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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 ..... te guarantee commission @ 0.5%. However, considering the facts of the present case, we are of the opinion that the computation of the amount guaranteed as corporate guarantee commission @ 0.53% would be appropriate. Furthermore, the Revenue cannot be worsen of thereby reducing the corporate guarantee commission from 0.53% to 0.50% in its appeal. Accordingly, the appeal of the Revenue on this aspect is without any basis. Other aspect on which the CIT(A) has granted relief is that the assessee has only provided the corporate guarantee to its AE to the extent of 30.50% on the outstanding loan balance of US $ 10 million advance to its AE. In our view, the pro rata corporate guarantee is required to be calculated as directed by the Ld.CIT(A) on the amount for which the assessee has sought which would be 30.50% of the total amount of US $ 10 million advanced to its AE. Therefore, the corresponding corporate guarantee commission @ 0.53% is required to be computed on the amount of 30.50% of assessee s share on the outstanding loan balance of US $ 93,05,376. Accordingly, grounds 2 to 4 of the Revenue appeal are dismissed. Whether the corporate guarantee given by the assessee to its AE would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Revenue. R D Expenses, Head Office Marketing Office Expenses while computing the PLI of the comparable companies - Grievance of the Revenue before us is that the ld.CIT(A) while excluding R D expenses, Head Office and Marketing Office Expenses had not given the opportunity to the AO while computing the margins of the comparables after excluding the R D expenditure, Head Office and Marketing Office Expenses - In our view, the law requires the CIT(A) to grant the opportunity to the Assessing Officer/TPO before making any adjustment on account of excluding R D expenses, Head Office and Marketing Office Expenses in the financials of the comparable. The ld.CIT(A), has not done the same and has thus violated the principle of natural justice under 46A of I.T. Rules. We deem it appropriate to remand back the entire issue 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 undert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee for the corporate guarantee provided by them and, therefore, the learned CIT(A) should hot have accepted the plea of TPO that adjustment can be made towards Corporate guarantee fee. 3. On the facts and in the circumstances of the case the learned CIT(A) ought to have considered that Hetero FZCO is a 100% subsidiary of the appellant and therefore, he ought to have held that no fee, against any corporate guarantee provided, can be collected and ought to have deleted the addition suggested in this regard. 4(a) The learned CIT(A) erred in confirming the action of the Assessing Officer in making adjustments towards interest on outstanding trade receivables. On the facts and in the circumstances of the case he ought not have made such adjustments. 4(b) The learned CIT(A) ought to have seen that in respect of trade receivables from the non-AEs, the appellant did not collect any interest. 4(c) The learned CIT(A) ought to have Same as in 4(a) above considered the fact that the date on which the payment against the goods supplied is to be received (due date) is already mentioned in the invoice itself and there is no mention about charging of interest in the invoice, in case of late paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes as Comparable Uncontrolled Price for benchmarking the interest on delayed receivables. 7. Whether on the facts and circumstances of the case, the CIT(A) is justified in directing to adopt interest rate @ LIBOR+200 basis points on account of interest on delayed receivables without recognizing the fact that delayed receipt of receivables from Associated Enterprises(AEs) can be the strain on taxpayer's cash flow due to charging of interest for the delayed period at LIBOR+200 basis points. 8. Whether on the facts and circumstances of the case, the CIT(A) is justified in directing the TPO to include M/s. Sun Pharma Laboratories Limited holding that the comparable is having export turnover without appreciating the fact that the data with regard to the export turnover of the company is not available in the Annual Report and thus passing of export turnover filter adopted by the TPO is unverifiable. 9. Whether on the facts and circumstances of the case, the CIT(A) is justified in directing the TPO to include M/s. Macleods Pharmaceuticals Ltd as the company passes export turnover filter (32.99%) without appreciating the fact that out of the three weighted average years taken into con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l the comparable companies while working out the PLI in contravention of Rule 46A of the Income Tax Rules, as the assessee has not made such submissions before the Transfer Pricing proceedings and submitted for the first time before the CIT(A) only. 2.4 Similar grounds are raised by the Revenue in ITA No. 349/Hyd/2023 for A.Y. 2018-19, hence, we are not reproducing the same for the sake of brevity. 3. First we will take the appeal of Revenue in ITA No. 348/Hyd/2023 for A.Y. 2017-18 and also the assessee s appeal for this year. As the facts are similar except the quantum figures, we are reproducing the brief facts for the year 2018-19: 4. The brief facts of the case are that assessee is a limited company engaged in manufacture of Active Pharmaceutical Ingredients and Genetic Finished Dosages. Assessee filed its return of income for the assessment year 2018-19 on 30-11-2018 admitting income of Rs. 167,41,21,350/- under the normal provisions and admitted an income of Rs. 336,89,42,640/- as per the provisions of section 115JB. The return was processed u/s 143(1) on 21-02-2020. Subsequently, the case was selected for scrutiny through CASS and notices under section 143(2) and 142(1) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of TPO, which is to the following effect : 11. Issue of Corporate Guarantee by the assessee on behalf of the AE 11.1 In the TP Study report, the assessee did not furnish any details with regard to the corporate guarantee given and aggregated the transaction along with the sale and purchase transactions under TNMM. In response to the notice issued under 05.11.2020, the taxpayer vide submission dated 10.12.2020 has stated as under: During the year under consideration, the company has not extended 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 Loan as on 31-03-2017 US$ Hetero FZCO US $ 9,000,000 Pharmed Health Care Company SAE US $ 9,305,376 Pharmed Healthcare Company SAE The taxpayer has extended corporate guarantee in connection with term loan of USD 10 million during the year 2012-13 by its AE Pharmed Healthcare SAE, Egypt form Exim Bank an Indian Bank. Hetero FZCO The taxpayer extended corporate guarantee in connection with loan of USD 15 million obtained during the year by Hetero FZCO from Bank of Baroda an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of corporate guarantee by the parent company makes the risk-laden loan seem risk-free once it is gilded by corporate guarantee. This is the true breadth of the transaction. ii) To put the transaction in perspective, a corporate guarantee is akin to undergirding a loan, wherein in the case of a default, the promising party is under a liability to honor the commitment. Hence the guarantor carries the liability in the balance-sheet, be it contingent or not, until the liability is settled by the subsidiary/AE. This is a strain in the credit worthiness and credit sourcing abilities of the corporate entity. Any prudent company, in the face of such a liability makes a provision to meet a possible contingency payout in the future. On the flip-side, by virtue of assessee's corporate guarantee, the AE gets certain benefits viz. easy availability of loan, interest saving on the loan etc.,. In an arm's length situation, no independent party would pass on such benefits to a third party, while retaining with itself all the risks attached to such benefits, without charging any fee. Hence, an appropriate fee needs to be charged on the corporate guarantee issued by the assessee to its AE. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of liquidated damages or other monies in accordance with the Loan agreement, or in due compliance with any of the formalities for drawal of the Loan or otherwise in the observance or performance of any other terms and conditions of the Loan Agreement, then and in such event, the Guarantor shall, within a period not exceeding fifteen days front the date of dispatch or delivery by Exim Bank to the Guarantor of a notice in writing of such default by the Borrower (AE), pay to Exim Bank, at Mumbai on first demand without delay, demur or protest. ii. The Guarantee shall be a continuing guarantee and shall remain in force until the outstanding amount upto 35% of the Loan i.e. USD 3.5 mn together with interest, service fee and all other moneys in respect thereof shall be paid off to Exim Bank in full. iii. The Loan limit is USD 10 million iv. The Loan is taken to part finance cost of setting up of a new manufacturing facility for pharmaceutical formulations of the Borrower (AE) at a project cost of USD 14 mn. iv. The Guarantee shall, be irrevocable and binding on the Guarantor (Assessee) and its successors. vi. The Guarantor (assessee) agrees that until the Guarantor shall have full ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntees 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. 5.4. In support of its case, the ld.DR filed written submissions. The written submissions with respect to Corporate Guarantee are to the following effect : In Transfer Pricing Study Report, the taxpayer did not furnish any details with regard to corporate guarantee given and aggregated the guaranteed 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 media ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and purchase transactions under TNMM. During the year under consideration, the company has not extended any new Corporate Guarantee to the AEs, however, guarantees extended in the earlier years and outstanding loans as on 31.03.2017 are as under: Name of the Company Currency in which outstanding guarantee provided on 3103-2017 US $ Loan / Outstanding loan as on 31.03.2017 INR 164.84 Vs USD) Hetero FZCO S 9,000,000 58,36,41,000 PharmedHealth Care Compere SAE, Egypt S $ 9,305,376 60,34,44,328 118,70,85,328 The AE, Hetero FZCO is a 100% subsidiary of the appellant company and hence guarantee was extended by the appellant as parent company capacity. Since the ultimate beneficiary is the parent company (the appellant), guarantee commission was not charged. Further, Pharmed Healthcare Company SAE is a 45% Joint Venture of the appellant with other group company Hetero Drugs Ltd. Both the companies have extended corporate guarantees to Pharmed Healthcare Company SAE in their promoter capacity. In this case also, no fee was charged by the appellant for providing such guarantee on behalf of the AE. However, the TPO observed that the corporate guarantee provided by the appellant is in the na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not. Explanation For the removal of doubts, it is hereby clarified that-- (i) the expression international transaction shall include (a). the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b). the purchase, sale, transfer, lease or use of intangible properly, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licenses, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; (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 advance, payments or deferred payment or receivable or any other debt arising during the course of business; (d). provision of services, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates for FY 2016-17 of commercial banks? It is seen that the bank guarantee and corporate guarantee are two different transactions and cannot be compared in the case of the appellant for the following reasons: (i). The appellant is not engaged in the bus ness of extending guarantees, unlike Banks, (ii). The corporate guarantee is in respect of guaranteeing a loan extended by a Bank, to a related party, whereas banks are prohibited to give bank guarantees for guaranteeing loans, (iii). If bank guarantee is invoked by a third party, then bank recovers all such expenses from the assessee and the default amount is treated as a loan till such expenses are paid by the assessee, whereas in corporate guarantee, there is no option to recover such costs from the AE, as it is the AE which was in default. Further, reliance is placed on the decision of Hon'ble Bombay High Court in the case of Everest Canto Cylinders [2015] (ITA 1165/2013 dated 08-05- 2015), wherein it was held that the corporate guarantees cannot be compared with bank guarantees. The Hon'ble Bombay High Court reconfirmed the above stand in its judgement in the case of CIT Vs. Glenmark Pharmaceuticals Ltd (ITA No. 1302 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 93,05,376). The AO is directed to give effect accordingly. Accordingly, ground No. 4(a) of the appeal is partly allowed and the ground No. 4(b) is dismissed. 7. The ld.CIT(A) had relied upon the decision of the Tribunal in the case of Mylon Laboratories Ltd Vs. ACIT wherein the Tribunal has decided the issue in favour of the assessee by quantifying the bank guarantee charges at 0.53%. 8. Before us, ld.AR submitted that the assessee had filed detailed reply before the Ld. CIT(A) which was reproduced at Pages 98-106 of the order of the CIT(A). The summary of contentions of the assessee regarding charging of any corporate guarantee fee is as follows:- (i) The Corporate Guarantee fee does not fall under the definition of guarantee under international 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guarantee based on bank guarantee rate. The Ld.CIT(A) has granted relief to the assessee by relying upon the decision of co-ordinate Bench of the Tribunal in the case of Mylon Laboratories Ltd Vs. ACIT (ITA No. 2123/Hyd/2011) and had computed the corporate guarantee commission @0.53as against 1.90% as determined by the TPO. 9.1. The submissions of both the assessee as well as the Revenue are captured hereinabove. Infact, we have the occasion to examine the identical issue recently in the cases of M/s. Aurobindo Pharma Limited, Hyderabad Vs. ACIT, Central Circle 1(2) (ITA No. 485/Hyd/2022 dt. 27.04.2023 and ITA No. 1860/Hyd/2019 for A.Y. 2015-16). In the case of M/s. Aurobindo Pharma Limited (ITA No. 485/Hyd/2022 dt. 27.04.2023) (supra), we have held as under : 8. We have heard the rival contentions of the parties and perused the material available on record. The issue of whether the corporate bank guarantee given by the assessee on behalf of its AE is an international transaction or not, is no more res integra, as the explanation to section 92B of the Act itself had made it abundantly clear that if the assessee is providing the capital financing, including any type of long term or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain Irrigation Systems in ITA 822/Pun/2022 dt. 22.12.2022, respectively. Respectfully following the view taken by the Delhi, Bangalore and Pune Benches of the Tribunals in the above cited cases and also in the case of Vivimed Labs (supra), we partly allow the ground of the assessee and restrict the addition to the tune of 0.5% on the amount guaranteed as corporate guarantee commission. Thus, ground nos. 1 to 4 are partly allowed. 9.2 In our view, the facts of the present case are similar to the facts in the case of Aurobinda Pharma (supra). Therefore, relying upon the decision of the co-ordinate Bench of the Tribunal in the case of Aurobinda Pharma (supra), we uphold the computation of Corporate Guarantee Commission at 0.53%. Undoubtedly, in the facts of the case of Aurobinda Pharma (surpa), we had determined the amount guaranteed as corporate guarantee commission @ 0.5%. However, considering the facts of the present case, we are of the opinion that the computation of the amount guaranteed as corporate guarantee commission @ 0.53% would be appropriate. Furthermore, the Revenue cannot be worsen of thereby reducing the corporate guarantee commission from 0.53% to 0.50% in its appeal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arantee to the extent of 30.50% only to Pharmed Healthcare Company, Egypt. In view of this, the CIT(A) directed to calculate corporate guarantee @0.53% of 30.50% (taxpayer's share on outstanding loan balance 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 M/s. 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 guar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to be paid for rendering shareholder services by an enterprise to its associated enterprise as a shareholder. Further, 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. 10. We have heard both parties and perused the material on record. In the present case, the Ld.CIT(A) while deciding the grounds of appeal at page 175 to 178 (supra) has discussed the issue whether the corporate guarantee given by the assessee to its AE would constitute the international transactions or not ? The Ld.CIT(A) after relying upon the Explanation to 22A had decided the issue and has held that the grant of corporate guarantee to its AE would constitute international transactions. After holding the grant of corporate guarantee as international transaction, the Ld.CIT(A) has adjudicated and determined the corporate guarantee @0.53% instead of @1.90% on the outstanding amount of the corporate guarantee. Hence, we d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded in the earlier interest of Rs. 42,78,66,807/-, making the total adjustment to Rs. 68,05,72,337/-. During the course of appellate proceedings, the appellant submitted that it is not charging interest from non-AEs on delayed receivables due beyond the credit free period of 90 days, and also not paying any interest on trade payables, there is no financial benefit that is extended by the appellant to foreign AEs. Therefore, trade receivables outstanding beyond credit period is not an international transaction and no such ALP interest can be imputed on the same. The appellant further submitted that if at all the interest to be charged on trade receivables, the interest rate on delayed receivables are to be benchmarked with LIBOR (London Interbank Offer Rati, rather than Indian interest rates, as the exports are denominated predominantly in US dollars. Alternatively, interest rate @2.46% p.a. based on the rate charged by the banker to the appellant for short-term (6 months) foreign currency loan extended towards exports known as packing credit foreign currency (PCFC) loan can be taken into consideration. Now the question arises whether outstanding trade receivables constitute separat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Kusum Healthcare Pvt. Ltd. was duly considered in the case of Ameriprise India Pvt. Ltd. and it was observed from para 20 to 23 as under- 20. The Id. AR supported the impugned order by relying, on a Tribunal order dated 31.3.2015 passed in Kusum Healthcare Pvt. Ltd. vs. ACIT (ITA No. 6814/ Del/ 2014) in which it has been held that no additional imputation of interest on the outstanding receivables is warranted if the pricing/profitability is more than the working capital adjusted margin of the comparables. In the opposition, the Id. DR relied on a later order dated 6.7.2015 passed by the Tribunal in the case of Techbooks International Pvt. Ltd. (supra), in which the transfer pricing adjustment on account of the delayed realization of invoices from AEs has been upheld. The Id. DR contended that the order in the case of Kusum Healthcare Pvt. Ltd. (supra), has been passed without considering the amendment to section 92B carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002, which has been duly taken into account by the Tribunal in its later order in Techbooks International Put. Ltd. (supra). 21. After considering the rival submissions and perusing the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest income short charged or uncharged. Under such circumstances, the contention taken by the assessee before the TPO that it is not an international transaction, turns out to be bereft of any force. 23. The Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 215 Taxmann 108 (Born.) dealt, inter alia, with the following question of law:- (c) Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises? 24. While answering the above question, the Hon'ble High Court noticed that an amendment to section 92B has been carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside the view taken by the Tribunal, the Hon'ble High Court restored this issue to the file of the Tribunal for fresh decision in the light ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Rate. Further, it is seen that LIBOR is a rate applicable in the transactions entered into between banks and the loans advanced by these banks are secured by security and guarantee. However, in the case of the appellant, the loans advanced in the form of outstanding trade receivables to its AEs are without any security or guarantee and hence LIBOR plus a reasonable markup should be considered as arm's length interest rate. The reliance is placed on the decision of Hon'ble ITAT, Hyderabad in the case of Albany Molecular Research Vs. DCIT, Circle-1(1), Hyderabad dated 26.11.2020 in which it was held 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. The relevant portion of the said decision is reproduced as under: 5.5. For the A Yrs 2013-14 and 2014-15, there is no dispute that assessee had realised its receivable from its AEs after abnormal delay beyond the agreed credit period. This, in our considered opinion, tantamount to indirect funding made by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 under consideration but beyond the agreed credit period, imputation of interest by applying LIBOR + 200 basis points is to be made from 1st day of April of the relevant years till the date of realization of debts. In respect of invoices raised during the respective years, where the amounts were realized during the respective years itself, but beyond the agreed credit period, imputation of interest by applying LIBOR +200 basis points is to be made from the date of expiry of agreed credit period from the date of raising the invoice and the same is to be charged till the date of realization of debts. We hold that the decision of the Hon ble Delhi High Court in Kusum Healthcare talks about only outstanding receivables at the end of the year i.e. to say when working capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant from its AEs by adopting LIBOR as applicable to the country in which AE is situated + 200 basis points instead of short term deposit rates of SBI. It is noted that the TPO has allowed credit period of 60 days while calculating interest on outstanding trade receivables and the appellant is seeking the credit period of 90 days which has not been substantiated by the appellant with regard to its transactions with unrelated parties nor any explicit invoices regarding the same have been produced. The credit period of 60 days allowed by the TPO is found reasonable as this is the prevalent credit period allowed in the line of business of the appellant unless specifically proved otherwise by the appellant in the peculiarity of its own operations and transactions with non-AEs for similar product/ transactions. The credit period of 60 days was also found reasonable in the decision of Mumbai Bench of the ITAT in the case of Tecnimont ICB House Vs. DCIT in ITA No. 487/Mum/1014 vide order dated 08.07.2015. Accordingly, ground No. 5(b) and 5(c) are dismissed and 5(a) is partly allowed to the extent of relief granted on the basis of LIBOR plus 200 basis points. 11.1. The written su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Ingersoll Rand (I) Pvt. Ltd. (dated 10.11.2017), ITAT Delhi in the case of BT e-serve India Pvt. Ltd. (dated. 30.10.2017) (87 Taxmann.com 251), ITAT, Hyderabad in the case of Albany Molecular Research Vs. DCIT, Circle-1(1), Hyderabad dated 26.11.2020 and further the decision of Mumbai Bench of the ITAT in the case of Tecnimont ICB House Vs. DCIT in ITA No. 487/Mum/1014 vide order dated 08.07.2015. 11.3. Per contra, the ld. AR has made the following written submissions : The assessee s main argument is that it did not charge any interest whatsoever on the similarly delayed foreign Non-AE debtors. In this regard, the assessee submitted a summary of invoices realised with various delays from AEs and non-AEs and was submitted before the Ld. CIT(A), which is available on Page 110 of the order of the CIT(A) for AY 2017-18. This is further expanded as under by including the amounts involved in respect of these invoices:- Further, the assessee also submitted Annexure-L in physical form before CIT(A) in respect of invoice details of realisation of AE and Non-AE exports from two plants. However, the CIT(A) rejected this ground by simply stating that (at Pages 183 184 of the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeds 180 days. (ii) In order to penetrate in the pharmaceutical markets of the respective countries, the assessee company has to extend credit period beyond the due date for foreign AEs and Non-AEs. So, it is commercial decision of the assessee out of its business expediency to give extended credit facility for both the foreign AEs and Non-AEs equally. In summary, as the assessee did not charge interest for equal delay in realisation of Non-AE exports, under internal CUP method, the assessee is justified in not charging interest on delayed receivables from foreign AEs. Credit Free Period:- Without prejudice to the above argument that non-charging of interest on delayed receivables from foreign AEs is justified in view of the fact that the assessee is not charging any interest for such equal delay of realisation of receivables from foreign AEs, the assessee submits that even if interest is chargeable on delayed receivables, the interest-free credit period must be allowed for 180 days, rather than 60 days as allowed by the Ld. CIT(A) mainly for the following reasons:- (i) There are significant number of export invoices raised against foreign AEs with 180 days credit period. A sample ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pattern during A.Y. 2018-19 Particulars Total Number of Invoices during the A.Y. 2018-19 Amount Export Invoice value in Rs. % of invoices realized to total invoices raised during the year A) Realised within credit period 3,001 6,48,15,77,864 91.22 B) Realised beyond credit period of 60 days 10 days 241 36,27,20,363 5.10 10-20 days 204 18,88,04,889 2.66 20-30 days 45 7,11,80,351 1.00 30-45 days -- -- -- 45-60 days -- -- -- =60 days 29 11,63,338 0.02 Sub total (B) 519 62,38,68,941 Total (A) + (B) 3520 7,10,54,46,805 10. From the perusal of the Chart, it is absolutely clear that there were 519 invoices valued at Rs. 62,38,68,941/- for which the payments were due beyond the credit period 60 days. In our view, the lower authorities have computed the Arm s Length Price and have mentioned that the same being international transaction, the same is required to be bench marked by considering the SBI short term deposit interest rate. 11. The above-said issue of delay in receivables is no more res integra. The co-ordinate Bench in the cases relied upon by the Revenue examined the issue and thereafter directed the TPO / Assessing Officer to apply rate of interest of 6% on outstanding receivable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 22 Apache Footwear India Pvt.Ltd. 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 Arms Length however, nothing has been brought to our notice that the assessee has brought any comparable instance. In these circumstances, the TPO had applied the banking rate as applicable to short term loans. In our view, the same is required to be corrected and instead thereof, ALP is to be computed by adding notional interest @ 6% on the receivable. Considering the totality of facts and circumstances, in view of the decisions cited supra and in view of fore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd transactions with non-AEs for similar product/ transactions. The credit period of 60 days was also found reasonable in the decision of Mumbai Bench of the ITAT in the case of Tecnimont ICB House Vs. DCIT in ITA No. 487/Mum/1014 vide order dated 08.07.2015. Accordingly, ground No. 5(b) and 5(c) are dismissed and 5(a) is partly allowed to the extent of relief granted on the basis of LIBOR plus 200 basis points. ( emphasis supplied by us ) 12.7 Surprisingly, the assessee before us in the written submissions had sought the credit period of 180 days as against 90 days claimed before the ld.CIT(A). The basis for claiming 180 days by the assessee before us was the order passed by the Assessing Officer / TPO u/s 92CA(3) for the assessment year 2016-17 and 2022-23 dt.09.02.2024. In order for the assessment year 2016-17, the TPO in Para 6.5.6 to 6.5.8 in order dt.09.02.2024 it was held as under : 6.5.6 In view of the above, SBI short Term deposit rates as applicable for F Y 2015 16 is considered as appropriate under Other Method to determine ALP of Outstanding receivables'. During the course of Transfer Pricing Proceedings of the cases for AY 2016-17, the then TPO gathered the SBI Ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate of SBI for F.Y. 2021-22 after allowing a credit period of 180 days as under: Description Amount (Rs.) Interest on delayed trade receivable in respect of invoices raised during the F.Y. 2021-22. 8,69,73,742 f - Add : Interest on delayed trade receivable in respect of invoices which were raised in previous FYs but remained unpaid on the opening day of the current F.Y 2021-22. 24,03,09,219 Total interest on delayed receivables 32,72,82,961 6.5.9 Accordingly, an amount of Rs. 32,72,82,961/- is proposed as an adjustment towards interest on delayed trade receivables. 12.9 From the perusal of para 6.5.7 for the assessment year 2016-17, it is clear that the Assessing Officer has computed the interest by adopting the short term deposit of SBI for financial year 2015-16 after allowing a credit period of 180 days. No reasoning was given by the Assessing Officer in order dt.26.09.2023 while granting the credit period of 180 days. 12.9.1. Similarly, the Assessing Officer for the A.Y 2022-23 in order dt.09.02.2024, it had mentioned by the Assessing Officer that considering the facts of the case and submissions of the taxpayer and keeping in view of the fact that credit period allowed to mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue are partly allowed and the grounds relating to this issue i.e., 4(a) to 4(d) raised by the assessee in ITA No. 312/Hyd/2023 for A.Y. 2017-18 are dismissed. GROUNDS 8 AND 9 13. Grounds 8 and 9 are with respect to inclusion of M/s. Sun Pharma Laboratories and M/s. Macleods Pharmaceuticals Ltd by the ld.CIT(A) as comparable. 131. The ld.DR has drawn our attention to Page 196 and 197 of the order of ld.CIT(A), which is to the following effect : Related Party Transaction (RPT) filter: Further, it is seen that the TPO has applied 25% RPT filter in the search process under TNMM, wherein companies with related party transactions more than 25% were rejected. The applicability of this fifty is not disputed by the appellant. However, it is noticed that from the accept/reject matrix of search process carried out by the TPO, the following companies were rejected as comparables based on 25% RPT filter: (i). Sun Pharma Laboratories Ltd. (ii). Macleods Pharmaceuticals Ltd. On the contrary, based on the information and data available in the above 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or data of the company Which does not fall within 12-month period i.e. 01-042016 to 31-03-2017, were rejected (c) Companies having negative net worth were excluded (d) Companies having persistent loss were excluded (e) Companies whose manufacturing sales is less than 75% of its total sales were excluded (f) Companies who have more than 25% related party transactions of the sales were excluded (g) Companies whose Net Sale was less than Rs. 1 Crore were excluded (h) Companies who have export sales income less than 25% of the sales were excluded. 14.2 Based on the above filter, the TPO has found out 19 comparables which are to the following effect : S. No. Company Name Wt. Avg Turnover for AY 2017-18 (in Crores) Total OR In Millions (Rs.) Total OC In Millions (Rs.) Total OP In Millions (Rs.) OP/OR (%) 1 Medico Remedies Ltd. 1826 1743 82 4.51 57.19 2 R P G Life Sciences Ltd. 8732 8217 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the RPT filters and have included these comparables as suitable comparables. So the final list of comparables found by the ld.CIT(A) were mentioned at page 198 of the order, which are to the following effect : 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 TPO s Comparable 7 Centaur Pharmaceuticals Pvt. Ltd 553.38 TPO's Comparable 8 Unichem Laboratories Ltd 1413.85 TPO'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 Laborator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are showing more than ordinary profits. The two eligible units which are showing more than ordinary profits are having purchase transactions with the non eligible units. Therefore, the TPO has chosen OP/OR as the PLI and the exempt units as the tested parties and compared the margins of the each unit with the margins of the external comparables. 15.2 It was submitted that as clear from the table above, the unit VA-SEZ Jedcharia had OP / OR (operating cost / operating revenue) at 40.33% and whereas Unit IV Baddi was having OP/OR at 25.71%. It 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 al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing expenditures were not allocated by the appellant to these units, while preparing the financial statements of these units:- i) R D Expenditure - Rs. 54,89,45,332/- ii) Head Office Marketing Office Expenses - Rs. 251,09,12,940/- Therefore, as per above submissions, the computation of PLI at the unit (enterprise) level of the appellant doesn't include major expenses towards R D, Head Office 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 informa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seen that while arriving at Arm's Length Price (ALP) of Specified Domestic Transactions (SDT), the TPO has considered the following financials:- 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 appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational transaction with the A.E. has to be seen in relation to the uncontrolled transaction with the 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 betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 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 analyzing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cing 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 (enterprise) level of the assessee don t include major expenses towar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 such expenses are incurred by the eligible units or in other way, no such R D and marketing functions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-exempt units despite the opportunity granted. 16. The TPO rejected the TP Study of the assessee for the reasons mentioned in the order by the TPO. Thereafter, the TPO has selected various comparables afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble 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 its related parties. The TPO issued a show cause notice to the assessee on 21.12. 2020, asking the assessee as to why the margin of 12.74% should not be considered for benchmarking the domestic specified transaction and also why the adjustment of 12.74% should not be made under section 92CA(3) of the Act. 16.4. The assessee filed reply and raised objections which are captured by the TPO. In the reply dt.06.01.2021, the assessee had categorically submitted as under : (Para 18 of TPO orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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. 16.7 As discussed hereinabove, while discussing grounds 8 and 9, these two companies were excluded from the list of comparable by our order. The ld.CIT(A) had excluded i) Medico Remedies Limited, ii) Shree Ganesh Remedies Limited and iii) Mangalam Drugs and Organics Limited and included i) Divis Laboratories, ii) Natco Pharma Limited and iii) Ajanta Pharma Limited iv) Sun Pharma Laboratories Ltd., and v) Macleods Pharmaceuticals Limited. 16.8 The revenue has already challenged the inclusion of two companies nam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. restrict the calculation of ALP to value of SDT instead of value of all the other transactions as under: Description/Amount (Rs Cr) Unit VA, Jadcherla Unit IV, Baddi Total Value of SDT (Purchases) 31.28 113.79 4 145.07 Value of Other Purchases 246.14 167.66 % of SDT Purchases 11.28% 40.42% Operating Revenues 408.10 400.52 Proportionate revenues 46.03 161.89 Arm's Length Margin to be considered (OP/OR) 17.87% 17.87% ALP of SDT Purchases 37.80 132.96 TP Adjustment that should have been made 6.52 19.17 25.69 Actual ..... X X X X Extracts X X X X X X X X Extracts X X X X
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