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TMI Blog2020 (7) TMI 620X X X X Extracts X X X X X X X X Extracts X X X X ..... by treating the outstanding receivables from the related parties as an "international transaction" within the meaning of section 92B(1) of the Act. 3. That DRP/AO/TPO erred on the facts and in the circumstances of the case and in law by re-characterizing the transaction of trade receivables as unsecured loans advanced to the AE's and charging interest on the same. 4. That DRP/AO/TPO erred on the facts and in the circumstances of the case and in law by not understanding the business model/contractual terms of the Appellant and erred in applying Comparable Uncontrolled Price ('CUP') Method without providing any comparables and charging interest rate @ Libor plus 300 bps (3.5335%). 5. That DRP/AO/TPO erred on the facts and in the circumstances of the case and in law by not making suitable adjustments to account for differences in the risk profile of the Appellant vis- a-vis the comparable companies. 6. That AO/TPO erred on the facts and in the circumstances of the case and in law in: * not examining the validity of initiation of penalty proceedings u/s 271 (1) (c) of the Act and * computing interest under section 234B and 234C of the Act." 3. Brief facts of the case show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osing the total adjustment of provision of IT enabled data conversion services of Rs. 143,627,996/-. As assessee selected three years weighted Average margin of the comparables, the learned transfer pricing officer asked assessee to update the margins for one year. Assessee further included three comparables as per submission dated 22 December 2015. The learned transfer pricing officer did not agree to the comparability analysis prepared by the assessee. He accepted 9 of the comparables selected by the assessee and also included Infosys BPO Ltd and e4 healthcare business services Ltd as comparables, computed the average profit level indicator of those company at 27.38%. After considering the reply of the assessee this adjusted margin was corrected to 25.27%. Thereafter same was applied to the international transaction of the assessee. The AO found that assessee has total operating cost of Rs. 145,64,32,672 and 25.27% of the margin thereon is Rs. 368,040,536. Therefore, he held that the arm's-length price of the international transaction is Rs. 182,44,73,208 against which amount received by the assessee of Rs. 168,08,44,212/- and therefore he proposed an adjustment on that account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceivable is an international transaction in terms of the provisions of Section 92B of the act and therefore the trade receivable beyond the specified time limit are required to be classified as a separate international transaction. It was further noted that there is delay in recovery of outstanding by the assessee and no interest was charged by the assessee on the outstanding amount. The DRP held that the learned TPO applied the interest rate at the rate of 12.65% on all the delay where recovery is beyond 60 days. It held that the TPO was fully justified in calculating interest on debt as recoverable beyond the period of 60 days. However, it noted that assessee was exposed to exchange risk on receipt of belated payment and the amount remained outstanding with the associated enterprise without any guarantee. Assessee also did not furnish any details of comparable group affiliates who had entered into transaction with the independent third parties or of independent third parties who has entered into similar transactions with the third parties in this fashion. However, the learned dispute resolution panel after considering the argument of the assessee held that interest shall be cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal at any stage of the proceedings relying on the decision of the honourable Supreme Court in National thermal Power Co Ltd. 10. The learned departmental representative vehemently objected to the admission of the above grounds. It was further stated that examination of the working capital adjustment with respect to the addition made by the learned assessing officer requires the examination of the fresh facts. Therefore, it is not a legal ground. With respect to ground number seven, it was stated that whether a particular comparable is to be selected for the comparability analysis is necessarily an examination of the facts with respect to the functions of the assessee with the functions of comparable companies and therefore it requires the investigation of fresh facts. Therefore, this ground cannot be admitted. 11. We have carefully considered the rival contentions and find that ground number five raised by the assessee is a legal ground, that when there is a working capital adjustment granted to the assessee, it takes care of the outstanding debtors, therefore separate adjustment with respect to outstanding debtors of associated enterprise beyond specified period cannot be con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest on receivable is occurring because of the main business transaction and hence it cannot be characterized as a separate independent transaction ignoring the actual transaction undertaken by the assessee. He further relied on the decision of the honourable Delhi High Court in CIT versus EKL appliances Ltd (ITA number 1068/2011). He further stated that the principle of aggregation is a well-established rule in the transfer pricing analysis. According to that principle all functionally similar transaction wherein arm's-length price can be determined for a number of transaction taken together cannot be separately benchmarked. He further referred to the decision of the honourable Delhi High Court in case of Sony Ericsson mobile communications India private limited (TS - 96 - HC - 2015 (Del) - TP). The assessee further argued that working capital adjustment was undertaken by the assessee for the comparable companies selected in the transfer pricing documentation. Therefore working capital adjustment takes into account the impact of outstanding receivable and therefore no separate addition can be made. Assessee relied on the decision of the coordinate bench in case of Kusum healthca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding receivables, the appellant has always been in compliance with the Reserve Bank Of India norms and always obtained unqualified audit opinions from its statutory auditors. In nutshell, he submitted that associated enterprise was facing genuine business downturn due to structural pressure faced by the traditional publishing industry, the delay in recovery of the outstanding by the assessee from its associated enterprise is for the business reasons. Thus, he submitted that the adjustment cannot be made in the hands of the assessee. 15. The learned departmental representative submitted that the issue is squarely covered against the assessee by the decision of the coordinate bench in assessee's own case and in case of Samsung India Ltd in ITA number 6813/del/2012 decided on 7/4/2020. 16. We have carefully considered the rival contention and perused the orders of the lower authorities. Identical issue arose in the case of the assessee itself for assessment year 2010 - 11 Techbooks International (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle-3, Noida* [2015] 63 taxmann.com 114 (Delhi - Trib.) wherein the coordinate bench decided it is Under:- "VI. INTEREST ON DELAYED/NON-R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tered by the ld. DR. 13.3 We are not persuaded to accept this argument. The argument that the Agreement does not provide for charging any interest on late realization of invoice value and hence no interest can be charged, deserves the fate of dismissal under the transfer pricing provisions. Chapter X of the Act has been enshrined to determine the income from an international transaction at ALP, being in the same manner as is determined between two independent parties. It means that if an income is not charged or under charged by an Indian entity from its foreign AE, which ought to have been properly charged if the transaction had been between two independent parties, then such under charged or uncharged income needs to be brought to tax by determining the ALP of the international transaction giving rise to such income." 13.4.Coming to other argument that no interest is chargeable under the present circumstances on the strength of the judgment in the case of Vodafone India Services (P.) Ltd. (supra), we find that the point of controversy in that case was quite distinct. Addition on account of the excess share premium was made which, in the opinion of the TPO, should have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;....' 13.6 On circumspection of the relevant part of the Explanation 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 of interest or 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 needs to be brought to 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the matter finally came up before the Hon'ble High Court, it held that the amount in question was given in foreign currency, i.e., in US Dollars and was also to be repaid in the same currency, i.e., US Dollars. In that view of the matter, it was held that the currency in which the loan is to be repaid normally determines the rate of return on the money lent and the interest rate applicable to loans granted and to be returned in Indian rupee would not be a relevant comparable. The prime lending rate was, therefore, held to be not applicable. From the above narration of facts, it is clear that, firstly, in the case of Cotton Naturals (I) (P.) Ltd. (supra), that assessee charged interest on loans given to its AE. The controversy was only about the rate of interest, which ought to have been charged. In the case under consideration, the assessee did not charge any interest on the amounts remaining parked with its foreign AE due to late or non-realization of invoices in time. As the assessee before us did not charge any interest, the judgment in Cotton Naturals (I) (P.) Ltd. (supra) rather supports the view canvassed by the Revenue on the basic issue of chargeability of interest. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s beyond the stipulated period. When the interest for realization of trade advances up to 150 days is part and parcel of the price charged from the AE, then the delay up to this extent cannot give rise to a separate international transaction of interest uncharged. Rather interest for the period in excess of normally realizable period in an uncontrolled situation upto 150 days needs to be considered in the determining the ALP of the international transaction of the 'Provision of IT Enabled data conversion services'. This can be done by increasing the revenue charged by the comparable companies with the amount of interest for the period between that allowed by them in realization of invoices and 150 days as allowed by the assessee, so as to bring such comparables at par with the assessee's international transaction of provision of the ITES. To illustrate, if the comparables have allowed credit period of, say, 60 days and the assessee has realized its invoices in 180 days, then interest for 90 days (150 days minus 60 days) should be added to the price charged by the comparables and the amount of their resultant adjusted operating profit be computed. Rule 10B permits making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ysed annual accounts of the assessee for the year ended on 31st of March 2012. These are placed at page number 122 - 149 of the paper book. The assessee has a share capital as on 31st of March 2012 of Rs. 4,65,400/- and free reserve Under the head reserve and surplus of Rs. 123,48,89,903/-. The assessee has provided services to its associated enterprise during the financial year ended on March 31, 2012 amounting to Rs. 168,08,45,212/-. During the year the assessee has shown profit for the year of Rs. 12,15,16,517/-. The assessee has also shown outstanding receivable (trade receivable) amounting to Rs. 1324807379/- as on 31st of March 2012 from its AE. 18. For the year ended on 31st of March 2011, the assessee has share capital of Rs. 4,65,400/- and reserve and surplus of Rs. 111,33,73,386/-. The assessee provided services to its associated enterprise of Rs. 144,11,87,715/- and earned profit for the year of Rs. 21,23,74,837/-. For that year the trade receivable from its associated enterprise was Rs. 102,73,60,940/-. 19. From the above analysis it appears that the assessee has share capital and free reserve as on 31st of March 2011, amounting to Rs. 111,38,38,786/- whereas the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transfer pricing study report submitted by the assessee which is placed at page number 150 - 215 of the paper book, the learned authorised representative could not show us that assessee himself has claimed any working capital adjustment while preparing its comparability analysis. In para number 4.3 of the transfer pricing study report the assessee has stated what kind of assets it has employed and it has not stated that any working capital has been employed by the assessee. Even otherwise the assessee could not show us what is the difference in working capital of the assessee compared with comparable companies. Thus the adjustment of working capital was not at all there in case of assessee for this year. In view of this, we reject this argument. 21. We have also carefully perused the various judicial precedents relied upon by the learned authorised representative. However as the issue squarely covered against the assessee by the decision of the coordinate bench in assessee's own case as well as the peculiar facts noted by us, all those decisions do not apply in view of distinguishing features. 22. The decision of the coordinate bench in assessee's own case for earlier year ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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