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TMI Blog2023 (3) TMI 189X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest on delayed receivables should not be considered as international transactions and notional interest computed by the AO/TPO/DDRP which is libor +450 basis points, therefore the adjustment should not be made for the interest on delayed receivables - HELD THAT:- We reject the plea of the assessee that the interest on receivable is not an international transactions after relying on the judgments as cited by the DRP in his order and the order of the coordinate bench in the case of Outsource partners International (P.) Ltd.. [ 2022 (6) TMI 1361 - ITAT BANGALORE] We also uphold that the interest on delayed receivables is an international transactions, accordingly the adjustment should be made on those receivables which were not realized within the agreements period.. During the course of hearing, it was brought into the notice of both the parties that in respect of rate for calculation of interest is to be considered by the AO/TPO/DRP at libor + 350 basis points considering the nature of business and location of the receivables with the consent of AR. Accordingly this issue is also remitted back to the file of the AO. Deduction u/s 35(2AB) - weighted average deduction - H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 The TPO and MP has erred in rejecting Shrey Nutraceuticals Herbals Private Limited as a comparable to your appellant by applying lower turnover filter of Rs.10 crores instead of Rs.1 crore which was consistently followed by your appellant and the TPO in the earlier years. 4 The TPO and DRP has erred in rejecting Sanat Products as a comparable to your appellant on the contention that it has failed the net worth filter though it had passed that filter. 5 The TPO and DRP has erred in rejecting Gujarat Organic Limited as a comparable to your appellant on the contention that it is functionally different. 6 The TPO and DRP has erred in rejecting Endo Amines Limited as a comparable to your appellant on the contention that it is- functionally different. 7 The TPO and DRP has erred in rejecting Tyche Industries Limited as a comparable to your appellant on the contention that it is functionally different. 8 The TPO and DRP has erred in rejecting Yasho Industries Limited as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20 Without prejudice to Ground 19, the TPO and DRP has erred in considering rate of interest on outstanding trade receivables at 6 months LIBOR + 450 basis 21 The AO had wrongly denied deduction of R D Expenditure amounting to Rs.3,86,333/- under section 35(1)(i) or 37( l ) of the Act though the same was incurred wholly and exclusively for the purpose of business. 22 The AO has erred in computing interest u/s 234A of the Act though there was no delay in furnishing the return of income by your appellant. 23 Without prejudice to the other grounds, the AO has erred in computing interest u/s 234B as Rs.4,20,07,491/- as against the correct computation of Rs.3,98,01,513/-. 24 For these and other grounds that may be adduced at the time of hearing, the order passed by the AO, TPO and DRP may be set aside to the extent appealed against. 25 Your appellant craves leave to add, amend, alter, vary and/ or withdraw any or all of the above grounds of appeal. 2. The b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a particular format: Amount raised in invoice. date of invoice, date of receipt, delay in no. of days. In response to the SCN, the assessee filed its reply on 15.12.2020 in its submission. 3.2 Considering the submissions made by the assessee regarding invoice wise details of all the trade receivables from AEs during the year. Interest is calculated using LIBOR- 6 months + 450 basis points applicable for the FY 2016-17 and which works out to 5.975%. 3.3 Thus. arm's length interest amount to be charged works out to be Rs. 72,92,193/-. The same is treated as adjustment u/s 92CA for interest on delayed receivables Sl.No. Description Adjustment u/s 92CA(Rs.) 1 Manufacturing segment 19,63,67,067 2. Interest on delayed receivables 72,92,193 Total 20,36,59,260/- 3.4 Accordingly, an amount of Rs.20,36,59,260/-is proposed as the transfer pricing adjustment to arrive at arm's length price of the international transactions and he passed the order u/s 92CA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r which is not in line with the various judicial precedents in the regard. c) There are errors in the margin computation of Normal Remedies Pvt Ltd. and Neuland Laboratories Ltd,done by the TPO. d) Symed Labs Ltd. and Granuls India Ltd selected by the TPO are to be rejected since it fails the TRP filter. e) ZCL Chemicals Ltd selected by the TPO is to be rejected as it is a Contract Manufacturing Company and hence is functionally dissimilar to your assessee company. 4.1 The submission of the assessee was duly considered by the AO but not found acceptable since TPO has passed the order after considering the submission of the assessee. Further, the assessee has submitted that it is in the process of filing a rectification application seeking rectification of above errors which are apparent on records. In this regard, it is submitted that, if TPO rectifies the order, effect of the same will be given accordingly. Now , in this regard TPO has proposed adjustment to arrive at Arm's Length Price of the international transactions entered by the assessee with Associated Entities amounting to Rs. 20,36,59,260/-. Accordingly, adjustment is made to total income of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not . Only if the financial are audited, the TPO should undertake adjustment at segment level. The TPO has not followed this direction of the DRP though audited segment financials was submitted during the course of the assessment proceedings. Refer pages 310-312 12. In this connection, we wish to draw the kind attention of this Hon ble Bench to the decision of this Bench in the appellant s own case for AY 2013 14 and AY 2014-15 ( VI)). In the said case, the Hon ble Benc 3200): 4. We note that admittedly, the transactions in a controlled transaction with a related party and an uncontrolled transactions with unrelated parties will result into more appropriate bench marking of arm s length price. Under the circumstances, if there is availability of sufficient data of internal comparables, the Ld.TPO first should have recourse to such internal compares before moving on to external comparables. Only on insufficiency of data in respect of internal comparables, support must be drawn from the external comparables 4.1 We therefore, direct the Ld.TPO to carry out detailed analysis of the international transactions using TNMM as MAM, based on the materials fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) (d) Having regard to the above, the TPO ought to have accepted the internal TNMM analysis undertaken by the Appellant. However, the TPO has not commented on the internal TNMM analysis undertaken by the Appellant and has proceeded to undertake external TNMM analysis, thereby selecting companies operating in pharmaceutical and chemical industry. The DRP has also not made any specific observation or finding on the internal TNMM performed by the appellant. 17. In this regard the Appellant wishes to highlight the difference between nutraceuticals and pharmaceutical industry in the ensuring paragraphs and submits that considering both as similar is not appropriate. 18. It is important to understand that the comparable of nutraceutical industry are companies which are into extraction of contents from food based or plantbased sources and not companies involved in complex function of pharmaceutical industry. 19. Major difference between nutraceutical and pharmaceutical industry is furnished in Page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d party, it is always safe and advisable to have recourse to such internal comparable case. . 14. Hence we are of the opinion that the TPO had erred in choosing an external comparable, when there was an internal comparable uncontrolled transaction which the assessee had taken in its TP study 24. The Hon'ble Delhi High Court in the case of Sony Ericcson Communications India P. Ltd. Vs. CIT (2015) 55 taxman.com 240 held that the TNMM is a preferred TP Method of determination of ALP of international transactions for its proficiency, convenience and reliability and in TNMM preference should be internal or in-house comparables. 25. Based on the above referred judicial precedents including in the Appellant s own case for AY 2013-14 and AY 2014-15, we request this Hon ble Bench to direct the TPO to consider internal TNMM as the MAM for bench marking international transactions with Associated Enterprises. round 19: Delayed receipts from AE s considered as unsecured loans and interest being calculated on it 55. The TPO has benchmarked the delay in receipt of the receivable and imputed interest of Rs.72,92,193/- based on the LIBOR rate during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... once the primary international transaction has been tested. 61. Without prejudice to the other contentions of the Appellant, the primary transaction in relation to trade receivable has been tested and consequently the notional interest should not be imputed. The receivables that have arisen and represented in the books are on account of the sale of chemical and herbal extract by the Appellant during the FY 2016-17 being the primary international transactions entered with the AE. Accordingly, the notional interest should not be imputed on the same. 62. In this regard, the Appellant highlights the Hon ble Bangalore Tribunal ruling in the case of Assistant Commissioner of Income Tax vs. Millipore India Limited [80 taxmann.com 12] wherein the Hon ble Tribunal followed the decision of the Co-ordinate Bench of Mumbai in the case of M/s Goldstar Jewellery Limited Vs. JCIT (53 taxmann.com 353) and deleted the TP adjustment arising on account of notional interest on overdue receivables from AEs. The Hon ble Tribunal noted that the transaction was an integral part of sale made by the Appellant to its AEs and therefore must be considered among with main transaction. The extract o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the seller. Therefore, the transaction of sale to AE and credit period allowed in realization of sale proceeds are closely linked as they are interlinked and the terms and conditions of sale as well as the price are determined based on the totality of the transaction and not on individual and separate transaction. Respectfully following the above decision, we hold that there can be no separate international transaction of interest in the international transaction of sale. Early or late realization of sale proceeds is only incidental to transaction of sale, but not a separate transaction in nature. Since we hold that the impugned transaction of interest on delayed realization of sale proceeds is not international transaction, it is not necessary to adjudicate upon the additional grounds raised by the Appellant Company. Hence, the appeal is treated partly allowed for statistical purposes. Respectfully following this decision, we hold that no ALP adjustment is permissible on this issue. (Emphasis supplied) 63. Further, reliance can also be placed in the case of Mastek Ltd. vs. ACIT [21 taxmann.com 173], the relevant extract of the ruling is provided below: If t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this period is reasonable and so no interest can be levied, just because amounts are shown as 'outstanding'. Accordingly, we cancel the interest levied and allow assessee's contentions. Grounds are considered allowed. (Emphasis supplied) 66. Further, in the case of Ingersoll Rand (India) Ltd V/s DCIT (67 taxmann.com 328 ITAT Bangalore Page 3520 3543 of the Case law Compilation (PB VI), wherein the Hon ble ITAT Bengaluru Bench in deleting the notional interest on trade receivables stating that no interest liability arises even if payment is made by the AE beyond the credit terms. The relevant extract of the ruling in Para 35 is provided below 11.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decision cited and placed reliance upon. We find that the decision of the ITAT, Mumbai Bench, in the case of Evonik Degussa P. Ltd. V ACIT - 05D, Circle 3(1), Mumbai (ITA No.7653/Mum/2011, dt.21.11.2012) of ITAT, Mumbai Bench is squarely applicable to the facts of the case in the case on hand. In this decision the ITAT, Mumbai Bench at para 28 thereof has held as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent to the debtor, time to process invoice both at the end of debtor and the Appellant, and the terms of payment and normal business practices. From an arm s length perspective what may be examined is the commercial transaction itself, as a result of which the debit balance has come into existence, and the terms and conditions, including terms of payment, on which the said commercial transaction has been entered into. Also, typically, the impact of receivables is factored by independent companies in the sale price and thus no separate compensation or transaction is undertaken. 69. While proposing the notional interest on receivables outstanding from AE, the TPO wants to bring it within the ambit of Section 92, a transaction that is non-existent. In the absence of any specific provision in the Act which seeks to tax any hypothetical income, the Appellant cannot be subject to tax in respect of 'hypothetical income', i.e., to say an income which ought to have been earned-or that the Appellant failed to earn. In the present case, since no income has been earned or can be said to have been earned by the Appellant in respect of interest chargeable from AEs, the question o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s length price is determined in respect of the sale/service transaction, it would be deemed to be covering all the elements and consequences of the transaction of sale/service. After having determined the arm s length price in a sale/service transaction, it cannot be accepted that separate adjustment is required in respect of interest therefrom. Judicial Precedents 74. The Honorable Supreme Court in the case of Commissioner of Income Tax vs. Bokaro Steel Ltd. 236 ITR 315 1999 SC has held that only real income can be brought to tax and not hypothetical income. In this connection, the Appellant wishes to highlight to the judicial pronouncements in India by the Mumbai ITAT in the case of Nimbus Communications Ltd. (9 taxmann.com 26) wherein the ITAT has also held that debit balances are not an international transaction. ITAT in their order have specifically noted that the international transaction resulting in a debit balance and the debit balance itself should not be analyzed. The relevant extracts of the ruling have been provided as follows: A continuing debit balance, in our humble understanding, is not an international transaction per se, but is a result of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not followed the prescribed economic analysis to determine a mark-up via any of the prescribed methods as per the Act for determination of mark-up of 450 basis points and therefore the interest rate considered by the TPO is arbitrary and whimsical. Therefore, the adjustment on account of interest imputed on delayed receivables ought to be rejected. A. Grounds 21-23 Corporate tax adjustments Ground 21: Denial Of deduction of R D Expenditure u/s 35(1)(i) or 37(1) of the Act 77. The AO and DRP has erred in law and on facts by not allowing the claim of Rs.3,86,332/- [out of the total disallowance u/s 35(2AB) of Rs.7,72,665/-] either u/s 35(1) or u/s 37 of the Act, without appreciating that the same was incurred for the purpose of business of the appellant even if it did not qualify for weighted deduction u/s.35(2AB). 78. The Appellant has a state-of-the-art in house research facility in Peenya, Bangalore. The Appellant has a modern R D center supported by a full-fledged pilot plant, testing facilities. R D facility is also equipped by the latest and modern Medium Pressure Liquid Chromatography's (LC's) and Preparative High-Performance Liquid Chr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 233.20 NIL Revenue Expenditure 875.25 871.40 3.85 Eligible R D Expenditure u/s 35(2AB) 1108.45 1104.60 3.85 Weighted deduction at 200% 2216.92 2209.20 7.72 82. No specific reason is furnished by DSIR for the small disallowance of Rs.7.72 lakhs made by them. Although the company feels confident that there is no reason for the disallowance, in view of the difficulties and expenses involved in taking up the matter with DSIR in Delhi, the appellant company had accepted the small disallowance. 83. It was explained in detail vide submissions to the AO dated 10th Feb 2021 (pages 202-208 of paper book I) that based on the DSIR certificate issued in Form 3CL, a sum of Rs.7,72,665/- is ineligible for weighted deduction of 200% u/s 35(2AB) of the Act. However, the same does not take away the right of the appellant to claim the same as an allowable expenditure u/s 35(1) of the Act to the extent of 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure since it has been incurred wholly and exclusively for the purpose of business of the assessee. However, the AO and DRP has not allowed this claim. 88. Since all these expenditures were incurred by the Appellant in the course of its business and since all of the expenditure is in the nature of revenue expenditure, the Appellant shall be eligible for deduction of these expenditure either under section 35(1)(i) or under section 37(1) of the Act. 89. In this regard, reliance is placed on the following decisions which have upheld the alternate claim of deduction of the expenditure incurred: a) Resil Chemicals Private Limited vs. DCIT [ITA No. 1719 (Bang) 2016, dated 7th July 2017] - Hon ble Tribunal, Bangalore Bench had held as under in para 10 (Page 3609 of Caselaw Compilation (PB VII)): Under these facts, we feel it proper to restore this matter to the file of AO for fresh decision with this direction that the disallowance should be in respect of weighted deduction only and not for the original expenditure to the extent of 100% of the expenses b) Coromandel International vs. ACIT [ITA No. 101/Hyd/2012, dated 28th August 2014]- Hon ble Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the matter may be send back to the file of AO/TPO in the light of above judgments. 7. The ld.DR relied on the order of the lower authorities. 8. After hearing both the sides and perusing the entire material and examining the assessee s own case as cited by the ld.AR of the assessee, we observe that the issue raised before us is similar in assessee s own case cited supra. The relevant part is as under:- 3. At the outset, it is submitted that assessee bench marked the transaction of sale to the AE using Cost Plus Method (CPM) analysis, however, the Ld.TPO rejected the CPM analysis and used Transactional Net Margins Method (TNMM) as most appropriate method. 3.1 The Ld.AR at this juncture submitted that assessee do not object for the use of TNMM. Accordingly, ground no. 1 stands dismissed. However, she submitted that there are internal comparables available and sufficient data were filed before the DRP which were not considered for purpose of comparability analysis. She prayed that as against the external comparables used by the Ld.AO/TPO, the internal comparables submitted by assessee may be considered in order to bench mark the international transaction for the years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal comparables so filed by assessee. In the event, the details filed by assessee is not verifiable or not in accordance with law, the Ld.AO/TPO is open to carry out analysis in accordance with law. Ground nos. 2-4 raised by assessee stands allowed for statistical purposes. Ground nos. 5-10 becomes academic at this juncture as the entire assessment in respect of transfer pricing adjustment has been remanded to the Ld.AO/TPO for de novo consideration based on the directions hereinabove. These grounds may be considered by the Ld.AO/TPO afresh in the remand proceedings. Needless to say that proper opportunity of being heard needs to be granted to assessee. Accordingly, grounds raised by assessee stands partly allowed for statistical purposes. 9. Respectfully following the above decision in the assessee s own case cited supra we also send back this issue to the file of AO/TPO for de-novo consideration in the above terms and decide the issue as per law. Needless to say reasonable opportunity of hearing to be given to the assessee and the assessee is directed not to seek unnecessary adjournments for early disposal of the case. 10. Accordingly ground No.1 is allowed f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction - Held, yes [Para 13] [In favour of revenue] II. Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm s length price (Adjustment - Interest) - Assessment year 2015-16 - Assessee was engaged in business of providing information technology enabled services (ITeS) to its Associated Enterprises (AE) - TPO had held that outstanding receivables from AE was in nature of loans and calculated interest on receivables from AE - DRP upheld adjustment of TPO with respect to interest on receivables with a direction to reduce credit period from 90 days to 30 days - It was found that assessee had entered into a service agreement with its AE with regard to providing ITeS wherein by way of amendment credit period was increased to 90 days - Whether since said fact had not been taken into consideration by DRP, TPO should compute ALP afresh and should consider credit period of 90 days while determining ALP of international transaction of interest on receivables - Held, yes [Paras 12 to 15] [Matter remanded] 14.2. Respectfully following the above judgments, we also uphold that the interest on delayed receivables is an international transactions, accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X
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