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TMI Blog2025 (4) TMI 470X X X X Extracts X X X X X X X X Extracts X X X X ..... and thereby made an error in making an addition on account of TP adjustment in the SWD segment. 6. The facts, in brief, are that the assessee is a private company and engaged in the business of software development services as well as the trading and marketing of test and measurement equipment. During the year, the assessee entered into several international transactions with its AE in the SWD segment and the trading/marketing segment. The assessee computed the operating margin of both segments as OP/OC and OP/OR at 17% and 9.38%, respectively. 7. Further, by applying the TNMM as the most appropriate method, the assessee claimed the international transactions to be at ALP. However, the TPO rejected the assessee's TP study and made the following adjustments: 1. SWD Segment Rs. 6,43,87,045/- 2. Trading segment Rs. 6,68,26,605/- 3. Interest on receivable Rs. 1,92,61,607/- 8. Accordingly, the AO framed the draft assessment order under Section 144C(1) of the Act on September 23, 2023, incorporating the TP adjustment proposed by the TPO, as well as other additions/disallowances made by him (the AO) on corporate issues. Against this, the assessee filed an objection before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment in the SWD segment. Hence, the ground of appeal of the assessee is hereby allowed. 16. The issue raised by the assessee through ground Nos. 4 to 12 of its appeal pertains to the addition on account of TP adjustment in the trading/distribution of the test and measurement equipment segment. 16.1 The relevant facts are that, in the trading/distribution/marketing segment, the assessee reported an operating revenue of Rs.63,80,90,666/-, which included revenue from the following sources: 1. Revenue from direct sales by assessee Rs. 35,47,80,375/- 2. Commission on sales AE through Assessee Rs. 15,77,45,601/- 3. Receipt of maintenance and support services Rs. 12,55,64,690/- Total Rs. 63,80,90,666/- 16.1 After claiming operating expenses such as the cost of goods purchased, opening and closing stock, employee costs, depreciation, and other operating expenses, the assessee reported an operating profit of Rs.5,98,29,929/- only. Accordingly, the assessee worked out the PLI as OP/OR at 9.38% and claimed that the margin was at ALP under the TNMM. 16.2 However, the TPO observed that the assessee was dealing in test and measurement equipment produced by its AEs. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AEs sell directly to customers, while the assessee facilitates discussions, providing market insights and ensuring smooth transactions. For these services, the assessee earns a 20% commission on sales made by AEs, without assuming any inventory or credit risk. The TPO initially sought to segregate and benchmark the trading and indent commission segments separately but later accepted the assessee's aggregation approach. However, the TPO erred in recomputing the PLI margin by artificially inflating the operating revenue, thereby distorting the assessee's actual profit margin. 19.1 The ld. AR submits that there is no basis for the TPO to consider AE sales as part of the assessee's revenue since it does not undertake sales-related functions such as invoicing, collection, or inventory management. 19.2 The learned AR argued that the principle of consistency must be followed, as the assessee has been consistently aggregating its trading and commission segments from Assessment Year (AY) 2012-13 onwards, and PLI margin computed on same methodology, the TPO accepting this approach in previous years, including AY 2019-20. Further the Hon'ble Tribunal, in the assessee's own case for AY 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,90,666/- only. However, the TPO while computing the value of OR have taken the gross value of sales made by the assessee's AE instead on commission earned by the assessee which resulted huge increase in the value of OR. Though the TPO in computing the operating cost increased the corresponding amount in relation to sales made by the AEs and thereby the operating profit remained the same as computed by the assessee as well by TPO. However, in computing the PLI as OP/OR the denominator OR increased from Rs. 63,80,90,666/- to Rs. 126,91,03,543/- and thereby PLI margin decreased from 9.38% to 4.71%. 21.2 Thus, the question arise can the TPO include the gross value of sales made by the AEs in the value of operating revenue of the assessee. The assessee in this regard has contended that it acts as a low-risk distributor and merely facilitates sales, earning a 20% commission without assuming inventory or credit risks. Therefore, re-computation of PLI by TPO by artificially inflated operating revenue by including AEs sales was erroneous as it should not be considered part of the assessee's revenue. Additionally, the learned AR of the assessee pointed out that the same aggregation approa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 of its appeal pertains to the action of the learned DRP/TPO/AO in benchmarking the interest on outstanding receivables. 22.1 During the proceedings, the TPO has noticed that the assessee has outstanding receivable from its AEs for long time. The TPO opined that the delay in payment of receivables from the AEs constitutes an International Transaction under section 92B of the Act, which explicitly includes such deferred payments under the ambit of transfer pricing provisions, thereby warranting an Arm's Length Price (ALP) determination. 22.2 The TPO rejected the assessee contention that the receivables transaction should not be separately benchmarked as it was part of an overall business arrangement with the AE. As such the TPO noted that aggregation of transactions is permissible only when the underlying transactions are continuous, closely interlinked, and have a direct bearing on pricing. The burden of proving such linkage rests with the assessee, which, in this case, failed to provide substantial evidence to justify aggregation. Hence, the TPO proceeded with a transaction-by-transaction approach for benchmarking the delayed receivables. 22.3 The TPO also rejected the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the definition of international transaction. Accordingly, the assessee required to charge interest on the extended period of credit as per ALP. 24.2 The learned DRP to support their view referred the decision of Delhi ITAT in case of Bechtel India Pvt Ltd in ITA No. 6530/Del/2017 wherein the Tribunal considering the amended provision of section 92B of the Act and judicial pronouncement held that non-charging or under charging of interest on extended credit period allowed to the AE on trade receivable is international transaction on which ALP is required to be determined. 24.3 The learned DRP also referred the decision of Hon'ble Karnataka High Court in case of DCIT vs. AMD India Pvt Ltd in ITA No. 274/2018 and Hon'ble Bombay High Court in case of Technimont Pvt Ltd. in ITA No. 487/Mum/2017 where it was held that allowing the extend credit period beyond the agreed/normal time would constitute independent international transaction. 24.4 The ld. DRP regarding the assessee's contention that the TP adjustment shall be made on real transaction held that the theory of real income does not apply in the contexts of transfer pricing. In holding so the learned DRP referred various case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n outstanding receivables is an international transaction, and it certainly requires separate benchmarking. 28.1 Now the question arise can the credit period allowed in normal/ordinary course of business shall be considered as separate transaction. In this regard, we find that generally in the business the supplier of services or good allows certain period of credit to recipient which in our considered opinion cannot be considered as separate transaction for the purpose of TP adjustment or benchmarking. However, the extended credit period or credit allowed over and above the agreed period shall considered as separate international transaction required to be benchmarked. In holding so, we referred the Decision of This tribunal in case of AMD India Pvt Ltd vs. DCIT reported in 95 taxmann.com 531 wherein it was held as under: "10. In our considered opinion, to the extent of agreed credit period, the sale price to AE or non AE is inclusive of possible interest on such agreed debt and therefore, for such credit allowed to AE, it cannot be said that this is an independent international transaction. But when extra credit is allowed beyond the agreed credit period, the same is a subsequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a credit in excess of agreed period of 30 days, profit shifting is there because if credit period is more, prices go up which is not done in the present case since, the prices are determined on the basis of 30 days credit period. 28.2 The above finding of the Tribunal was challenged by the Revenue before the Hon'ble jurisdictional High Court in the case of PCIT vs. AMD India Pvt Ltd reported in 98 taxmann.com 512 wherein the revenue's appeal was dismissed by observing as under: 5. Having heard the learned counsel for the appellants-Revenue, we are therefore of the opinion that no substantial question of law arises in the present case also. The appeal filed by the Appellants-Revenue is liable to be dismissed and it is dismissed accordingly. No costs. 28.3 Coming to facts of the case on hand, we find that the TPO while calculating the ALP interest receivable has allowed 30 days of credit period. However, the assessee before us argued that as per the agreement the agreed credit period was of 42 days. We further note that the TPO has computed ALP interest average of opening and closing value of receivable from the AEs shown in financial statement, meaning thereby that the TPO has c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old that the appropriate rate interest shall be LIBOR + 200 Basis point. In view of the above detailed discussion, the ground of appeal raised by the assessee is hereby allowed for statistical purposes. 29. The issue raised by the assessee through ground Nos. 19 to 25 of its appeal pertain to disallowances of CSR expenditure claimed under section 80G of the Act for Rs. 15,00,400/- only. 30. The relevant facts are that the during year under consideration the assessee incurred expenses under Corporate Social Responsibility (CSR) amounting to Rs. 30,00,800/- and the same was disallowed while computing business profit under the Act in accordance with the provision of section 37 of the Act. However, an amount equivalent to 50% of CSR i.e. 15,00,400/- was claimed under section 80G of the Act from gross total income. 31. During the assessment proceedings, the assessee argued that as per the provision of section 37 of the Act, the CSR expenditure is not allowable only for computing the business profit. The deduction under section 80G of the Act is allowed from the gross total income provided that the amount donated/contributed to eligible institution or fund. Therefore, the provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecord. The issue revolves around whether CSR-related donations made to specified funds or charitable institutions, which qualify under section 80G of the Act, can be claimed as deductions despite the mandatory nature of CSR expenditure under section 135 of the Companies Act, 2013, and its disallowance as a business expense under section 37(1) of the Act. 36.1 In this regard we note that section 37(1) pertains solely to the computation of income from business or profession, and its scope is confined to allowing or disallowing expenditures incurred for business purposes. On the other hand, section 80G provides deductions for donations made to specified funds and institutions while computing the total income of the assessee. The disallowance of CSR expenditure under Explanation 2 to Section 37(1) applies only in the context of determining business income and does not preclude an assessee from claiming deductions under Chapter VIA (which includes Section 80G) for eligible donations. 36.2 While CSR expenditure is mandatory under section 135 of the Companies Act, 2013, the assessee retains discretion over the recipients of such contributions. When such contributions are made to approve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and, hence, shall not be allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed deduction under those sections subject to fulfilment of conditions, if any, specified therein." 13. From the above it is clear that under Income-tax Act, certain provisions explicitly state that deductions for expenditure would be allowed while computing income under the head, "Income from Business and Profession" to those, who pursue corporate social responsibility projects under following sections. ♦ Section 30 provides deduction on repairs, municipal tax and insurance premiums. ♦ Section 31, provides deduction on repairs and insurance of plant, machinery and furniture. ♦ Section 32 provides for depreciation on tangible assets like building, machinery, plant, furniture and also on intangible assets like know-how, patents, trademarks, licenses. ♦ Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for computing income under the head, "Income from Business and Profession". 16. For claiming benefit under section 80G, deductions are considered at the stage of computing "Total taxable income". Even if any payments under section 80G forms part of CSR payments(keeping in mind ineligible deduction expressly provided u/s.80G), the same would already stand excluded while computing, Income under the head, "Income form Business and Profession". The effect of such disallowance would lead to increase in Business income. Thereafter benefit accruing to assessee under Chapter VIA for computing "Total Taxable Income" cannot be denied to assessee, subject to fulfilment of necessary conditions therein. 17. We therefore do not agree with arguments advanced by Ld.Sr.DR. 18. In present facts of case, Ld.AR submitted that all payments forming part of CSR does not form part of profit and loss account for computing Income under the head, "Income from Business and Profession". It has been submitted that some payments forming part of CSR were claimed as deduction under section 80G of the Act, for computing "Total taxable income", which has been disallowed by authorities below. In our view, asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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