TaxTMI 
TaxTMI 
2017 (5) TMI 965
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....return of income declaring an income of Rs. 56,76,79,230/- under the normal provisions of the Income-tax Act at adjusted book profit of Rs. 5,34,52,420/- u/s 115JB of the Income-tax Act. During the year, the assessee had reported the following international transactions in Form 3CEB:- Nature of transaction Method Value of transportation Provision of engineering design related services TNMM 2,41,35,50,058 Provision of financial and accounting support services TNMM 58,819,101 Provision of IT infrastructure support services TNMM 185,065,757 Reimbursement of expenses (paid) TNMM 53,087,566 Reimbursement of expenses (received) CUP 178,315,111 3. Accordingly, the reference was made to ld. TPO for determining the arm's length price (ALP). The ld. TPO issued a show cause notice dated 1st May, 2016 to the assessee as detailed below:- "Examination of the balance sheet reveals receivables thereby implying that the payment for the invoices raised by you have not been received within the stipulated time as provided in your service agreement with your AE. In this regard, you are requested to furnish the time period for payment....
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.... to his notice during the course of proceedings pending before him. He further examined the assessee's objection that receivables was not an international transaction and, in this regard, referred to the amendment being Explanation (1) (c) to the section 92 to be inserted by Finance Act, 2012 w.e.f. 01.04.2002 amending the term 'International taxation' by including therein the following:- "Capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business." 7. From this, he concluded that any type of advance, payments or deferred payments are receivable or any other debt during the course of business advancement is covered under the definition of 'International transaction.' The ld. TPO further pointed out that in this case, admittedly, the tax payer had provided benefit to its AE by way of advancement of interest free loan in the garb of delayed receipt of receivables. He observed that these funds could have been otherwise deployed for at least earning interest income. Therefore, th....
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....re on the assessee. However, the assessee had failed to discharge its burden of proof. The ld. DRP further observed that even if the transactions were to be aggregated and only entity level profits considered, it was essential for the assessee to have shown that the comparable selected by the assessee, were also comparable from the perspective of having receivables on which no interest had been charged. The assessee had failed to demonstrate that selected comparables had similar overdue receivables and no separate adjustment was required on interest of overdue receivables. The ld. DRP further observed that the assessee failed to show that the delay in payment of receivables was compensated by the AE through a set off in any other transaction. He further pointed out that any set off requires that both the transactions which set off each other should be benchmarked separately and the ALP must, firstly, be determined separately for these transactions. He referred to OECD guidelines and pointed out that the same recognizes that a set off does not mean that both the transactions should not be at arm's length. The guidelines also say that the onus of demonstrating the existence of a set ....
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....and closing balances appearing in the balance sheets. In view of these facts, the working capital adjustment does not entirely cover the adjustment toward interest on receivables. To illustrate, if receivables though outstanding throughout the year, were reduced to nil at the end of the year, this would not have any impact on the working capital adjustment, since that depends on the closing balance which is nil. However, the computation of interest on receivables would take this into account as it considers the outstanding balance throughout the year." 8. The ld. DRP relying on the decision of ITAT in Ameriprise India Pvt. Ltd. vs. ACIT, 2015-TII-347-ITAT-DEL-TP, rejected the assessee's contention that this adjustment is not required as working capital adjustment takes into account the delay. The next objection of the assessee was that the adjustment towards interest on delayed receivables was not warranted as the assessee was a zero debt company. This plea was rejected observing that ALP is the price which could have been paid in an uncontrolled transaction. The ld. DRP demonstrated that even though marginal cost is zero, still the goods will command price. The ld. DRP further ....
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....g the principal of judicial discipline. 3. That the Ld. AO has erred in charging interest under section 234B and 234C of the Act amounting to INR 990,007 and 160,583 respectively. 4. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act." 10. The ld. counsel submitted that the ld. DRP has provided working capital adjustment in its directions which takes into account the impact of outstanding receivables on the profitability. Therefore, no separate adjustment is warranted on account of outstanding receivables. The ld. counsel referred to the decision of the Tribunal in the assessee's own case for assessment year 2010-11 contained at pages 196 to 218 of the paper book and pointed out that the Tribunal has held that the assessee is a debt free company and, therefore, it was not justifiable to presume that borrowed funds had been utilized to pass on the facility to its AEs. The Tribunal, relied on the decision of Kusum Healthcare Pvt. Ltd., TS/129/ITAT/2015/Del/TP for holding that no separate adjustment was warranted on account of interest on receivables. The ld. counsel furt....
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....para 26, pointed out that the issue has been restored to the TPO for examining the similarity of facts for both the years, inter alia, holding as under:- ".......... In view of the same, the issue is restored to the TPO to consider the same and the facts as argued by the assessee before the ITAT in 2010- 11 assessment year may be demonstrated to be in existence in the year under consideration also before the TPO as reliance placed on Kusum Healthcare Pvt. Ltd. qua the facts in the year under consideration also needs to be established. Accordingly the issue is restored back with the above direction." 13. The ld. counsel further relied on the decision of ITAT in the case of Kusum Healthcare Pvt. Ltd. (supra), wherein it was held that if the impact of the credit period was duly factored as in a working capital adjustment while determining the ALP, then, no separate adjustment for interest on receivables was warranted in the hands of the tested party. The ld. counsel pointed out that the decision in Kusum Healthcare Pvt. Ltd. has been followed in the following cases:- i) Information Systems Resource Centre Pvt. Ltd. (TS-252-ITAT- 2015-MUM; and ii) Gold Star Jewellery Ltd. vs. ....
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....for the rendering of services. In the oppugnation, the non-realization of invoice value beyond the stipulated period is a separate international transaction, whose ALP is required to be determined. Granting of working capital adjustment has been held to be confined to the international transaction of rendering of services, whose ALP is separately determinable. On the other hand, the international transaction of interest receivable from its AEs for late realization of invoices beyond such stipulated period is a separate international transaction. Allowing working capital adjustment in the international transaction of rendering services has been held to have no impact on the determination of ALP of the international transaction of interest on receivables from AEs beyond the stipulated period allowed as per the Agreement. In our considered opinion, whereas, the international transaction of purchase/sale of goods from/to AE contemplates comparison of the price charged/paid for such goods by impliedly including the interest for the period allowed for realization of invoices as per the terms of the agreement, the international transaction of charging interest on late recovery of trade re....
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....ofit shifting from India to abroad. He referred to Schedule 15 (paper book 128) and pointed out that the assessee has earned Rs. 1.87 crore interest on 'demand deposits. He submitted that instead of earning interest in India and paying taxes in India, the funds have been utilized by its AE and thus there is resultant avoidance of tax in India. As regards the assessee's plea that it has debt free funds, he submitted that the same is of little consideration in transfer pricing because benchmarking is to be done in respect of separate international transaction involving non-charging and under charging of interest on delayed receivables. This plea is relevant only when the issue regarding disallowance of interest u/s 37(1) is under consideration. 17. We have considered the submissions of both the parties and perused the record of the case. The assessee's grievance is two-fold. Firstly, when working capital adjustment has been made, then, no separate adjustment is required to be made in respect of accounts receivables because the same gets subsumed in the working capital adjustment. The second plea of the assessee is that since its funds are entirely debt free, therefore, no adjustme....
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....es is not an international transaction. At this stage, it would be apposite to note that the Finance Act, 2012 has inserted Explanation to section 92B with retrospective effect from 1.4.2002. Clause (i) of this Explanation, which is otherwise also for removal of doubts, gives meaning to the expression 'international transaction' in an inclusive manner. Sub-clause (c) of clause (i) of this Explanation, which is relevant for our purpose, provides as under:- `Explanation.-For the removal of doubts, it is hereby clarified that- (i) the expression "international transaction" shall include- (a) ............ (b) ........... (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 of advance, payments or deferred payment or receivable or any other debt arising during the course of business;....' 22. On going through the relevant part of the Explanation inserted with retrospective effect from 1.4.2002, thereby also covering the assessment year under consideration, there remains no doubt that apart from any long-term or short-term lending or borrowing, etc., or any type of adv....
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....g of interest on the excess period of credit allowed to the AE for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined." 18. In view of the above observations, the reliance placed by the ld. counsel for the assessee on earlier decisions cannot be accepted. 19. In the case of Ameriprise (supra), it has been observed that the working capital adjustment is in respect of international transaction of rendering services to the AE. Interest for credit period allowed as per the agreement is given in the price charged for rendering of services. Whereas the non-realisation of invoice value beyond the stipulated period is a separate international transaction whose ALP is required to be determined. Granting of working capital adjustment is confined to the international transaction of rendering of services, whose ALP is separately determinable. On the other hand, the international transaction of interest receivable from its AEs for late realization of invoices beyond such stipulated period is a separate international transaction. Allowing working capital adjustment in the international transactio....