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TMI Blog2024 (7) TMI 430X X X X Extracts X X X X X X X X Extracts X X X X ..... COURT] left the question open regarding whether transfer pricing adjustment on delayed receivables could apply to a debt free company. Hence, the submission of assessee that the decision of Hon ble Delhi High Court in assessee s own case for AY 2014-15 and Tribunal decision in assessee s own case for AY 2010-11 still applies. We find ourselves in agreement with the submissions of the assessee, since in assessee s own case, the issue is decided in favour of the assessee. Following the principles of stare decisis we set aside the orders of the authorities below on this issue and addition is deleted. - SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER And SHRI SUDHIR KUMAR, JUDICIAL MEMBER For the Assessee : Shri Porus Kaka, Sr. Advocate And Shri Divesh Chawla, Advocate For the Revenue : Shri Rajesh Kumar, CIT DR ORDER PER SHAMIM YAHYA, ACCOUNTANT MEMBER : This appeal by the assessee is directed against the order of the Assessing Officer dated 21.01.2022 pursuant to the directions issued by the DRP for the Assessment Year 2017-18. 2. Grounds of appeal taken by the assessee read as under :- General grounds: 1. On the facts and in the circumstance of the case, the learned AO has erred in assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;ble DRP have erred in not accepting the economic analysis undertaken by the Appellant in accordance with provisions of the Act read with the Income-tax Rules, 1962 ('the Rules ') and modifying the same for determination of arm's length price of the impugned international transactions to hold that the same are not at arm's length. 8. On the facts and in the circumstances of the case, the learned TPO/ AO have erred by wrongly rejecting certain companies from and adding certain companies to the final set of comparables for the impugned international transactions on an ad-hoc basis, thereby resorting to cherry picking of comparables for benchmarking the impugned international transactions. 9. On the facts and in the circumstances of the case, the learned TPO/ AO / Hon'ble DRP have erred in excluding Informed Technologies India Ltd in the final set of comparables for benchmarking the impugned international transaction, even though the said company is functionally comparable to the Appellant. 10. On the facts and in the circumstances of the case, the learned TPO/ AO / Hon'ble DRP have erred in excluding R Systems International Limited in the final set of compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al interest on outstanding AE receivables arising from provision of services. Corporate tax grounds: 17. On the facts and in circumstances of the case, the learned AO has erred in levying consequential interest under Section 234B of the Act in the income tax computation as per final assessment order. 18. On the facts and in circumstances of the case, the learned AO has erred in considering an incorrect amount of book profits at INR 74,84,47,150 as against the correct book profit of INR 69,88,35,419 as reported in the return of income. 19. On the facts and in the circumstances of the case, the learned AO has erred in initiating penalty proceedings under section 270A of the Act. Each of the above grounds of appeal is without prejudice to and independent of one another. 3. We have heard both the parties and perused the records. Both the parties have given written submissions which bring out the facts and respective arguments as under :- SUBMISSIONS BY THE LD. COUNSEL FOR THE ASSESSEE : As submitted during the hearing, if the issues determined in grounds 6 and 15 are adjudicated in favour of the Appellant, no further transfer pricing adjustment would stand. Therefore, submissions are l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties. 1.5 Below is a detailed computation of the Appellant s operating margin after excluding proportionate third-party expenses from the cost bases as submitted during the hearing. Sr.No. Particulars Amount A Total revenue from operations 5,22,79,60,006 B Less: Third party income 10,51,89,946 C Transactions with AE [A-B] 5,12,27,70,060 D % of third-party transaction to total revenue from operations [B/A] 2.01% E Total operating cost (including cost for third party services) as per revised transfer pricing order dated 1 September 2021 4,47,70,40,439 F Less: Proportionate reduction in operating cost to the extent of third- party income [E*D] 9,00,80,957 G Revised Operating cost base of the Appellant [E=F] 4,38,69,59,482 H Revised Operating profit [C-G] 73,58,10,578 I Revised Operating Profit / Operating cost [H/G] 16.77% H Arm's length range as per order giving effect to DRP directions 16.06% - 24.03% 1.6 As mentioned earlier, when determining the ALP, benchmarking should only be conducted on AE transactions, excluding third-party transactions. This principle was affirmed by the Bombay High Court in Hindustan Unilever Ltd [72 taxmann.com 325J. The Special Leave Petition has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is particularly so as in respect of transaction with non-Associated Enterprises, Chapter X of the Act is not triggered to make adjustment to considerations received or paid unless they are Specified Domestic Transactions. The transactions with non- Associated Enterprises are presumed to be at the arm's length as there is no relationship likely to influence the price. If the contention of the Revenue is accepted, it would lead to artificial increase in profits of the transactions entered into with non- Associated Enterprises by applying the margin at entity level which is not the object of Chapter X of the Act. Absence of segmental accounting is not an insurmountable issue, as proportionate basis could be adopted as done by the Delhi High Court in Keihin Panalfa Ltd. (supra). 13. In the above view, no substantial question of law arises. There/ore, we do not entertain the present appeal. (emphasis supplied) 1.9 During the hearing before Your Honors, the learned Department Representative ('DR') did not provide any counterarguments to the above submission made by the Appellant's Counsel. Further, it accepted that the Learned TPO failed to follow the directions of the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany. 2.4 It is not disputed that the Appellant is a debt-free company. This fact can be verified from its financials on page 267 of the paperbook. Furthermore, Schedule 5 deals with current liabilities (page 274 of the paperbook), confirming that the Appellant has no loans. Additionally, Schedule 16 deals with 'other expenses' (page 288 of the paperbook), showing that the Appellant did not incur any interest expenses. Hence, in the absence of interest outflow in the Appellant's books due to its debt-free status, any adjustment for notional interest on outstanding receivables is not warranted. 2.5 Reliance is also placed on decision of jurisdictional Hon'ble Tribunal ruling in the Appellant's own case for A Y 2014-15 (Case law no. 2 of the Legal paperbook) and A Y 2010-11 (Case law no. 3 of the Legal paperbook) wherein the jurisdictional Hon 'ble Tribunal held that in case of a debt free company, there is no requirement for making transfer pricing adjustment on account of the interest on outstanding receivables. The Hon'ble Tribunal after considering the learned DR's argument on the amendment in Section 92B held as under:- 5.6. The learned DR, on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eparate addition is not required under the TP provisions. Thus, it was contended that the outstanding amounts are not to be considered for adjustment. 17.3 We have considered the issue and examined the rival contentions. In the case of Evonik Degussa India P. Ltd., in ITA No. 76531Mum12011, it was already held the TP adjustment cannot be made on hypothetical and notional basis, until and unless there is some material on record that there has been under charging of real income. Thus on the facts and circumstances of the case, we are of the opinion that addition on account of notional interest relating to alleged delayed payment in collection of receivables from the AEs is uncalled for on the facts of the present case. Even though DRP tried to distinguish the above decision on facts, as seen from the facts in both the cases, we are of the opinion that the above decision will equally apply to Assessee's case. Assessee has outstanding service charges receivables and as seen from the order of TPO, the outstanding is only from 31-07-2009. There seems to be no such delay in earlier months. Assessee has no interest liability at all so notional interest cannot be brought to tax under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cing adjustment raised on account of notional interest on outstanding receivables has to be deleted where the Appellant has already factored the impact of receivables by undertaking working capital adjusted margins of comparables for comparability purposes and no further adjustment on basis of outstanding receivables should be made. TCI -GO Vacation India (P) Ltd vs ACIT [2024] 159 taxmann.com 710 (Delhi-Trib.) (Case law no. 18 of the Legal paperbook) Kronos Solutions India (P) Ltd vs DCIT [2023] 149 taxmann.com 194 (Delhi-Trib.) (Case law no. 19 of the Legal paperbook) Alcatel Lucent India Ltd vs ACIT [2023] 149 taxmann.com 150 (Delhi-Trib.) (Case law no. 20 of the Legal paperbook) DCIT vs IQOR India Services (P) Ltd [2022] 140 taxmann.com 629 (Delhi-Trib.) (Case law no. 21 of the Legal paperbook) 2.8 The learned DR relied on the retrospective applicability of the amendment to explanation (i)(c) of Section 92B introduced by the Finance Act, 2012, citing the following judicial precedents to support his position: Apache Footwear India (p.) Ltd. vs ACIT [2023] 148 taxmann.com 371 [Hyd-Trib.] In this ruling, the Hon'ble Tribunal confirmed the retrospective application of the amend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Delhi) (Case law no. 17 of the Legal paperbook) wherein the High Court has upheld this principle. Conclusion 2.11 In view of the above contentions, it is respectfully submitted that, in light of the apex court's decision in the case of Bechtel India Pvt. Ltd. (supra), as well as precedents set in the Appellant's own cases at both the High Court and Tribunal levels, the transfer pricing adjustment related to notional interest ought to be deleted. SUBMISSIONS BY THE LD. DR FOR THE REVENUE : Kindly refer to the above. The case was heard on 24.04.2024 and during the course of hearing, both the sides argued the matter. Further, both the sides were given the liberty to file written submissions, and in line with the directions, the written submissions are filed with the request to take it on record. It is also brought to the notice of the Hon'ble Bench that the submission filed by the assessee's counsel has been received in the office of the undersigned on 01.05.2024. Issue no. 1: Adjudication of ground of appeal no. 6 before DRP During the course of hearing, the Id. Counsel of the assessee has referred to the GoA no.6, taken before the DRP and stated that the AO has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttled law that interest on receivables is a separate international transactions and it has been held in number of judgements/orders by various courts including Hon'ble Delhi ITAT also and for the sake of brevity, the same are not reproduced. (2) The Ld. Counsel has relied on the order of the Hon'ble Delhi High Court in the case of Bechtel India Pvt. Ltd. in ITA No. 379/2016 which was passed in appeal by the Pro CIT-2, New Delhi against the order passed by Hon'ble ITAT in ITA No. 1478/Del/2015. First of all it is humbly submitted that the Hon'ble Tribunal in that case did not consider the amendment in section 92B by Finance Act 2012 inserted with retrospective effect from 01.04.2002. (3) In fact, in the subsequent case of Bechtel India Pvt. Ltd. vs. ACIT 4(2), 85 taxmann.com 121 (Delhi Tribunal 2017) for A.Y.2009-10, the Hon'ble Delhi Tribunal has after considering the amendment to section 92B with regard to notional interest on receivables has a clearly considered this issue i.e. whether interest could be attributable to debt free company or not and clearly held that interest is required to be computed separately for late realization of receivables and it has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he interest on delayed payment of receivables get subsumed in the working capital adjustment allowed to the assessee. The ld. counsel has also advanced an argument that since it was debt free fund company, which finding is not disputed, therefore, no interest could be attributable on the late realization of receivables. In our opinion, this plea is to be rejected at the threshold because, as noted earlier, interest on delayed realization of receivables is a separate international transaction and, therefore, requires separate benchmarking. It has nothing to do with the operations of the assessee company being with the debt free funds only. It is also submitted that in the above noted case of Bechtel India Pvt. Ltd, the Hon'ble Tribunal has arrived at the decision after analyzing the decision of the Hon'ble ITAT in the case of Kusurn Healthcare Pvt. Ltd. Vs (ITA 6814IDeV2014), ITAT, Delhi and also the decisions of the Hon'ble ITAT in the case of Ameriprise India Pvt. Ltd.(2015) 62 Taxmann.com 237 (Delhi Tribunal) and Mckinsey Knwledge Centre Pvt. Ltd. vs DCIT (2017) 77 taxmann.com 164 (Delhi Tribunal). (4) Thus it is respectfully submitted that the decision cited by the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 do not find any error in the same. 13. The reliance of the assessee in the case of Betchel India (P.) Ltd. (supra) is also not correct as A.Y. in that case was 2010-11. By the Finance Act, 2012, the Explanation was inserted in Sec.92B of the Act and by virtue of which payment or deferred payment or receivable or any other debt arising during the course of business has been considered to be an international transaction which is required to be benchmarked. Following the above said Explanation, the co-ordinate Bench for the subsequent assessment years vide order dt.16-5-2017 in the case of Bechtel India (P.) Ltd. v. Asstt. CIT [2017} 85 taxmann.com 121 (Delhi - Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered opinion, tantamount to indirect funding made by the assessee to its AEs by allowing the AE to utilize funds of the assessee as per its whims and fancies. Merely because the assessee is a debt free company except ECB loan, it cannot allow its funds to be utilized by its AE for an indefinite period of time beyond the agreed credit period. We find that clause C of Explanation to section 92B of the Act has been introduced in the statute by the Finance Act 2012. (7) Reliance was also placed on the recent decision of Hon'ble Tribunal in the case of Iomedia India Pvt. Ltd. vs. ACIT, Circel-12(3), ITA no. 99S/DelJ2021 for A.Y. 2016-17 (copy of the order submitted during hearing), to emphasis on the remarks in the decision by Hon'ble Tribunal that interest is now charged on outstanding receivables by various tribunals across the country. For ready reference, operative part of the decision is reproduced below:- 6. This definition of Eligible International Transaction in Rule 1 OTC is for the purpose of applicability of Safe Harbour Rules only. Hence the international transaction of interest on outstanding receivables does not figure in any of the clauses (i) to (x) in the afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Aicatel Lucent India Ltd. vs. ACIT (2023) 149 taxmann.com 150 (Delhi Tribunal). In this connection, it is respectfully submitted that in the subsequent assessment year i.e. for A.Y. 2018-19, the Hon'ble Delhi ITAT vide its order in ITA 0 1447/Del/2022 dated 20.03.2024 has after discussing its own order for A.Y. 2017-18 has taken a contrary view and has restored the matter to the AO. Being pertinent, the operative part of the decision is reproduced below:- 39. Though we are conscious of the fact that in assessment year 2017-18, the co-ordinate Bench has decided the issue in favour of the assessee, however, we are of the view that in the impugned assessment year, the issue has not been examined in the context of principles laid down by the Hon 'ble jurisdictional High Court in case of Kusum Healthcare Pvt. Ltd. (supra). However, in all fairness, it must be said that there is delay in trade payable to AEs. Therefore, some benefit on account of delayed payables must have percolated to the assessee. Thus, it needs to be examined whether and to what extent the benefit received by the assessee on account of trade payables can be set off against the purported benefit given to the A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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