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TMI Blog2024 (3) TMI 713X X X X Extracts X X X X X X X X Extracts X X X X ..... ing LIBOR + 200 Points. In the case of Apache Footwear India Pvt. Ltd. vs. ACIT [ 2023 (4) TMI 521 - ITAT HYDERABAD] concluded that interest on outstanding receivables from the AE is required to be separately benchmarked and interest should be charged on the delayed period @ 6% on the receivables. We also make it clear that interest cannot be charged on each and every receivable and has to be examined on case to case basis and the TPO has to enquire and analyze the statistics over a period of time to discern a pattern to come to a conclusion that the arrangement reflects an international transaction. The AO has to examine the transactions of similar in nature with non-AEs to come to a conclusion to charge interest and also to determine the basis of interest to be charged. In this case, the inter company services agreement provides for charging of interest on delay of receivables after 60 days. The argument that the chargeability may accrue and doesn t necessarily binding on the assessee to charge the interest cannot be accepted. The very purpose of transfer pricing mechanism and determination of arm s length price is to examine whether the related party is given undue benefit at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of law that the actual expenditure which directly pertains to a particular unit cannot be allocated to other unit. AO has also allocated the Repair and Maintenance expense to the SEZ unit ignoring the fact that as per clause 3.10 of the lease agreement of the SEZ unit all repair are to be carried out by Lessor. Thus, the allocation of such expenses is fundamentally flawed. Staff welfare expenses, contribution to gratuity and recruitment expenses being directly identifiable cannot be apportioned on the basis of number of employees. With respect to indirect/ common costs as well, the turnover basis for allocation of indirect/ common expenses is the most reasonable method which had been consistently followed by the Appellant in the preceding years and duly accepted by the revenue authorities. Hence, we find that the reasons given by the Revenue and the case laws relied there upon cannot be said to be reasonable grounds to reallocate the expenses in existence of the facts contrary to the decision taken by the ld. DRP. The appeal of the assessee on this ground is allowed. Increase in Capital Reserve - disallowance of additional claim for deduction paid to the employee towards compensati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany receivables as a separate international transaction of unsecured loan and imputing interest on such transaction. 2.4 That on the facts of the case and in law, the Hon'ble DRP/Learned AO/Learned TPO has erred in making the adjustment despite Appellant being a debt free company. 2.5 That on the facts of the case and in law, the Hon'ble DRP/Learned AO/Learned TPO has erred in making the adjustment even though no interest was charged for delayed realization from third party customers as well. 2.6 That on the facts of the case and in law, the Hon'ble DRP/Learned AO/Learned TPO has erred in not considering the period of 90 days, as provided under section 92CE of the Income Tax Act, 1961 read with Rule 10CB of the Income Tax Rules, 1962, for the purpose of computing the subject adjustment. 2.7 That on the facts of the case and in law, the Hon'ble DRP/Learned AO/Learned TPO has erred, by not giving the benefit of set off the outstanding payables and advances from AEs while computing the subject TP adjustment. 2.8 That on the facts of the case and in law, the Hon'ble DRP/Learned AO/Learned TPO has erred, by considering the interest rate of LIBOR plus 400 basis poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd. and reproduced only a part of the extract of the Supreme Court ruling referred to by the Hon'ble Delhi High Court in the case of CIT vs. EHPT India (P.) Ltd. [2013] 350 ITR 41 (Delhi). 4.5 Without prejudice to above, the Learned AO has erred in applying an incorrect ratio to reallocate the expenses between the SEZ and taxable units. 4.6 On the facts and circumstances of the case and in law, the Hon'ble DRP, has erred in not adjudicating sub-ground 4.5 above relating to application of incorrect ratio by the Learned AO to reallocate the expenses between the SEZ and taxable units. The Appellant has filed a rectification application before the Hon'ble DRP/Learned Respondent for rectification of the above mistake and the aforesaid ground shall not be pressed where the application is allowed by the Hon'ble DRP/Learned Respondent. Ground No. 5 - Addition on account of increase in Capital Reserve amounting to INR37,82,75,381 5.1 On the facts and circumstances of the case and in law, the Hon'ble DRP/Learned AO has erred in making an addition of INR 37,82,75,381 representing voluntary contribution received by the Appellant from group company as reimbursement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Learned AO has erred in charging excess interest under section 234B of the Act. The Appellant has filed a rectification application before the Learned Respondent for rectification of the above mistake and the aforesaid ground shall not be pressed where the application is allowed by the Learned AO. 9 Ground No. 9 - Initiation of penalty proceedings under section 271(1)c) 9.1 On the facts and circumstances of the case and in law, the Learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act against the Appellant on account of the above adjustments made in the assessment order. 3. The grounds to be adjudicated are, 1. Interest on receivables 2. Capitalization of wireless ports 3. Allocation of expenses 4. Capital reserves and 5. Employee compensation 4. At the outset, the ld. AR argued referring to the submissions made before the revenue authorities. 5. Against the arguments of the ld. AR, the ld. CIT DR submitted his arguments in writing which is reproduced as under: Issue No 1. (Revised Grounds of Appeal No. 2, 2.1, 2.2 2.3) Interest on delayed receivables In this case, the AO/TPO has made addition of Rs. 7,66,20,461/- on account of interest on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be characterized as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee will have to be studied. In other words, there has to be a proper inquiry by the Transfer Pricing Officer by analyzing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an associated enterprise, the arrangement reflects an international transaction intended to benefit the associated enterprise in some way. 11. The court finds that the entire focus of the Assessing Officer was on just one assessment year and the figure of receivables in relation to that assessment year can hardly reflect a pattern that would justify a Transfer Pricing Officer concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o provide benefit to its AE. For ready reference, the addition made by the TPO/AO/DRP for delay in respect of payments to be received from AEs for A.Y. 2015-16 and A.Y. 2017-18 is mentioned below for the kind perusal of the Hon'ble Bench. Year wise pattern of delay in receivables in the case of M/s Concentrix Daksh Services India Pvt. Ltd. are given below- Year wise pattern of delay in receivables in the case of Concentrix Daksh Services India Pvt. Ltd. S. No A.Y. Whether TPO treated outstanding receivables as separate International transaction Interest Charged by TPO @ DRP s Directions 1 2015-16 Yes LIBOR+400 basis points LIBOR+400 basis points 2 2016-17 Yes and invoice wise analysis done LIBOR+400 basis points LIBOR+400 basis points 2017-18 Yes and invoice wise analysis done LIBOR+400 basis points LIBOR+400 basis points (3) From the perusal of the above table, it is clear that there is delay in receivables for the years F.Y. 2015-16 to F.Y. 2017-18. Not only this, in these years, the AO/TPO has examined year wise delays and based on the examination of invoices/delays in the above cases for the respective years, the AO/TPO/DRP has computed the delays after duly considering / a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im of such transactions would invariably be to benefit the AE. Otherwise if it is delay on normal functioning, which will be covered within the same F.Y. then the delayed period cannot be factored in the working capital adjustments. (vi) Further, this issue of delayed receivables by the company, whether, gets factored in the working capital adjustment or not has been dealt in detail by the Hon'ble Delhi ITAT in the case of Bechtel India Pvt. Ltd. vs ACIT 4(2), 85 Taxmann.com 121 (Delhi Tribunal 2017) wherein the Hon'ble Tribunal has explained the issue of working capital adjustment on account of delayed receivables. Being very pertinent, the relevant extract of the Hon'ble Tribunal order is reproduced below:- 19. In the case of Ameriprise India (P.) Ltd. (supra), it has been observed that the working capital adjustment is in respect of international transaction of rendering services to the AE. Interest for credit period allowed as per the agreement is given in the price charged for rendering of services. Whereas the non-realisation of invoice value beyond the stipulated period is a separate international transaction whose ALP is required to be determined. Granting of wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng with the debt free funds only. It is also submitted that in the above noted case of Bechtel India Pvt. Ltd, the Hon'ble Tribunal has arrived at the decision after analyzing the decision of the Hon'ble ITAT in the case of Kusum Healthcare Pvt. Ltd. Vs (ITA 6814/Del/2014), ITAT, Delhi and also the decisions of the Hon'ble ITAT in the case of Ameriprise India Pvt. Ltd. (2015) 62 Taxmann.com 237 (Delhi Tribunal) and Mckinsey Knowledge Centre Pvt. Ltd. vs. DCIT (2017) 77 taxmann.com 164 (Delhi Tribunal). (vii) It is further submitted that the various Hon'ble Tribunals after relying on the various High Court decision, after the amendment to section 92B of the IT Act introduced by the Finance Act 2012, have held that the outstanding receivables from the AEs constitute a separate international transactions and on which interest is to be calculated separately and ALP adjustment are required to be made. Also the various Hon'ble ITATs have also distinguished the decision of Hon'ble Delhi High Court in the case of Kusum Healthcare Pvt. Ltd. and have held that the outstanding receivable constitute a separate international transaction and the department /TPO can charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgued that the working capital adjustment has been granted by the Id. TPO to the assessee for both the years and hence, there cannot be further imputation of interest on outstanding receivables as the same gets subsumed in the working capital adjustment itself. In this regard the Id. AR placed reliance on the decision of Delhi High Court in the case of Pr. CIT v. Kusum Healthcare (P.) Ltd. [2018] 99 taxmann.com 431/[2017] 398 ITR 66/[2018] 300 CTR 343 and also the Co-ordinate bench decision in the case of ValueLabs v. ACIT [IT Appeal Nos. 1909 and 1910 (Hyd.) of 2017, dated 9-7-2020]. We find that there is absolutely no dispute that working capital adjustment had indeed been granted by Id. TPO to the assessee for A. Y. 2013-14 and 2014-15. Infact, there is also an exclusive discussion made by the Id. DRP in para 2.1.12 of its order regarding the same for A.Y. 2014-15. Hence, by applying the ratio of the Hon'ble Delhi High Court in the case of Kusum Healthcare referred to supra, no imputation of interest on outstanding receivables could be made thereon for both the years. However, in respect of invoices raised in earlier years, where the amounts were realized during the year und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Hon'ble Delhi High Court in the case of PCIT vs. Kusum Healthcare Pvt. Ltd. 398 ITR 66 (Delhi 2017. After considering the various grounds raised by the assesseee in those cases, the Hon'ble Respective ITATs has rejected the assessee's contentions and considered the interest on outstanding receivables as separate international transactions which is required to be benchmarked separately and assessee was found liable for separate adjustment on account of interest receivables. Also in all these cases the decision of Hon'ble Delhi High Court in the case of Kusum Healthcare was duly considered and distinguished. 4. Reliance is also placed on the recent decision of the Hon'ble ITAT Hyderabad in the case of Apache Footwear India Pvt. Ltd. v. ACIT (2023) 148 taxmann.com 371 (Hyderabad-Trib.), wherein the Hon'ble Tribunal after considering the various decisions including the Hon'ble Delhi High Court decision in the case of Kusum Healthcare Pvt. Ltd. have come to conclusion that outstanding receivables by the assessee from AEs are required to be separately benchmarked and interest should be charged on the delayed period @ 6% on the receivables. Being very pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he argument of the assessee that the assessee is a debt free company and therefore, no borrowed fund was used for making supplies to it's A.E. and therefore, is not liable to be compensated for the delay in receiving the receivable is concerned, the same in our view, suffers from inherent flaw as in the T.P. analysis, the TPO is required to examine whether the assessee had supplied the product/services to it's A.E. at Arm's Length Price or not? If by providing the services/goods at a discounted rate or permitting the assessee to receive the payment after a long period of 60 days or 90 days, then it will amount to permitting the A.E. to use the working capital of the assessee for the purposes of earning the profit. No prudent business man would venture into this kind of activity and permit a third party to use the working capital of the assessee and earn profit thereon. In the present case, though the assessee was required to maintain the T.P. Study and file the same before the TPO to show that the assessee's transactions with it's A.E. were at Arm s Length however, nothing has been brought to our notice that the assessee has brought any comparable instance. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire transfer. Daily interest at the rate of prime rate plus two percent (2.0%) per annum may accrue and be charged, until paid, on all payment not received by an invoicing party within such sixty (60) days period. (C) In the event that a party disputes an invoice, the disputing party shall deliver a written statement describing the dispute to the invoicing party within sixty (60) days following receipt of the disputed invoice. The statement shall provide a sufficiently detailed description of the disputed items. Amount not so disputed shall be deemed accepted. Thus, in the case of assessee, the agreement itself provides for charging of interest in case of delay in payments after more other 60 days. Further, the agreement itself says that interest @ prime rate + 2% per annum is to be charged on all payment which are received after 60 days and interest is to be charged is from the 61 day till the time the payment is made. Thus, from the perusal of the agreement clearly shows that the AE is liable to compensate the assessee company for all delayed payments and there is no exception granted on delayed payments. Thus, the AO/TPO/DRP has charged the interest and their action is clearly i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve ) and other cases cited above. (ii) Further, the above noted decisions of various Hon'ble tribunals clearly discusses the issue raised by the assessee of working capital adjustment subsuming the interest on outstanding receivables and categorically gives a finding that working capital adjustment doesn't subsume the within year transactions of outstanding receivables i.e. invoices realized during the year after the completion of credit period from AE's. Also this finding is not from only from one tribunal but several tribunals have given similar findings and interpreted the decision of Hon'ble Delhi High Court in Kusam Healthcare. It is also brought to the kind attention of the Hon'ble Bench i.e. the decision of various Hon'ble ITAT on the issues of interest on receivables are recent ones i.e. after the decision of Hon'ble ITAT in the case of the assessee for A.Y. 2015-16 Thus, it is humbly submitted that the ratio laid down in above noted decision with regard to working capital adjustment subsuming the interest or outstanding receivables realized during the years, may kindly be followed in the instant case also. D. Further the assessee has also relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 018 (9) SCC 1(SC) FB CIT V/s. GM Knitting Industries (P) Ltd. (2015) 376 ITR 456 (SC) have settled the law that the relevant provisions in the Act ought to be put to stricter interpretation only. It is also informed that during the course of hearing the assessee has mentioned that it is mostly deriving receipts from related parties only and the position taken in the hearing is contradicted to the grounds of appeal and hence not tenable. F. Reliance is also placed on the decision of the Supreme Court of India in the case of Distributors (Baroda) Pvt. Ltd. vs. Union of India (1985) 22 taxman 49 (SC), wherein the Hon'ble Supreme Court has clearly held that if the earlier orders are based on mistaken presumption with regard to existence or continuance of a statutory provision then the same should not be followed as a precedent and the law should be settled correctly and permanently (para 19 of the Hon'ble Supreme Court decision.) On the facts of the assesse case in the instant year, the ratio of the Hon'ble Suprie Court decision is squarely applicable as the earlier orders of the ITAT, in the case of the assessee are not based on correct appreciation of the facts and the la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company of the Assessee. Prior too aforesaid transfer of CRM Business, IBM had laid down an employee award program wherein as part of IBM centennial year celebrations, certain stock options were to be granted to the employees of IBM, and its group entities including the assessee company. However, as a result of acquisition of the CRM business from IBM, it was consequently agreed that the Synnex/ parent Company shall be responsible entity for compensating the eligible employees of the award program through a cash settlement. Thus, such settlement In respect of the employees of the Assessee. award program was an obligation required to be settled by Synnex/parent Company for al the In view of the above arrangement and understanding between Parties, the Assessee during the given year FY 2015-16 made a lump sum payment of IN 37.82.75.381m to its employee as cash settlement in lieu of aforesaid employee award program which was treated as a part of employee salary. Furthermore, for the purpose, of computing taxable income for Ay 2016-17. 17. The Assessee has a part of INR 26,78,37,118 from the above payment of INR 37,82,76,381 as a prior period expense. Copy of Computation of income for A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the employees was part of employee award program and treated (as evident from the assessee's reply filed before AO) as a part of employee salary. The salary payment is definitely a revenue expenditure and by the same logic, any reimbursement received from the parent company is also a revenue receipt and by no stretch of imagination, the reimbursement for salary can be treated as capital receipt. (3) The assessee's action of treating the two parts of the same transactions i.e. payment of salary to the employees as revenue expenditure and reimbursement of the same amount as capital receipt, is clear cut case of self contradiction because the two limbs of the same transaction which is of same nature, involves same amount etc. cannot be treated differently in the accounting principle. (4) In the assessee's case, the amount which it has been reimbursed, exactly the same amount which it has paid to its employee and in fact, it is clearly mentioned in the reply of the assessee that it has received lump-sum amount and treated to be part of the salary of the employees only. Thus there is a clear cut nexus between the receipt and the expenditure and it is a clear case of one to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of salary. Thus it is proved beyond doubt, that assessee received the amount of Rs. 37,82,75,381/- as reimbursement for giving of extra salary to employees and also disbursed the same amount as salary only. (e) Reliance is also placed on the order of the Hon'ble Mumbai ITAT in the case of GBTL Ltd. (2668/Mumbai/2018, A.Y. 2013-13). In this case, the assessee received a grant from its holding company for payment of salary to directors but did not show the entire remuneration in the P L a/c as income. The Hon'ble Tribunal has clearly held that the amount received from the holding company cannot be allowed to be treated as exempt if the utilization out of it is allowed as deduction from the total income, chargeable to tax. The Hon'ble Tribunal has clearly held that the assessee cannot treat the grant, as its non taxable income but at the same time claim utilization out of it as deduction from total income. The operative part of the order of the Hon'ble Tribunal on this issue is reproduced below:- 19. We find that the aforesaid conduct is unsustainable. The contention of the assessee is that the said sum was received from holding company to enable it to pay directors re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubstance the assessee is claiming the utilization of grant as deduction in the computation of income. 20. In this view of the matter in our considered opinion CIT(A) has completely erred in this regard. The amount received from the holding company cannot be allowed to be treated as exempt if the utilization out of it is allowed as deduction from the total income chargeable to tax. The assessee cannot treat the grant as its not taxable income and at the same time claim utilization out of it as a deduction from total income. Hence, we are of the considered opinion that the sum of Rs. 2.27 crores has been rightly brought to tax in as much as its utilization as remuneration has been claimed and allowed as deduction. The effect of this addition/disallowance is assessee's dubious act of not having claimed the expenditure/utilization of grant ostensibly though profit and loss account but claiming it though deduction in computation of income surreptitiously is nullified. Hence, we set aside the orders of learned CIT(A) and allow the Revenue's appeal on aforesaid reasoning. The ratio of above noted case clearly applies in the case of the assessee and it is humbly requested that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted, reallocated certain expenses between SEZ. (excempt) unit and taxable unit. (para 6.6 to 6.7 / Pg 18 to 19 to AO order. And based on that reallocation, recomputed deductions u/s 10A and made addition of Rs. 7,51,20,905/- (b) The AO and DRP have discussed the contentions of the assessee at length. Further the issue is argued in detail before the Hon'ble bench. However for the assistance of the Hon'ble bench, the following brief submissions may also be taken on record. (c) Repair Maintenance (R M); The assessee is in its 10th Year of operation of SEZ unit and it has not claimed any expense on Repair and maintenance. This is simply not possible, because how can a manufacturing unit can run in its 10th year without incurring any expense on R M. This looks beyond human probabilities and cannot be accepted. Reliance in this case is placed on the judgments of Hon'ble Supreme court in the cases of CIT v. Durga Prasad More Sumati Dayal v. Commissioner of Income -tax, (1995) 80 Taxman 89 (SC). (d) During the course of hearing the assessee has stated that it has signed lease agreement with a third party and because of that it is not debiting any separate repair and maintenan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aws cited are. 1) Controls Switchgear Co. Ltd. v. Deputy Commissioner of Incometax, HIGH COURT OF DELHI (2011) 16 taxmann.com 375 (Delhi). (para 13 14) 2) Khinvasara Investment (P.) Ltd. v. Joint Commissioner of Income tax SR-5, Pune (2018) 110 ITD 198 (Pune) ITAT PUNE BENCH 'A' (para 4.1 to 4.3) 3) Telecommunications Consultants India Ltd. v. Additional Commissioner of Income-tax, Range 16, New Delhi ITAT DELHI BENCH 'E' (2012) 20 taxmann.com 31 (Delhi). (para 13 to 16) 6. The arguments of the ld. DR have been provided to the ld. AR who inturn submitted his rebuttal in writing is reproduced below: 1. Transfer Pricing- Proposed Addition of INR 7.66.20,461 (Ground No. 2 to 2.3) 1.1 At the outset, it is submitted that late realization of sale proceeds gets subsumed under the working capital adjustment and accordingly, no further separate adjustment is warranted in respect of overdue receivables, as also upheld by the Hon ble Delhi High Court in the case of Kusum Health Care Pvt. Ltd. (ITA 765/2016) and by Hon ble Delhi Tribunal in Assessee s own case for AY 2015-16 (ITA No. 4453/Del/2019). 1.2 It is Ld. DR s contention that the AO/TPO order on Interest on delayed rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pression receivables does not mean that every receivable would automatically be characterised as an international transaction. The TPO has to enquire and analyse the statistics over a period of time to discern a pattern to come to a conclusion that arrangement reflects an international transaction. The High Court further held that merely stating that receivables have been outstanding beyond 180 days cannot in itself satisfy the aforesaid condition. 1.4.2 Further, even if it is established that such outstanding receivables indeed amount to an international transaction, even than no additions can be made where assessee has already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables as any addition on that account would distort the picture. 1.5 In the present case, the primary contention of the Appellant is that the TPO while benchmarking the ITeS segment has granted working capital adjustment to the Appellant and thus the Appellant s profitability was benchmarked against working capital adjusted margins of the Comparable. Thus, in term of the decision of jurisdictional high Court in case of Kusum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing balance of the comparable companies are available in the public domain. It is based on these principles and harmonic reading of the Income-tax Act, 1961 Income-tax Rules, 1962 that the jurisdictional High Court held that in case where working capital adjusted margins are compared then adjustment on account of outstanding receivable is not warranted. 1.10 Thereafter the DR in the submission (Pg. 5 6, Paragraph (vi) (vii) has referred to the following decisions of the Tribunal where adjustment in respect of notional interest on receivables has been upheld by the Tribunal: Bechtel India Pvt. Ltd. vs AC1T 4(2), 85 Taxmann.com 121 (Delhi Tribunal 2017) Ameriprise India Pvt. Ltd. (2015) 62 Taxmann.com 237 (Delhi Tribunal) Mckinsey Knowledge Centre Pvt. Ltd. vs DC1T (2017) 77 taxmann.com 164 (Delhi Tribunal) 1.11 Recently a coordinate bench of this Tribunal in the case of Orange Business Services India Solutions (P.) Ltd. v. DCIT ([2022] 141 taxmann.com 167 (Delhi - Trib.)) and Global Logic India Ltd [TS810-ITAT-2022(DEL)-TP], upheld the deletion of adjustment on account of interest on outstanding receivables by placing reliance on the Hon ble Delhi High Court ruling in the case of Ku ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expression receivables does not mean that de hors the context every item of receivables appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterized as an international transaction and (ii) With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis oj the outstanding receivables would have distorted the picture and recharacterized the transaction. 16.In the appeal filed by the assessee in the case of Mckinsey Knowledge, the Hon'ble High Court vide order dated 7-2-2018, while admitting the appeal on the other issue, remitted the issue of interest charged on outstanding receivables to IT AT, following their decision in the case of Kusum Healthcare. 17.However, vide order dated 9-8-2018, the Hon'ble High Court in the case of Mckinsey Knowledge, while deciding the appeal of the assessee on other issue, also rejerred to the decision of the Hon'ble Delhi Tribunal in case of Ameriprise India (P.) Ltd. (supra) on issue of interest charged on outstanding receivable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Health Care Pvt. Ltd. is still the binding precedent on the issue of outstanding receivables. 1.13. With regards to the DR s contention that the Appellant being a debt free company is not relevant, it is humbly submitted that same is in teeth of the observations made by the Hon ble jurisdictional high court in the case of Bechtel India [ITA 379/2016) wherein it has been 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 . 1.14. The relevant extract of the ITAT order (ITA No 1478/Del/2015) is reproduced hereunder: 15.1. It is brought to our notice that the Assessee is a debt free company. In such circumstances it is not justifiable to presume that, borrowed funds have been utilized to pass on the facility to its AE s. The revenue has also not brought on record that the Assessee has been found paying interest to its creditors or suppliers on delayed payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied on the aforesaid intercompany agreement to show that was applicable for AY 2016-17 only and not for earlier year. 16. It is submitted that there is no change in the facts in AY 2016-17 viz. a viz AY 2015-16. The intercompany agreement relevant for AY 2015-16 also provided for the same interest clause. See below extracts: 2.4 Invoicing and Settlement of Costs (B) Unless otherwise specified in Exhibit A, all payments under this Agreement shall be in United States dollars and shall be due within sixty (60) days of the date of invoice and may be made by check or wire transfer. Daily interest at the rate of the Applicable index - USD prime, LIBOR, or other similar index appropriate for the applicable currency or geography - plus two percent (2%) per year, may accrue and be charged, until paid, on all payments not received by the invoicing party within such sixty (60) day period. 1.21. In view of the above, it can be seen that there is no change in the facts in AY 2016-17 viz. a viz AY 2015-16, as alleged by the DR. Accordingly, it can be construed that the order passed by the Tribunal for AY 2015-16 for deleting adjustment in respect of notional interest receivables was passed af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (as the amount was payable to the employees who continued till December 2015) and crystallized in the subject year (when the stock awards were cancelled and cash-settled compensation became due), such an amount needs to be allowed as a deduction for the subject year. Accordingly, expenditure of INR 26,78,37,118, reported as prior period expenditure in the books of account based on accounting principles, is allowable in the current year. 2.6. Without prejudice to the above, it is to be noted that payment made by the Assessee to its employees in lieu of the unvested stock awards granted under the Centennial Award programme is governed by the provisions of section 43B of the Act, which provides for deduction of bonus on payment basis. 2.7. However, where the contention of the learned AO is accepted that the amount received has a direct nexus with the expenditure incurred by the Appellant, then there has to be uniformity in accounting for the 2 transactions, the addition for the year should be restricted to 1NR 11,04,38,263. 3. Allocation of expenses between SEZ and taxable units- INR 5,62,64,530 (the addition made in the final assessment amounting to INR was reduced from 7,51,20,905 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue authorities in previous years. Reliance placed on the Hon ble jurisdictional High Court judgment in the case of CIT vs. EHPT India (P.) Ltd. [350 ITR 41], wherein it was held by the Hon ble jurisdictional High Court that distortion of profits may arise if the consistently adopted and accepted method of apportionment is sought to be disturbed in a few years. 7. Heard the arguments of both the parties and perused the material available on record. 8. We have examined the provisions of the Act and judgments on this issue. 9. As per explanation (i)(c) of Section 92B of the Income Tax Act as amended by Finance Act, 2012 w.r.e.f. 01.04.2002, the interest receivables is an international transaction. Section 92B(i)(c) reads capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business . 10. In the instant case, the revenue has clearly shown a pattern by analyzing the statistics over a period of time which is spread over more than one year and based on that the AO came to conclusion th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ays. The argument that the chargeability may accrue and doesn t necessarily binding on the assessee to charge the interest cannot be accepted. The very purpose of transfer pricing mechanism and determination of arm s length price is to examine whether the related party is given undue benefit at the cost of the profits and the consequent taxes to be paid in India. The extract of the agreement is as under: 2.3 Invoicing and Settlement of Costs (B) Unless otherwise specified in Exhibit A, all payments under this Agreement shall be in United States dollars and shall be due within sixty (60) days of the date of invoice and may be made by check or wire transfer. Daily interest at the rate of Prime rate plus two percent (2%) per annum may accrue and be charged. until paid, on all payments not received by an invoicing party within such sixty (60) day period. 15. Hence, we direct that the adjustment on account of receivables be computed after following the directions of the ld. DRP. The AO has considered each and every transaction and arrived at right conclusion to determine the adjustment. While computing so, it is directed that the AO shall set off the receivables cleared by the AEs in le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tutory bonus of Rs.32,46,28,564 and employee award compensation of Rs. 37,82,75,381 b. Differences in commercial and business parameters prevalent in the respective units 19. The AO reallocated the expenses between SEZ and taxable units in the following manner: a. Repair and maintenance expense have been proposed to be allocated in the ratio of the block of assets of the respective units. b. Staff welfare and contribution to gratuity expenses have been proposed to be allocated in the ratio of employees working in SEZ and taxable unit (0.19:1). c. Recruitment and sub-contract expenses have been proposed to be allocated in the ratio of the turnover of SEZ and taxable unit (0.22:1). In this manner, the AO proposed the following disallowance: Description Non-SEZ SEZ Total Direct Expenses (Specifically Identified): a. Repair and Maintenance (Building) 38,92,65,053 - 38,92,65,053 b. Repair and Maintenance (Plant) 4,80,69,893 - 4,80,69,893 c. Staff Welfare expenses 5,08,14,690 36,06,655 4,72,08,,035 d. Contribution of Gratuity 10,62,22,763 1,05,71,295 9,56,51,468 e. Recruitment expenses 14,12,32,148 1,17,30,593 12,95,01,555 f. Sub-contractor charges 50,10,02,990 17,520 50,09,85,740 Indire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure which directly pertains to a particular unit cannot be allocated to other unit. 26. The AO has also allocated the Repair and Maintenance expense to the SEZ unit ignoring the fact that as per clause 3.10 of the lease agreement of the SEZ unit all repair are to be carried out by Lessor. Thus, the allocation of such expenses is fundamentally flawed. 27. Further the staff welfare expenses, contribution to gratuity and recruitment expenses being directly identifiable cannot be apportioned on the basis of number of employees. With respect to indirect/ common costs as well, the turnover basis for allocation of indirect/ common expenses is the most reasonable method which had been consistently followed by the Appellant in the preceding years and duly accepted by the revenue authorities. 28. Reliance in this regard is placed on following decisions CIT vs. IBM Global Services India (P.) Ltd [2020] 429 ITR 386 (Karnataka) CIT vs. EHPT India (P.) Ltd. [2013] 350 ITR41 (Delhi) In a case where alternative methods of apportionment of the expenses are recognized and there is no statutory or fixed formula, the endeavour can only be towards approximation without any great precision or exa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime voluntary contribution by Synnex and not as a consideration for provision of any services or in any other manner in the ordinary course of business. It is, accordingly, argued that the said contribution qualifies as a capital receipt and cannot be brought to tax in the hands of the assessee. It is also said that mere change in the settlement mechanism between the Buyer (Synnex) and IBM (Seller) and subsequent contribution by Synnex of an equivalent amount to the assessee would not impact the taxation of the assessee. 32. The directions of the ld. DRP on this issue are as under: The AO has returned a finding that the assessee has treated the payment made to its employees as revenue in nature and debited the same from its total income. However, the reimbursement received by it from its parent company of exactly the same amount and exactly the same purpose has been treated as capital by the assessee. There has to be uniformity in accounting for the entire transaction. The assessee cannot avail both the benefits of treating the payments made to the employees as revenue and the reimbursement (since there is no profit element in the amount given by Synnex to the assessee company) rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the balance amount of Rs.11,04,38,263/- was reported as the expenditure for the current year (which included a sum of Rs.3,39,13,372/- being retention bonus paid to the employees of the Appellant) was reported as the expenditure for the current year. The Appellant disallowed Rs.26,78,37,118/- (recorded as prior period expenditure), while filing the return of income and thus, deduction of aforesaid amount was not claimed in the return. Arguments: The amount of Rs.37,82,75,381/- was received by the Appellant as one-time voluntary contribution by Synnex and not as a consideration for provision of any services or in any other manner in the ordinary course of business. The contribution was made to protect the capital investment made by the Synnex in the Appellant, in the respondent. Hence, the said contribution qualifies as a capital receipt and cannot be brought to tax in the hands of the Appellant. Such treatment is also in line with the accounting treatment followed towards such receipts which were accounted for as a capital contribution by Synnex to the Appellant. Mere change in the settlement mechanism between the Buyer (Synnex) and IBM (Seller) and subsequent contribution by S ..... 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