked using a combined transaction approach. He referred to a plethora of decisions on the issue that transaction by transaction approach has to be adopted and, therefore, transaction relating to receivables needs to be benchmarked separately. In order to find out cost of funds blocked in intra group loans, he adopted CUP as the prime lending rate of SBI to which 300 basis points was being added to take into account the various factors of the risks. In support of his contention, he relied on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out that the same recognizes that a set off does not mean that both the transactions should not be at arm's length. The guidelines also say that the onus of demonstrating the existence of a set off built into two transactions was on the assessee. It was for the assessee to establish set off which require supporting evidence. The ld. DRP further pointed out that the assessee's contention that no separate adjustment can be made towards interest on overdue receivables as the entity level results had already been considered by the TPO was not acceptable because consideration of entity level results does not preclude examination of individual transactions to see whether they are at arm's length. He pointed out that TNMM, as its very name suggests, is the Transactional Net Margin Method. It cannot be interpreted as the overall net profit method. An aggregate approach does not mean that if an assessee receives less than the ALP on transactions and more than the ALP in another transaction, then, both transactions are to be automatically aggregated and no TP adjustment made. He pointed out that, in fact, in such a case, TP adjustment is still required to be made in respect of the transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the price which could have been paid in an uncontrolled transaction. The ld. DRP demonstrated that even though marginal cost is zero, still the goods will command price. The ld. DRP further observed in para 2 as under:- "Further, the assessee's balance sheet shows substantial current liabilities and also loans and advances. The P&L A/c shows significant income from interest and the assessee has also debited interest of ₹ 64,79,897/-. It is apparent that if the assessee had received its receivables from its AE within time, it could have reduced its interest payment, or increased the interest income. The assessee has also failed to demonstrate that interest bearing funds were not utilized for extending this special facility to its AE. The burden of proving any such claim was on the assessee however, the assessee has failed to substantiate this claim." 9. In view of the above discussion, the ld. DRP rejected the assessee's claim that no separate adjustment was warranted in regard to receivables. The assessee is in appeal before us raising the following grounds:- 1. That on facts and circumstances of the case and in law, the Ld. AO/Ld. Transfer Pricing Officer ("TPO&quo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, relied on the decision of Kusum Healthcare Pvt. Ltd., TS/129/ITAT/2015/Del/TP for holding that no separate adjustment was warranted on account of interest on receivables. The ld. counsel further pointed out that Hon'ble Delhi High Court while dismissing the appeal of the Revenue, has held as under:- "4. As far as question (B) concerning the adjustment for interest no receivables, the Court finds that the ITAT has returned a detailed finding of fact that the Assessee is a debt free company and the question of receiving any interest on receivables did not arise. Consequently, no substantial question of law arises for consideration as far as this issue is concerned." 11. The ld. counsel further referred to the decision of the Tribunal in the case of Actis Global Services Pvt. Ltd. (ITA No.30/Del/2015) dated 10th December, 2015, wherein in para 59, the Tribunal, inter alia, has observed as under:- "59. We have considered the submissions of both the parties and have perused the record of the case. As far as Id. counsel's plea based on the directions of DRP for AY 2009-10 is concerned, we find that in the said assessment year the assessee had objected to the TPO not allowi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision in Kusum Healthcare Pvt. Ltd. has been followed in the following cases:- i) Information Systems Resource Centre Pvt. Ltd. (TS-252-ITAT- 2015-MUM; and ii) Gold Star Jewellery Ltd. vs. JCIT (ITA No.6520/Mum/2012). 14. The assessee further placed reliance on the ITAT Delhi in the case of Indo German Jewellery Ltd. (ITA No.587/Mum/2009), wherein it has been held that the transaction of sale and lending are distinctly set out as per section 92 of the Act and it was held that interest income is associated more with lending or borrowing of money and not with sale. It was further held that while determining the ALP of the sale transaction, all relevant aspects including credit period allowed are taken into consideration and that interest aspect is embedded in the sale price. It was further held that there can be no separate international transaction of interest, outstanding receivables and that early or late realization of sales proceeds is incidental to transaction of sale. 15. The ld. DR submitted that for the proposition that non-charging or under charging of interest on the excess period of credit allowed to the AE for the realization of invoices amounts to an internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dly including the interest for the period allowed for realization of invoices as per the terms of the agreement, the international transaction of charging interest on late recovery of trade receivable covers the period which starts with the termination of the period of credit allowed under the agreement, which is subject matter of the international transaction of purchase/sale of goods. There is one more fallacy in the argument about the subsuming of interest income in the working capital adjustment. It is simple that working capital adjustment is ordinarily computed by considering the average of the opening and closing values of inventories, receivables and payables. A transfer pricing adjustment on account of interest on delayed realization of invoice value has nothing to do with the closing or opening values. It depends on the period of realization on transaction to transaction basis. To put it differently, suppose an invoice is raised on 1st May; period allowed for realization is two months; and the invoice is actually realized on 31st December. Notwithstanding the fact that interest on such late realization would become chargeable for a period of 6 months (from 1st July to 31s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of accounts receivables because the same gets subsumed in the working capital adjustment. The second plea of the assessee is that since its funds are entirely debt free, therefore, no adjustment is warranted in regard to late realisation of proceedings from receivables. The assessee's reliance as noted earlier, is on the decisions in its own cases for assessment year 2010-11 and 2011-12. The issue has been elaborately considered in the case of Ameriprise India Pvt. Ltd. (supra) and, again, in the case of Mckinsey Knwledge Centre Pvt. Ltd. (supra). In the case of Techbooks India International Pvt. Ltd. vs. DCIT (supra), taking note of the Explanation inserted by the Finance Act, 2012 to Section 92B, it was observed that there remained no doubt that apart from any short-term or long-term borrowing, etc., or even advance payments or deferred payments, 'any other debt arising during the course of business' had also been expressly recognized as an international transaction. In the said decision, the decision of the Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems was also considered, wherein Hon'ble Bombay High Court set aside the view taken by the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anation inserted with retrospective effect from 1.4.2002, thereby also covering the assessment year under consideration, there remains no doubt that apart from any long-term or short-term lending or borrowing, etc., or any type of advance payments or deferred payments, 'any other debt arising during the course of business' has also been expressly recognized as an international transaction. That being so, the payment/non-payment of interest or receipt/non-receipt of interest on the loans accepted or allowed in the circumstances as mentioned in this clause of the Explanation, also become international transactions, requiring the determination of their ALP. If the payment of interest is excessive or there is no or low receipt of interest, then such interest expense/income need to be brought to its ALP. The expression 'debt arising during the course of business' in common parlance encompasses, inter alia, any trading debt arising from the sale of goods or services rendered in the course of carrying on the business. Once any debt arising during the course of business has been ordained by the legislature as an international transaction, it is, but, natural that if there is any delay in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational transaction of interest receivable from its AEs for late realization of invoices beyond such stipulated period is a separate international transaction. Allowing working capital adjustment in the international transaction of rendering of services can have no impact on the determination of ALP of the international transaction of interest on receivables from AEs beyond the stipulated period allowed as per agreement. In the case of Mckinsey Knwledge Centre Pvt. Ltd. (supra), again, the Tribunal reiterated this reasoning and, inter alia, observed that: "……. In our considered opinion, whereas, the international transaction of purchase/sale of goods from/to AE contemplates comparison of the price charged/paid for such goods by impliedly including the interest for the period allowed for realization of invoices as per the terms of the agreement, the international transaction of charging interest on late recovery of trade receivable covers the period which starts with the termination of the period of credit allowed under the agreement, which is subject matter of the international transaction of purchase/sale of goods." 20. The Tribunal also explained that if an invoi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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