Tribunal directs exclusion of costs, reviews interest calculation in international transaction appeal.

The Tribunal partly allowed the appeal of the assessee, directing the AO/TPO to exclude reimbursement costs from operating costs and to verify the calculation of notional interest on outstanding receivables. The Tribunal emphasized the need for ALP determination in cases involving international transactions and granted the assessee an opportunity to be heard on the interest calculation issue. Other legal issues raised were not pursued, considering the potential academic nature if the final ALP aligns with the assessee's PLI range.

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Issues Involved:
1. Incorrect computation of operating margin by considering non-operating costs.
2. Adjustment of notional interest on outstanding receivables.

Detailed Analysis:

Issue 1: Incorrect Computation of Operating Margin by Considering Non-Operating Costs
The assessee, CPA Global Services P. Ltd. (CPA GSP), argued that the infrastructure setup costs were reimbursements and should not have been included in the cost base. The company had an infrastructure set up for 500 employees but only employed 98 on average during the assessment year 2011-12. The business decreased over the years, leading to a shutdown in August 2014. The assessee contended that the reimbursements were on a cost-to-cost basis without any markup, as per the intercompany agreement.

The Hon'ble DRP held that the ALP of the receipts from the AEs must include all costs, and the assessee failed to provide cogent reasons for excluding certain costs. However, the Tribunal found that the reimbursements did not involve any functions to be performed and should be excluded from the operating costs for profitability purposes. The Tribunal directed the AO/TPO to exclude the reimbursement costs while working out the operating costs, following principles laid down in previous cases such as HSBC Electronic Data Processing India Ltd. and Four Soft Limited vs. DCIT.

Issue 2: Adjustment of Notional Interest on Outstanding Receivables
The TPO had worked out an adjustment towards notional interest by applying an interest rate of 11.69% for deemed loans advanced for the period of receivables outstanding beyond the stipulated period. This adjustment was revised to 4.9% following the Hon'ble DRP's directions. The assessee argued that receivables could not become loan transactions and that it did not incur any interest on its receivables. The Tribunal noted that the issue of charging notional interest had been discussed in detail in the case of Ameriprise India P. Ltd., where it was held that non-charging or undercharging of interest on the excess period of credit allowed to the AE for the realization of invoices amounts to an international transaction requiring ALP determination.

The Tribunal agreed with the department that non-realization of invoice value beyond the stipulated period is a separate international transaction, whose ALP needs to be determined. However, the Tribunal restored the issue to the file of the TPO for verifying the calculation/working of interest after allowing a reasonable opportunity of being heard to the assessee.

Conclusion:
The appeal of the assessee was partly allowed. The Tribunal directed the AO/TPO to exclude the reimbursement costs while working out the operating costs and to verify the calculation of notional interest on outstanding receivables, allowing a reasonable opportunity for the assessee to be heard. Other legal issues raised in the grounds of appeal were not agitated as they might become academic if the ultimate ALP determined falls within the permissible range of the assessee's PLI.

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