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TMI Blog2022 (9) TMI 1463X X X X Extracts X X X X X X X X Extracts X X X X ..... olutions Limited is deriving income not only from the sale of traded/finished goods but also derives about 10% of revenue from the services like management fee and commission. The segmental information of the annual report reads that the entire revenue is from only one segment, without any detailed figures as to the profitability of the sale of product and sale of service. In these circumstances, we are of the considered opinion that it is unsafe to consider this entity as a comparable to the assessee. We, therefore, direct the AO/TPO to exclude this entity from the final list of comparables. Hindage Oilfield Services Limited - Both the entities [Assessee and Hindage] are engaged in the sale of traded products. There is slight variation in the description of the products. TNMM will take care of the variations. For this reason, we decline to interfere with the findings of both the authorities in respect of inclusion of Hindage Oilfield Services Limited as a comparable. Adjustment towards Interest on receivable - HELD THAT:- We are of the considered opinion that the ends of justice would be met by accepting the interest rate on similar foreign currency receivables/advances as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recomputed at Rs. 7,65,90,250/- under normal provisions of the Act and Rs. 5,08,80,452/- under the MAT provisions, by order dated 26/07/2019. 5. Hence, the assessee preferred this appeal before us on several grounds. Grounds No. 1 2 are general in nature, Ground No. 3 relates to the enhancement of adjustment value in respect of distribution segment of the assessee. This ground is not pressed by the assessee. Ground No. 4 relate to the challenge the inclusion of four entities, namely, KPL International Limited, Golden Chemicals Private Limited, Hitech Specialities Solutions Limited and Hindage Oilfield Services Limited. At the time of arguments, learned AR gave up the challenge in respect of Golden Chemicals Private Limited and confined to the other three entities only. Ground No. 5 is also not pressed but it relates to the addition of 5% mark up on recovery of expenses. Ground No. 6 relates to the outstanding receivables; whereas Grounds No. 7 8 are consequential in nature. 6. Coming to Ground No. 4, it could be seen from the record that the assessee determined the margins at 4.68% by adopting Transactional Net Margin Method (TNMM) as the most appropriate method and OP/O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... minantly involved in the business of trading of chemicals, merely because KPL involves in sale of tea, refrigerant gas and wind power only to the tune of 2.5% such objection cannot be countenanced. In respect of the ownership of intellectual property, learned TPO referred to the profit and loss account and found that the intellectual property/rights possessed by the KPL had no bearing on the profit margins. 10. Learned DRP also referred to schedule 17 at Page No. 32 of the annual report of KPL and found that the total revenue from the traded goods, namely, chemicals, polymers and others is Rs. 206,16,55,588/- whereas the total revenue of the company is Rs. 211,56,02,943/- which establishes that 97.2% of the total revenue of KPL is from trading in chemicals and, therefore, the contention of the assessee that the KPL is functionally dissimilar or that the non-availability of segmental information is fatal to the comparability. Learned DRP also further found that the ownership of IPRs by the KPL has no impact on the revenue generation or profit margin, and at the same time, the assessee also failed to explain how the IPRs have impacted the profits earned. Learned DRP, however, dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the learned DRP, it is 2.8%. There need not be any confusion between the dissimilarity of functions and dissimilarity of products. Function of both the assessee and the KPL is similar, namely, distribution of products. Even to the extent of 97.5% such products are also similar. Then, unless and until it is established by the assessee that a grave prejudice would be caused by comparing this company with the assessee or that the 2.5% revenue derived by KPL by the sale of other products, it is not fair for the assessee to seek the view taken in Intoto Software (supra), to be extended to the case of the assessee and KPL where both the companies are broadly in the sale of similar products and the additional product only secures 2.5% of the revenue. According to us, the view taken in Intoto Software (supra) has no application to the facts of this case. We accordingly uphold the findings of the learned Assessing Officer/ learned TPO and learned DRP in this regard and confirm the KPL as a comparable with the assessee. 13. Hitech Specialities Solutions Limited was objected by the assessee before learned TPO stating that this company is a trading business dealing in the distribution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no material before us to show that the management fee and commission derived by the assessee is altogether from a different segment and have nothing to do with the function of distribution of petroleum additives. Even the information furnished by way of the paper book also does not reflect on the functional difference of various segments if any, of this entity. Though the revenue recognition at page No. 844 of the paper book shows that revenue from sale of goods is recognized on transfer of all significant risks and rewards of ownership to the buyer, revenue from services is recognized on rendering of services to the customers, brokerage income is recognized when the receipt of the brokerage from the insurance companies becomes certain, dividend income is recognized when the right to receive payment is established and interest income is recognized on the time proportion basis. In the annual report, there is no information as to the functions performed and risks involved, in detail. 18. In the profit and loss account of this entity as stated above, the revenue from management fee and commission is shown as Rs. 6.16 crores as against the total revenue of Rs. 63.34 crores. It is, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss account incorporated in the annual report of Hindage Oilfield Services Limited, we find that the total revenue of operations is from sale of traded goods and the details of the traded goods describe the products as additives, lubricants and car care products. The traded goods relate to the consumables of the automobile sector and absolutely there is no material before us to show that sale of car care products constitute a distinct segment for the purpose of separately mentioning the segmental information. As stated above, the distinction between the similarity of functions and similarity of products has to be kept in mind and an entity which is predominantly in the sale of the products that are sold by the assessee also, merely because they are selling some other type of the consumable of the same field, it cannot be said that such an entity is dealing with diversified functions and is expected to maintain segmentals for each and every product separately. TNMM subsumes into its fold all such minor variations, lest, Comparable Uncontrolled Price (CUP) would have been resorted to. It is not always possible to see that the comparable company is also so exactly similar to the compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of M/s. Logix Microsystems Ltd. Vs. ACIT in I.T.A No.423/Bang/2009, dated 07/10/2010, learned TPO thought it proper to consider the SBI short term deposit rate as appropriate CUP to determine the ALP of the interest on outstanding receivables. 26. Learned DRP relied upon the same case law referred to by the learned TPO and also the decision of the Hon'ble High Court of Bombay in the case of PCIT Vs. Tecnimont (P) Ltd., (2018) 96 taxmann.com 223 and concluded that extending credit period beyond normal period of sixty days is in substance granting of loan to an AE so as to enjoy the funds, which the AE would otherwise have to repay within the period of sixty days and, therefore, extending credit period beyond the normal credit or agreed credit period would constitute a separate international transaction. Learned DRP, however, granted relief to the assessee to the extent of directing the learned TPO to compute the interest liability on payables on similar basis and adjust the same against the interest receivables. 27. We have gone through the findings of the authorities in the light of the submissions made on either side. In view of the view taken by the Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal sources and pay the amounts payable for exports and expenses within time. Therefore, extending of credit beyond the normal period of sixty days is in substance a granting of loan to an AE so as to enjoy the funds, which the AE would otherwise have to repay within the period of sixty days. On this premise the Hon'ble High Court upheld the Tribunal computing interest at LIBOR rates as the rate prevailing in country where the loan is received/consumed by the AE by observing that the same cannot be faulted. 29. In the case of CIT Vs. CottonNaturals (I) (P.) Ltd. [2015] 55 taxmann.com 523 (Delhi) the Hon'ble Delhi High Court considered the question - whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, observed that such a question must be answered by adopting and applying a commonsensical and pragmatic reasoning and held that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid; that the interes ..... X X X X Extracts X X X X X X X X Extracts X X X X
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