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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 ..... HIGH 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, the learned TPO/ AO / Hon'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 Internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an adjustment ought to be made in respect of notional 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred (calculated on a proportionate basis) in rendering services to such third 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 transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein is only to redetermine the consideration received or given to arrive at income arising from for International Transactions with Associated Enterprises. This 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... average period of realization of inter- company receivables should be considered in order to make a transfer pricing adjustment, if any, it is submitted that the Appellant is a debt free company. 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 accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r submitted that working capital adjustments are being made while analyzing the operational performance of the companies, therefore, outstanding amount gets adjusted in working capital adjustments and another separate 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also a debt-free company. 2.7 Additionally, without prejudice to Appellant's contention of debt- free entity, the Appellant also relied on the following jurisdictional Tribunal rulings, wherein it is held that the transfer pricing 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 int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lastly, if the outstanding receivables are benchmarked by undertaking working capital adjustment and then no separate adjustment are required to be undertaken for outstanding receivables. Reliance in this regard was placed on the Hon'ble Delhi High Court ruling in the case of Kusum Health Care Private Limited [2018] 99 taxmann.com 431 (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in the case of Kusum Healthcare Pvt. Ltd. on the point that when working capital adjustment has been made then no separate adjustment are required to be undertaken for outstanding receivables. B. Submission of the department:- (1) After the amendment brought about in explanation to section 92B by Finance Act 2012 inserted with retrospective effect from 01.04.2002, it is a settled 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the proceeds are realized within the year, but, beyond the stipulated period of agreement, then, the same will not come within the working capital adjustment because working capital adjustment is made with reference to the opening and closing balances as on 1st April and 31st March. Therefore, respectfully following the decision of the Tribunal noted above, we reject the assessee's contention that the 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 analyzi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision of Hon'ble Delhi High Court in the case of Boeing India (P.) Ltd. (supra), 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons are quoted below: (6) Albany Molecular Research Hyderabad Research Center (P.) Ltd.v. Deputy Commissioner of Income-tax [2021] 126 taxmann.com 289 (Hyderabad - Trib.) The relevant extract of the Hon'ble Tribunal decision is reproduced below:- 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 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 Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olutions India (P.) Ltd. v. Addl./Jt./Dy./Assistant Commissioner of Income-tax/Income-tax Officer, FAC) Delhi [2022] 137 taxmann.com 417 (Bangalore - Trib.) (e) Maxim Integrated Products India Sales Pvt. Ltd. v. DCIT (2022) 140 taxmann.com 578 (Bangalore- Tribe.) (f) Teradata India Pvt Ltd. vs. DCIT, Circle-3(1), Gurugram in ITA No. 1248 & 2337/Dell2022 for A.y. 2017-18 & 2018-19. D. The assessee has also relied on the decision of Hon 'ble Delhi IT A T in the case of 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X
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