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TMI Blog2024 (5) TMI 1108X X X X Extracts X X X X X X X X Extracts X X X X ..... e retention by AEs to 5% of consideration derived against supply of dossier. (i) The CIT(A) ought to have considered the fact that the T.P.O. cannot make any adjustment when there are no comparables and when no such adjustment was made in the earlier years. (ii) The CIT(A) ought to have considered the fact that the AE makes efforts in selling the dossier which is more advantageous to the appellant company. (iii) The CIT(A) ought to have noticed and considered the fact that the action of the TPO is without making any Transfer Pricing Exercise in determining ALP for the services. 2(a) The learned CIT(A) erred in confirming the action of the Assessing Officer in holding that any adjustment can be made in respect of corporate guarantee provided to Pharmed Health Care Company SAE and Hetero FZC0, UAE. 2(b) The learned CIT(A) ought to have Same as in 2(a) above seen that Pharmed Health Care Company SAE is a Joint Venture company wherein the appellant is holding equity shares and the bank guarantee was provided for 30.50% of the borrowings, and is in accordance with Joint Venture agreement. 2(c) The learned CIT(A) ought to have considered the fact that even other constituents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r on the given facts and circumstances of the case and in law, the CIT(Appeals) is correct in directing to charge the corporate guarantee fee at 0.53% contravening the India Transfer Pricing regulations, which prescribe that the data to be used for the purpose of comparability analysis should relate to the year in which the international transaction has taken place. 4. Whether on the facts and circumstances of the case, the CIT(Appeals) was justified in directing to adopt corporate guarantee fee @ 0.53% relying on the decisions of the earlier years without appreciating the fact that TPO has conducted a comparability analysis and arrived at arm's length rate @ 1.9%. 5. Whether on the facts and circumstances of the case, the CIT (Appeals) is justified in directing to adopt rate of interest @ LIBOR+200 basis points on account of interest on delayed receivables without giving any direction with regard to the benchmarking of the transaction which has to be benchmarked as per section 92B of the Act. 6. Whether on the facts and circumstances of the case, the CIT(Appeals) is justified in directing to adopt rate @LIBOR+200 basis points on account of transfer on delayed trade recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits and gains derived from the export of such article or thing' as mandated u/s. 10AA wherein no such expenses were attributed to these units and thus none of these expenses are attributable to the eligible units. 13. Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in directing to exclude R&D expenses and Marketing expenses from all the comparable companies while working out the FL! without appreciating the fact that the assessee company also has R&D expenses and Marketing expenses at entity level (which includes both ineligible and eligible units) similar to that of comparable companies and the assessee's eligible unit per-se did not have R&D expenses and marketing expenses attributable to it. 14. Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in directing to exclude R&D expenses and Marketing expenses from all the comparable companies while working out the PLI without having any segmental information about the units of the comparable companies similar to that of assessee's eligible units. 15. Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Arms Length Price (ALP) adjustments of the International transactions pertaining to transactions i.e., availing of marketing Services at Rs. 18,53,42,817/-, Corporate Guarantee Fee at Rs. 1,50,00,000/- and Interest on delayed receivables at Rs. 56,86,90,526/- totalling to Rs. 76,98,33,343/-. Thus, the adjustment of Rs. 76,98,33,343/- on account of international transactions determined u/s 92CA(3) by the Transfer Pricing Officer (TPO) was added to the total income of the assessee. Thereafter, the ALP adjustments on account of specified domestic transactions was proposed at Rs. 34,15,08,428/-. The Assessing Officer also disallows Rs. 1,88,12,419/- u/s 35(2AB) of the Act. Thus, the Assessing Officer passed the order assessing the total income at Rs. 280,42,75,540/-. 5. Ground Nos.1 raised by the Revenue in ITA No. 348/Hyd/2023 for A.Y. 2017-18 are general in nature and requires no adjudication. 5.1. Ground No. 1 and 5 raised by the assessee in ITA No. 312/Hyd/2023 for A.Y. 2017-18 are not pressed by the learned counsel for the assessee. Hence, the same are dismissed as not pressed. GROUNDS 2 TO 4 - CORPORATE GUARANTEE FEE 5.1.1. Ground nos. 2 to 4 are with respect to Corporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices rendered and it has a bearing on the profits or income or losses or assets of the assessee as well as its AE. In an arm's length situation, no independent party would render such services at free of cost. Further, as per the explanation inserted w.e.f. from 01/04/2002 in Section 92B by Finance Act, 2012, it has been clarified that guarantee is an international transaction and hence, Arm's Length Price has to be determined as per the provision of Section 92C of the Act. In view of the above, show cause notice dated 21.12.2020 was issued to the assessee asking it to show cause as: to why a fee of 1.9% should not be charged on the amount of corporate guarantee issued by it on: behalf of its AEs. The relevant extracts of the show-cause notice is reproduced as follows, "For the determination the ALP of the. Fee on the corporate Guarantee, the TPO chose 'CUP' as the most appropriate method as other methods are not applicable for this transaction. The following facts were considered to determine the ALP of transaction. i) When the assessee issues corporate guarantee' on behalf of its AE, the assessee incurs the following non-monetary costs viz. opportunity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... porate guarantee of above Rs. 10 Crores....." 5.3. The ld.DR has also drawn our attention to page 98 of the order of ld.CIT(A). "3.4 Issue of Corporate Guarantee by the assessee on behalf of foreign AE During the year under consideration, the company has not extended any Corporate Guarantee to the AEs. However, guaranteed extended in the earlier years and outstanding loans as on 31.03.2017 are as under: Name of the Company Currency in which Corporate guarantee provided Outstanding As on 31- 03-2017 Hetero FZCO, UAE US$ 9,000,000 Pharmed Healthcare Company, SAE, Egypt, US $ 9,305,376 The taxpayer has extended corporate guarantee in connection with term loan of USD 10 million during the year 2012-13 taken by its AE, Pharmed Healthcare Company SAE, Egypt from Exim Bank Pharmed Healthcare Company SAE Egypt is a joint venture of the assessee company with 55% shareholding in it as on 31-03-2017. The corporate guarantee agreement was executed on 11-06-2012 and loan agreement was executed on 31.05.2012. The salient features of the deed of corporate guarantee are - i. In the event of any default on the part of the borrower (AE) in the due repayment of the Loan or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d liability is limited to a maximum of USD 15 mn. ii. The assessee company to pay to the lender on demand and in the currency of which the same falls due for payment, every and all sum and sums of money which are now or shall at any time be owing by the foreign AE as a borrower to the lending bank(s), anywhere on any account whatsoever, from borrower, the said monies which the foreign AE is liable to pay the lender and remain unpaid to the lender under the financial arrangement. iii. The guarantee shall be a continuing guarantee for the purpose of securing the whole of the monies and shall remain in full force and effect till such titte the borrower (AE) or the guarantor (assessee), as the case may be, repays in fiill the amounts / financial liabilities, due and payable under the financial arrangement with the lender. iv. The creation of this Guarantee and the performance and observance of the obligations under the guarantee agreement does not and will not result in the creation or imposition of or oblige it or any of its subsidiaries to create any charge or other encumbrance on any of its or its subsidiaries' assets, rights or revenues (Clause'l)). v. The guarantee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of US $ 7,499,880). The decision of the CIT(A) to calculate corporate guarantee fee in respect of corporate guarantee extended to Pharmed Healthcare Company @0.53% of 30.50% and not on full value of guarantee was accepted by the Department. However, the decision of the CIT(A) with regard to guarantee fee rate to be applied 0.53% is not acceptable. The rate of guarantee commission/ fee changes with time i.e., year to year. Therefore, the rate adopted for earlier years may not be appropriate for the year under consideration. Further, as can be seen from order u/s. 92CA(3) the TPO has finalized the fee @1.8% based on information obtained from various commercial banks and after conducting a comparability analysis arrived at the arm's length margin/PLI rate of corporate guarantee @1.8%. Moreover, the case of MIs. Mylan Laboratories Ltd. which was relied upon by the CIT(A), the AY is 2008-09 whereas the AY involved in the present case is AY 2018-19. Hence, application of guaranteed fee rate for AY 2008-09 to AY 2018-19 is not logical and appropriate. Hence, the CIT(A) is not justified in directing the TPO to restrict the corporate guarantee fee @ 0.53% without any reasoning." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prise and in the present case, the guarantee does not have a bearing on profits, in income / losses or assets of the appellant. In this regard, it is necessary to go through the provisions of Sec. 92B of the Act, the relevant extract of section 92B of the Act along with explanations is reproduced as below: "92B. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person ;other than an associated enterprise shall, for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the section 92B(1) of the Act which reads 'any other transaction having a bearing on the profits, income, losses or assets of such enterprises'. Thus, the word 'guarantee' covers the corporate guarantee given by any assessee on behalf of its AE, if it has a bearing on profits or income or losses or assets of the assessee as well as its AE. It is to be noted here that the phrase 'such enterprises' refers to both the assessee and its AE. Thus, it is to be seen whether any transaction has a bearing on the profits or income or losses or assets of either the assessee or its AE and if it is found to be so, then the said transaction would be covered within the meaning of an international transaction. In the instant case, in obtaining the loan, the credibility and bargaining power of the AE increases, by virtue of the corporate guarantee issued by the appellant on behalf of the former. Further, the provision of corporate guarantee issued by the parent company makes the risk-laden loan into risk-free one and the corporate guarantee issued by the appellant on behalf of its subsidiary results in interest saving by helping the AE to get a loan at lower interest r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e guarantee transaction cannot be determined based on bank guarantee rates. Regarding the quantification of the Arm's Length Price for corporate guarantee advanced by the appellant to its AEs, the reliance is placed on the decisions of Hon'ble ITAT, Hyderabad in the cases of Mylan Laboratories Ltd. Vs. ACIT [2015] ITA No. 2123/Hyd/2011) and Rain Commodities Ltd. [2016] 65 taxmann.com 240, in which the corporate guarantee fee was determined at the rate of 0.53% and 0.50%. Therefore, in view of above decisions, the corporate guarantee commission rate should be adopted @0.53% instead of 1.90% as determined by the TPO. Further, the appellant has submitted the deed of guarantee dated 23.05.2012 for corporate guarantee advanced to AE, Pharmed Healthcare Company, Egypt. The relevant extracts of the deed of guarantee are reproduced as under: It is seen that the appellant has provided corporate guarantee to the extent of 30.50% only for the loan of US $10 million advanced to its AE, Pharmed Healthcare Company, Egypt by the Export Import Bank, Mumbai. Accordingly, the corporate guarantee fee for the loan advanced to Pharmed Healthcare Company, Egypt should be calculated propo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese foreign AEs is a paramount importance of the assessee, the guarantee was given in a way to protect assessee's own business interest in such subsidiaries. 8.1. The ld.AR in his written arguments submitted that the corporate guarantees extended to its foreign AEs are in the nature of shareholder activities and the assessee did not incur any expenditure, therefore, benchmarking of an activity of shareholder without any consideration is not in accordance with provisions of the Act and well accepted principle that no service fee is required to be paid for rendering shareholder services by an enterprise to its associated enterprise as a shareholder. The ld.AR further submitted that as the assessee company provided guarantee to the extent of only 30.50% of the borrowings of the foreign JV, Pharmed Healthcare Company SAE, the corporate guarantee fee, if anything is charged, to be restricted to 30.50% of the outstanding loan taken by the Foreign AE on the strength of the corporate guarantee given by the assessee to it. 9. We have heard the rival arguments and perused the material on record. The TPO at pages 22 to 24 of the order had made the adjustment of Rs. 1.48 crore in the hands o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corporate guarantee commission as against 0.10% was justified or not. 8.2 In this regard, the assessee had made elaborate submissions which are reproduced elsewhere and submitted that the assessee is taking the financial facilities from the SBI and is paying 0.10% as schedule of fees and charges to the bank. 8.3. We have considered the submissions and found that the charges paid by the assessee cannot be compared for the purposes of determining the ALP of corporate guarantee commission. In our view, no third party would provide similar type of services/corporate guarantee on behalf of its AE and expose itself to the risk of giving the corporate guarantee. Therefore, the charges paid by the assessee to SBI cannot be compared for the purpose of determining the ALP of corporate guarantee commission. The Co-ordinate Bench in the case of Vivimed Labs vide its decision dated 12-04-2022 had adjudicated corporate guarantee commission @ 0.5% qua the extent of the amount of the assessee's corporate guarantee actually utilised in these four assessment years. Thereafter, similar view had been taken by various Tribunals restricting the addition to 0.5% of the amount guaranteed as corporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, grounds 2 to 4 of the Revenue appeal are dismissed. 9.3 Coming to the assessee's appeal in ITA No. 312/Hyd/2023 for A.Y. 2017-18, written Submissions filed by Revenue with regard to Assessee's appeal are to the following effect: I. Ground No. 1 & 2 Corporate Guarantee: In Transfer Pricing Study Report, the taxpayer did not furnish any details with regard to corporate guarantee given and aggregated the guarantee transaction along with the sale and purchase transactions under TNMM. The taxpayer has not extended any new corporate guarantee to AEs, however, guarantees extended in the earlier years and the outstanding loans as on 31.03.2018 are as under: Name of the company Outstanding loan as on 31.03.2018 in US $ Outstanding loan as on 31.03.2018 in INR Hetero FZCO 60,00,000 38,89,80,000 Pharmed Health Care Company SAE, Egypt 74,99,880 48,62,17,200 87,51,97,220 The TPO determined Arm's Length Price of fee on Corporate Guarantee fee @1.9% taking into consideration the median of Bank Guarantee rates for the FY 2016¬17 of commercial banks and proposed adjustment of Rs. 1.58 crores (1.9% of Rs. 87.52 crores). The CIT(A) held that corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional transaction as such transaction does not have a direct or indirect bearing on profits, income, losses or assets of the assessee company. (ii) As these corporate guarantees extended by the assessee to its foreign AEs did not involve any costs to the assessee company, did not have any bearing on its profits, income, losses or assets, and are for the purpose of promoting its business interests in UAE and Egypt, the assessee did not charge any corporate guarantee fee from the foreign AEs. (iii) Even if such guarantee is an international transaction, no separate fee is required to be paid by foreign subsidiary / Joint Venture, as corporate guarantees are given to protect the assessee company as a shareholder in these foreign associated enterprises and thus form part of shareholder activities and don't require fee at arm's length. (iv) The corporate guarantee agreements and also the business transactions carried out by the assessee with these foreign AEs, it is very clear that the corporate guarantees are given by the assessee, not as service to foreign AEs, but to protect its own interest as a shareholder of these foreign AEs and also to promote its own business. Since, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ish invoice wise aging details of outstanding receivables, in respect of all invoices raised during the FY 2016-17 as well as the invoices which were raised in previous FYs but remained unpaid on the opening day of current FY 2016-17 vis a vis credit period as per the service agreement with AEs in the following format: S.No. Name of AE Invoice No. Date of Invoice Amount (INR) Due date of receipt of payment as per agreement Actual date/dates of receipt of payment (INR)** Period of delay Interest for the delay period*** Credit Period as per the agreement of the AE And to provide reasons why, the interest @SBI Short Term Deposit rate (i.e. Month wise) during .the financial year 2016-17 should not be charged on trade receipts from AEs beyond credit period. In response, the appellant submitted that outstanding receivables cannot be treated as separate transaction, when the . international transaction is that of sale, the interest aspect is embedded in it and it had not charged any interest on non-AEs as well. The appellant further submitted that since the receivables are a result of the internati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng or action in concer4- A. whether or not such arrangement, understanding or action is formal or in uniting; or B. whether or not sucA arrange, understanding or action is intended to be enforceable by legal proceeding..." On plain reading r of explanation (i)(c) to section 92B, it is seen that international transaction specifically include within its ambit "receivable arising during the course of business". In the present case, the appellant has provided benefit to its AEs by way of advancement of interest free loan in the garb of delayed receipt of sale proceeds. These funds could have been otherwise deployed for at least earning interest income. The appellant has therefore incurred cost in connection with a benefit and services provided to the AEs by way of delayed receipt of sales proceeds. Accordingly, the delay in receipt of receivables is an international transaction u/ s 92B(1) read with clause (v) of section 92F. The above view was supported by Hon'ble ITAT, Delhi in the case of Bechtel India Pvt. Ltd. (in ITA No. 6530/Del/2016 dated 16.05.2017), the relevant extract of the said decision is reproduced as under: "In the case of Techbooks India International Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which is relevant for our purpose, provides as under' Explanation-For the removal of doubts, it is hereby clarified that- (0 the expression "international transaction" shall include- (a) (b) (c) 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. 22. On going through 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/ 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 paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 Taxmann.com 251) The appellant's contention that the interest aspect is embedded in the sale price is not supported by any evidence, even the appellant does not know for sure as to when the. payment will be received. This is the very reason a credit period is agreed between the parties in normal course of business, so that the seller knows as lo how much interest should be loaded in the selling price. Further, regarding the contention of the appellant that it is not charging interest from non-AEs on similar trade receivables, the appellant did not furnish the invoice-wise realization details of sales proceeds w.r.t. AE and non-AE. Therefore, this contention of the appellant cannot be considered. In view of the above discussion, it is concluded that outstanding trade receivables constitute separate international transaction and should be benchmarked separately. Coming to the next point, what rate of interest on outstanding trade receivables in the case of the appellant should be benchmarked at arm's length and whether the TPO is correct in considering the short term deposit rates of SBI. It is seen that the appellant exports to its AEs in foreign currency and in return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant explanation is reproduced hereunder:- (c) 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;" The aforesaid clause C states "capital financing" to include "debt arising during the course of business". Manifestly, in the instant case the deferred receivables fall squarely within the ambit of debt arising during the course of business which is included in the category of expression "capital financing" under clause C of Explanation of Section 92B of the Act. Hence, we hold that the outstanding receivables from AE constitute a separate international transaction and on which interest is to be imputed thereon and consequently ALP adjustment to be made. Hence, the primary argument made by the Id. AR that the adjustment made on account of outstanding receivables cannot be construed as an international transactions is hereby rejected and dismissed. 5.6. We find that the Id. AR vehemently argued that the working capital adjustment has been granted by the Id. 'TPO to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finding with regard to invoices realized during the year from AE. To that extent alone, we are giving our independent finding by treating that as a separate international transaction and directing the Id. TPO to charge interest by applying LIBOR + 200 basis points in the aforesaid manner. 5.7. It would be relevant to note in the aforesaid paragraph that assessee had to receive its outstanding receivables from its .AE in foreign currency, it would be Just and fair to adopt LIBOR rate + 200 basis points as the applicable ALP interest rate for the purpose of imputation of interest on outstanding receivables from AEs. Needless to mention that the said imputation of interest is to be made on invoice to invoice basis on outstanding receivables so that the period of delay in respect of each invoke could be actually worked out. 5.8. The ground raised by the assessee for both the years praying for getting of outstanding payables to AEs with outstanding receivables from AEs cannot be entertained in view of our direction that imputation of interest is to be made on invoice to invoice basis on supplies made / services rendered by the assessee to its AEs. In view of this direction and in vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le ITAT, Hyderabad in the case of Albany Molecular Research vs. DCIT, Circle-1(1), Hyderabad dated 26.11.2020. The decision of CIT(A) is not acceptable for the following reasons : (a) that TPO has taken SBI Deposit Rate which is an independent non AE parameter as comparable. (b) Hon'ble ITAT in recent decisions in the cases of (I) M/s Zeta Interactive Systems (India) Pvt. Ltd. For the AY 2011-12 in ITA No. 1812/Hyd/ 2017 dated 07.06.2022 (ii) M/s. Satyam Ventures Engineering Services for the AY 2010-11 in ITA No. 362/Hyd/2021 dated 28.06.2021 and (iii) M/s. Apache Footware India Pvt. Ltd. for the AY 2018-19 in ITA No. 568/Hyd/2022 dated 16.01.2023directed to adopt interest on delayed receivables @6% as ALP instead of LIBOR + 200 pints. (c) The adoption of LIBOR + 200 points would amount to shifting the profit of the taxpayer to its AE situated abroad. In fact the transaction of the taxpayer is required to be examined from the perspective of a prudent businessman and required to be analyzed whether the taxpayer would give similar benefits to unrelated parties or not. Further, if the outstanding receivable are due for a longer period, then taxpayer would be required to de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... So, the assessee made significant exports to non-AEs as well. Number of export invoices raised against foreign AEs stood at 1671 out of total export invoices of 4934. Further, the analysis of above table with Annexure-L as submitted to CIT(A), these non-AE exports realised beyond credit free period can be considered as comparable uncontrolled transactions for the following factual reasons:- (i) The delay on account of trade receivables from AE exports varies from 0 to 1250 days and for Non-AE exports, the delay on account of trade receivables varied from 0 to 1303 days. (ii) The number of delayed invoices of Non-AE exports for each period are significant when compared to the number of delayed invoices from AEs (iii) The export invoices are spread over all the period for FY 2016-17 for both AE and Non-AE exports (iv) The export invoices with significant amounts were delayed for both the AE and Non-AE exports (v) The Non-AE exports are denominated in foreign currency as similar to that of the AE exports (vi) No interest is charged in respect of Non-AEs even where the delay is more than 500 days (as can be seen from the above table). In view of the above, it is clear t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preceding assessment year i.e. AY 2016-17. A copy of the order of the TPO dated 09-02-2024 is attached herewith as Annexure- III. (iv) The TPO or the Department allowed 180 days credit free period while computing interest on delayed receivables in similar set of facts and circumstances for the subsequent assessment year i.e. AY 2022-23. A copy of the order of the TPO dated 09-02-2024 is attached herewith as Annexure- IV. On without prejudice basis, and on the rule of consistency, the Hon'ble Tribunal may allow 180 days credit period for AY 2017-18 as well." 12. We have heard the rival submissions and perused the material on record. We have examined whether the interest on delayed outstanding payments is an international transaction or not. This issue has come up for our consideration in the following matters : 1. M/s Zeta Interactive Systems (India) Pvt. Ltd. For the AY 2011-12 in ITA No. 1812/Hyd/ 2017 dated 07.06.2022 2. M/s. Satyam Ventures Engineering Services for the AY 2010-11 in ITA No. 362/Hyd/2021 dated 28.06.2021 and 3. M/s. Apache Footware India Pvt. Ltd. for the AY 2018- 19 in ITA No. 568/Hyd/2022 dated 16.01.2023 12.1. We have consistently held that the int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pon various judgements. All these judgments have been considered by the coordinate Bench and thereafter, the above said direction was issued by the Bench. 12. The reliance of the assessee on the decision of Hon'ble Delhi High Court in the case of PCIT Vs. Boeing India Pvt. Ltd., reported in 2022 (10) TMI 498 is of no use to the assessee as in the said judgement, the Hon'ble Delhi High Court in Para 15 had mentioned that the issue receivable is essentially a question of fact. As mentioned hereinabove, in the present case, there is a delay in receiving the outstanding of Rs. 62,38,68,941/- in respect of 519 invoices as mentioned hereinabove and there is no explanation given by the assessee for such a delay in receiving the amount. The very purpose of benchmarking the transaction is to ascertain whether assessee, who is similarly situated, would render the same kind of services at the same or similar price to a third party or not. If we examine the issue in the above-said 21 Apache Footwear India Pvt.Ltd. context, it would be clear that the assessee would charge bank interest or any other interest with a view to compensate itself on account of delay in making the payment. Hence, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal of the assessee. Accordingly, the appeal of the assessee is dismissed." 14. Respectfully following our own decision, we direct the Assessing Officer to determine the ALP and compute the same by adding notional interest @ 6% on the receivable beyond a period of 60 days. Thus, ground nos. 5 to 10 are partly allowed." 12.3. However, while holding the outstanding trade receivables as international transactions, we have granted a credit period of 60 days in the case of Apache Footware India Pvt. Ltd. 12.4. In the present case, the assessee argues that the Assessing Officer granted the assessee a credit period of 180 days in the previous assessment year and in the subsequent assessment. 12.5 The learned TPO in para 13.3.1 of its order dt. 29.01.2021 had computed the interest on delayed receivables as under : "13.3. Computation of interest on delayed receivables 13.3.1. As discussed in the preceding paragraphs, interest on the delayed trade receivables was proposed to be computed and the assessee (vide the show cause issued on 21.12.2020) was asked to furnish invoice wise details of all the trade receivables from AEs during the year. The following details were asked in a par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posit rates vide issuance of notice u/s. 133(6) of the Income Tax Act, 1961. The details of SBI Term deposit rates are as under: wef wef wef wef wef wef wef Duration 08-12-2014 10-04-2015 11-05-2015 08-06-2015 08-06-2015 08-06-2015 08-06-2015 7 days- 45 days 5.00% 6.0 9 64)0%, ,e ' 5.50% 5.50% 5.50% 5.25% 46 days-90 days 7.00% 6.00% 6.00% 5.5d% 5.50% 5.50% 5.25% 91 days - 179 days .(7.00% "7.00% 7.00% 6.75%-',%'* ' 6.75% 6.75% 6.50% 180 days - 210 days 7.25% 7.25% 7.25% 7.25% 7.25% 7.00% 6.75% 211 days to 1 year 7.50% 7.50% 7.50% 7.50% 7.50% 7.25% 7.00% 1 year to 455 days 8.50% 8.25% 8.00% 8.00% 7.75% 7.50% 7.25% 456 days to <2 years 8.50% 8.50% 8.25% 8.25% 8.00% 7.75% 7.50% 2 years to <3 years 8.50% 8.50% 8.25% 8.25% 8.00% 7.75% 7.50% 6.5.7 Accordingly, interest is computed' by adopting the short term deposit rate of SBI for F.Y. 2015-16 after allowing a credit period of 180 days(computation is attached as annexure): Description Amount (Rs.) Interest on delayed trade receivables in respect of invoices raised during the FY 2015-16 4,51;00,952 Add : Interest on delayed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidering the facts of the case and submissions of the taxpayer and keeping in view of the fact that credit period allowed to most of the Non-AEs is 180 days, a credit period of 180 days is considered as internal CUP and thereby considered for the purpose of working of interest in respect of receivables from AEs." 12.10 Though the assessee has relied upon the assessment order for the A.Y 2022-23 dated 09.02.2024, however, this Tribunal cannot blindly follow the order of the Assessing Officer for the present assessment year. In fact, in the written submissions reproduced hereinabove, the assessee has mentioned that "The assessee's main argument is that it did not charge any interest whatsoever on the similarly delayed foreign Non-AE debtors." This statement of fact made by the assessee for the AY. 2017-18 is contrary to the statement of facts made for the assessment years 2016-17 and 2022-23. Further, as mentioned hereinabove, at page 187 of the order of ld.CIT(A), it is clearly mentioned that the assessee has not substantiated the credit period of 90 days. In our view, the onus is on the assessee to prove that the delayed credit period of more than 60 days is permissible in the Pha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies' Annual Reports and Prowess database for F.Y. 2016-17, it can be seen from the following table that these companies qualify 25% RPT filter for the current year: Sl No Name of the Company RPT% FT16-17 1 Sun Pharma Laboratories Ltd. 7.71% 2 Macleods Pharmaceuticals Ltd. 14.79% The above companies also qualify 25% export filter, manufacturing sales > 75% Revenue filter applied by the TPO and turnover filter of greater than Rs. 100 crores, as can be seen from the table below:- SI No Name of the Company 1 Export to Turnover % Turnover for the FY 16-17(Rs. Cr) Manufacturing Sales > 75% Revenue FY FY 16-17 1 Sun Pharma laboratories Ltd. > 25% (as per TPO order, failed only RPT filter and 5323.16 5322.89 (99.99%) not export filter) 2 Macleods Pharmaceuticals Ltd. 32.99% 5134.43 3928.43 (76.51%) Thus, since the above two companies are qualifying the 25% RPT filter, 25% export filter, manufacturing sales > 75% Revenue filter, turnover filter of greater than Rs. 100 crones and all other filters applied by the TPO and are also engaged in manufacturing of generic pharmaceutical formulations, these companies are to be considered as compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 515 5.9 306.81 3 Bharat Parenterals Ltd. 3968 3641 327 8.23 122.14 4 Lee Pharma Ltd. 5647 5135 512 9.07 205.07 5 Cadila Pharmaceuticals Ltd. * * 46273 42029 4244 9.17 1604.07 6 Bajaj Healthcare Ltd. 6768 6058 710 10.48 230.67 7 Mangalam Drugs & Organics Ltd. 8415 7473 941 11.19 312.67 8 Celon Laboratories Pvt. Ltd. 2626 2329 297 11.31 107.38 9 Kopran Ltd. 7448 6571 877 11.77 181.66 10 Indoco Remedies Ltd. 30183 26339 3844 12.74 1094.06 11 Lincoln Pharmaceuticals Ltd. 8701 7591 1110 12.76 308.06 12 Cipla Ltd. 339890 287315 52575 15.47 10637.08 13 Granules India Ltd. 40005 33709 .6296 15.74 1374.16 14 Shree Ganesh Remedies Ltd. 539 454 85 15.86 20.00 15 VasudhaPharmaChem Ltd. 16417 13678 2739 16.68 601.77 16 Malladi Drugs 86 Pharmaceuticals Ltd. 8997 7437 ;1560 17.34 330.80 17 Micro Labs Ltd. 81643 66981 14662 17.96 2598.76 18 Centaur Pharmaceuticals Pvt. Ltd. 15832 12913 ' 2919 18.44 553.38 19 Unichem Laboratories Ltd. 38310 27773 10537 27.5 1413.85 14.3. Based on the above comparables, the TPO computed the ALP of the specified domestic transaction at 12.74%. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's Comparable 9 Bajaj Healthcare Ltd. 230.67 TPO's Comparable 10 Bharat Parenterals Ltd. 122.14 TPO's Comparable 11 Celon Laboratories Pvt. Ltd. 107.38 TPO's Comparable 12 Kopran Ltd. 181.66 TPO's Comparable 13 Lee Pharma Ltd. 205.07 TPO's Comparable 14 Lincoln Pharmaceuticals Ltd. 308.06 TPO's Comparable 15 Malladi Drugs & Pharmaceuticals Ltd. 330.80 TPO's Comparable 16 R P G Life Sciences Ltd. 306.81 TPO's Comparable 17 Ajanta Pharma Ltd 1822.71 Assessee's comparable 18 Divi'S Laboratories Ltd 4066.80 Assessee's comparable 19 NatcoPharma. Ltd 2018.60 Assessee's comparable 20 Sun Pharma Laboratories Ltd 5323.16 Assessee's comparable 21 Macleods ' Itic Pharmaceuals Ltd 5134.43 Assessee's comparable 14.6 The Revenue is in appeal for wrong inclusion of the above said two companies namely M/s. Sun Pharma Laboratories and M/s. Macleods Pharmaceuticals Ltd in ground nos.8 and 9 before us on the pretext that these two companies fall on RPT filters. The ld. DR contended that on examination of annual reports of these companies, we may know that these companies had been wrongly i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was noted by the TPO that these two companies are showing more than the ordinary profit as they were having purchase transactions with non-eligible units. Therefore, the TPO made the adjustments towards the unit VA-SEZ - Jedcharia @ Rs. 112.61 crore and Unit IV Baddi @ Rs. 51.95 crore u/s 92CA(3) of the Act for specified domestic transaction. 15.3 The assessee preferred the appeal before the ld.CIT(A). The ld.CIT(A) at page 198 had noted down as under : "Final set of comparables : In view of the above discussion, after applying turnover filter of greater than Rs. 100 crores, export filter > 25%, RPT filter < 25%, manufacturing sales > 75% of Revenue along with other filters selected by the TPO, the final comparables that need to be considered to the appellant company for specified domestic transactions are as under: S. No. Company Name Turnover for FY 1617 (Rs Cr) Remarks 1 Cadila Pharmaceuticals Ltd 1604.07 TPO's Comparable 2 Indoco Remedies Ltd 1094.06 TPO's Comparable 3 Cipla Ltd 10637.08 TPO's Comparable 4 Granules India Ltd 1374.16 TPO's Comparable 5 VasudhaPharmaChem Ltd 601.77 TPO's Comparable 6 Micro Labs Ltd 2598.76 TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Marketing Office, whereas the comparable companies' margins were computed after considering these expenses (already debited in their profit & loss account) while computing the PLI at the entity level. It can be seen from the audited financials of the comparable companies that these companies report R&D expenses and marketing expenses under separate heads, but don't show head office expenses as a separate head. Therefore, only R&D and marketing expenses are to be allocated and nok head office expenses while computing margins of the units of the appellant company. In view of the above, to maintain consistency, the comparison of PLI should be made at same level of comparable companies with the appellant company, so that comparison of profitability is proper. Based on the information available in annual reports of the comparable companies, the PLIs of the final 21 comparable companies computed before interest, tax, R&D expenses and marketing expenses, are as under: S. No. Name of the Company Total Income for FY 16-17 Total OR Total OC Total OP Wt. Avg (Rs Cr) for 3 Yrs For 3 Yrs for 3 Yrs OP/OR (%) (Rs. Cr) (Rs. Cr) (Rs. Cr) 1 R P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ials:- Description Unit VA, Jadcherla Unit IV, Baddi Amount (Rs Crore) Percentage of total purchases Amount (Rs. Crore) Percentage of total SDT Purchases 31.28 11.28% 113.76 40.42% Other purchases 246.14 88.72% 167.69 59.58% Total Purchases 277.42 100% 281.45 100% The TPO made transfer pricing adjustment under TNMM at the enterprise (unit/undertaking) level of the appellant company, without considering the above fact that all purchases of the eligible units were not made from associated enterprises. As can be seen from above, the SDT purchases constituted only about 11.28% in Unit VA, Jadcherla and 40.42% in Unit IV, Baddi. So, at best only 11.28% and 40.42% of the operating profit of the respective units can be attributed to raw material acquired from appellant's associated units / enterprises. However, the TPO has calculated the operating profit on the entire sales of the appellant's eligible units, which is incorrect, when it is admitted position that only 11.28% and 40.42% per cent of raw material has been acquired by the appellant from its associate concerns / units for the purpose of manufacturing items. Further, whenever TNMM is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... independent parties. What is to be compared is the international transactions of the assessee with its related parties and not for its entire transaction with non-related parties also. Therefore, ALP has to be seen only with regard to international transaction with A.Bs and not on the entire turnover / sales. We, thus, agree with the contentions of the learned Sr. Counsel that bench marking should be done only on A.E. transactions and not for the entire turnover." The Department has filed against the said decision of ITAT, Mumbai in High Court. While adjudicating the same appeal, the Bombay High Court in the case of CIT Vs. Hindustan Unilever Ltd (ITA No. 1873 of 2013 Dated 26.07.2016) also supported the said view of ITAT. Even the matter is now res integra as SLP filed by the Department in the case of CIT Vs. Hindustan Unilever Ltd. (SLP(C) No. 22381 of 2017 Dated 29.10.2018), against the said decision of Bombay High Court was dismissed by the Hon'ble Supreme Court. In view of the above Supreme Court Decision, the Arm's length price of specified domestic transactions between the appellant and its AEs is determined by adhering the proportionality principle i.e. restric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... export of such article or thing'. Since these expenses were not included in the Profit & Loss Account of these units for the purpose of working of 'profits and gains derived from the export of such article or things it is clear that none of these expenses are attributable to these units. Had it been the case that these expenses are attributable for these eligible units claiming deduction u/s. 10AA, then the assessee should have included these expenses also in the respective P & L Account and claims the balancing figure only as deduction. Hence, there is no need for exclusion of these expenses from the comparable companies for working of PLI. It is further submitted that at the entity level there are R&D and Marketing expenses in the case of taxpayer company as well as comparable companies. Further, as discussed in preceding para, no such expenses are attributable to the eligible units of the taxpayer as the taxpayer has maintained separate books of accounts for eligible units as mandated u/s.10AA and has not claimed these expenses. Thus, the Ld.CIT(A) is not justified in directing to exclude R&D expenses and Marketing expenses for all comparable companies without analyzi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under transfer pricing is profitability results of the undertakings or units as submitted by the assessee for the eligible units based on audited financials of these undertakings. The TPO considered the unit level PLI for the two units of the assessee company as under:- Sl. No Description Unit V A, Jadcherla Unit IV, Baddi 1 Operating Revenues 420 385.21 2 Operating Cost 326.93 267.75 3 Operating Profit 93.07 117.46 4 Margin (OP/OR) 22.16% 30.49% The above financials are based on audited financial statements submitted for the above two units. However, it was brought to the notice of the Ld. CIT(A) that the following expenditure is not allocated by the assessee to these units, while preparing the financial statements of these units:- i) R&D Expenditure - Rs. 80.37 cr ii) Head Office & Marketing Office Expenses - Rs. 121.19 cr As admitted by the Department, the above expenditure is not allocated to the units and also Ld. CIT(A) did not allocate such expenses to these units. The same is accepted by the Department over the years and not controverted by the assessee before the Ld. CIT(A) either. Only that the computation of PLI at the unit (en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B(1)(e), which says that the net profit margin arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market. Thus, the Ld. CIT(A) has correctly recomputed the margins of the comparable companies after excluding R&D Expenses and Marketing expenses as these differences between the eligible unit of the assessee company and comparable companies materially effecting the net profit margin of the comparable companies. It is once again reiterated that the Ld. CIT(A) neither disturbed or reconstituted the profit margin disclosed by the assessee in respect of its eligible units not allocated R&D expenses and Marketing expenses to the eligible unit. The Department accepted such contention of the assessee over the years. What is disturbed by the Ld. CIT(A) is only computation of margins of the comparable companies as their margins were computed by the TPO after considering R&D expenses and marketing expenses, whereas no s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igible business Purchase of raw materials CUP Method/TNMM 647,13,78,934 TNMM OP/OR 24.10% Indian companies engaged in providing similar business TNMM OP/OR 24.90% NA Goods held for the purpose of the eligible business are transferred to any other business carried on by Hetero Sale of materials CUP Method/TNMM 894,06,98,331 TNMM OP/OR 24.10% Indian companies engaged in providing similar business TNMM OP/OR 24.90% NA 15.8 The TPO was not satisfied with the submissions of the assessee and asked the assessee to furnish segmental accounts of the exempt and non-exempt units in respect of the following 4 eligible units at page 57 of the TPO order. Sr. No. Name of the Unit Section under which Deduction/Exemption claimed Amount of Deduction/Exemption OP/OC OP/OR 1 Unit V- (SEZ Jedcharla) Unit VA - Sec. 10/TA 26,21,39,692 14.06% 12.33% 2 (SEZ Jedcharla) Sec 10A.4 75,54,69,091 67.60% 40.33% 3 Unit D C - (SEZ Nakkapally) Sec. 10.4.1 2,41,02,756 15.27% 13.25% 4 Unit IV - Baddi Sec. 801C 28,74,27,849 34.61% 25.71% 15.9 The TPO noted down at page 56 of the order that the assessee has not furnished the segmental accounts of the non-e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Remedies Ltd. 539 454 85 15.86 20.00 15 VasudhaPharmaChem Ltd. 16417 13678 2739 16.68 601.77 16 Malladi Drugs 86 Pharmaceuticals Ltd. 8997 7437 ;1560 17.34 330.80 17 Micro Labs Ltd. 81643 66981 14662 17.96 2598.76 18 Centaur Pharmaceuticals Pvt. Ltd. 15832 12913 ' 2919 18.44 553.38 19 Unichem Laboratories Ltd. 38310 27773 10537 27.5 1413.85 16.2 The TPO has computed median of the PLI of these comparable and arrived at 12.74%. The TPO has noted down that the OP/ OR of the following four units : Sr. No. Name of the Unit Section under which Deduction/Exemption claimed Amount of Deduction/Exemption OP/OC OP/OR 1 Unit V- (SEZ Jedcharla) Sec. 10/TA 26,21,39,692 14.06% 12.33% 2 Unit VA - (SEZ Jedcharla) Sec 10A.4 75,54,69,091 67.60% 40.33% 3 Unit D C -(SEZ Nakkapally) Sec. 10.4.1 2,41,02,756 15.27% 13.25% 4 Unit IV - Baddi Sec. 801C 28,74,27,849 34.61% 25.71% 16.3. Thereafter, the TPO had sought to make adjustment in respect of Unit VA - (SEZ Jedcharla) for an amount of Rs. 112.61 crore and Unit IV Baddi for an amount of Rs. 51.95 crore on account of specified domestic transaction between the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eproduced above. The ld.CIT(A) noted that 17 comparable companies out of 19 comparable companies qualified the turnover filter were greater than Rs. 100 crore and two companies namely, Medico Remedies Limited and Shree Ganesh Remedies Limited both qualified for the turnover filter. 16.6. The ld.CIT(A) further noted down that one comparable namely Mangalam Drugs and Organics Limited having the turnover of 312.67 crore having RPT% of 0.15% (0.05%) which is less than the export turnover filter of 25% and therefore, the ld.CIT(A) considered that Mangalam Drugs and Organics Limited cannot be considered as good comparable. The ld.CIT(A) has also mentioned at page 195 of his order that the TPO has rejected the following companies namely i) Divis Laboratories, ii) Natco Pharma Limited and iii) Ajanta Pharma Limited despite the fact that they export less than 25% of the export turnover and therefore, has found that these three companies as good comparable. 16.6.1 However, the ld.CIT(A) has directed the TPO to include Sun Pharma Laboratories Ltd., and Macleods Pharmaceuticals Limited despite the fact that the TPO has rejected these comparable on the pretext that they may fail on RPT filter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price (ALP) of international transactions or specified domestic tiansactions needs to be determined proportionately i.e. taking into account revenues or costs corresponding to international transactions on a proportionate basis on the costs or revenues, as the case may be This principle was followed in the decision of Hon'ble ITAT, Mumbai in the case of Hindustan Unilever Limited Vs. Ada. CIT [ITA No. 7868/Mum/2010 dated 10.12.20121, the relevant extract of the said decision is reproduced as under:. ............................." The Department has filed against the said decision of ITAT, Mumbai in High Court. While adjudicating the same appeal, the Bombay High Court in the case of CIT Vs. Hindustan Unilever Ltd (ITA No. 1873 of 2013 Dated 26.07.2016) also supported the said view of ITAT. Even the matter is now res integra as SLP filed by the Department in the case of CIT Vs. Hindustan Unilever Ltd. (SLP(C) No. 22381 of 2017 Dated 29.10.2018), against the said decision of Bombay High Court was dismissed by the Hon'ble Supreme Court. In view of the above Supreme Court Decision, the Arm's length price of specified domestic transactions between the appellant and its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue of TP adjustment with respect to both the eligible specified domestic transaction to the file of the Assessing Officer/TPO for passing a fresh order after affording the opportunity of hearing to the assessee. We further direct the assessee to provide the segmental accounts of the non-exempt units, more particularly, the assessee's transaction with its eligible undertaking and with the other non-related parties so that the ld TPO can benchmark the specified domestic transactions accurately. The ld Assessing Officer/TPO shall consider any other documents as may be filed by the assessee in accordance with law. In the light of the above, the ground No. 10 to 15 of the Revenue appeal are allowed for statistical purposes. 17. In the result, the appeal of Revenue in ITA No. 348/Hyd/2023 for A.Y. 2017-18 is partly allowed and the appeal of assessee in ITA No. 312/Hyd/2023 for A.Y. 2017-18 is dismissed. 18. Coming to Revenue and assessee's appeals for A.Y. 2018- 19 i.e., ITA Nos.349/Hyd/2023 and ITA No. 313/Hyd/2023, respectively, which are identical to the facts and issues raised by both the parties in their appeals for A.Y. 2017-18, we hold that our decision would apply mutatis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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