2022 (9) TMI 587

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....ked its international transactions under Transaction Net Margin Method (TNMM). The assessee filed its revised return of income for the assessment year 2017-18 on 21.11.2018 admitting a total income of Rs 132,15,54,810/-. The case was referred to the Transfer Pricing Officer [TPO] for determining Arms LengthPrice (ALP) u/s 92CA(3) in respect of its international transaction entered into with AE, after approval from the Principal Commissioner of Income Tax-1, Visakhapatnam on 1/4/2019. In response to the notices of the Ld. TPO, the assessee filed various submissions and requested for personal hearing which was allowed on 20/1/2021. Considering the submissions made by the assessee's representative, the Ld. TPO determined the ALP of the international transactions of the assessee with its AE, at Rs. 50,57,43,750/- and directed the AO to enhance the total income of Rs. 50,57,43,750/- u/s. 92CA(3) of the Act. The TPO gave the below summary of the adjustments u/s. 92CA(3) of the Act: Sl No. Description Adjustment u/s. 92CA(3) (Rs.) 1. Sale of frozen shrimp 26,23,99,832 2. Corporate Guarantee-given 2,46,43,000 3. Trade receivable 21,87,00,918 4. Tot....

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....spite the fact that the primary transaction has already been tested and considered to be at arms length under Transaction Net Margin Method at the entry level. 2.6. The DRP/TPO/AO ought to have appreciated that the appellant has earned a very high arms length net margin than that of the comparable companies (ie., 12.15% as against 8.07% with export incentive considered as operating income and 4.17% and 1.28% without export incentive). It impliedly demonstrates that the appellant is compensated for cost of delayed receivables through higher operating margin embedded in sales to AE. 2.7. Without prejudice to the above, the DRP/TPO/AO erred in not appreciating that the appellant has not charged interest on delayed realization of outstanding receivables from Non-AE's and as such trade receivable transactions with respect to AE are to be deemed to have been done on arm's length basis by applying internal CUP method, as resorted by the appellant. 2.8. Without prejudice to the above, the DRP/TPO/AO erred in not appreciating that the working capital adjustment would offset the impact of belated receipt of outstanding receivables and as such there is no requiremen....

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....argin is 4.17% as compared to the comparable selected by the Ld. TPO where the operating margin is at 3.69%. The Ld. AR further submitted that the assessee has made 72% of the total sales to AEs and 28% to non-AEs. The Ld. AR confirmed that no interest is charged on the outstanding receivables either to AE or Non-AE parties. The Ld. AR relied on the following case laws: (i) PCIT vs. Kusum Health Care (P) Ltd - [2018] 99 taxmann.com 431 (Delhi HC) (ii) PCIT vs. Amadeus India (P) Ltd [2020] 113 taxmann.com 393 (Delhi HC). (iii) Pegasystems Worldwide India Pvt Ltd vs. ACIT - [2015] 64 taxmann.com 470 (Hyd. Trib.) (iv) DCIT vs. CCL Products (India) (P) Ltd - [2019] 106 taxmann.com 11 (Visakhapatnam - Trib.) (v) Vestas Technology R & D Chennai Private Limited vs. ACIT - ITA No. 3081/Chny/2016 (Chennai Trib.) (vi) Gimpex (P) Limited vs. ACIT -[2019] 105 taxmann.com 365 (Chennai Trib.) (vii) Det Norske Veritas vs. ADIT - [2016] 67 taxmann.com 16 (Mum. Trib.) (viii) Hackett Group (India) Ltd vs. DCIT [2020] 116 Taxmann.com 631 (Hyd. Trib.) (ix) ERM India (P) Ltd. Vs. NEC [2021] 132 taxmann.com 220 (Delhi Trib.....

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.... are considered as non-operating income, the operating profit ratio of the comparable companies is 1.28% as against the operating margin of 4.17% of the assessee. Alternatively, if the export incentives are considered as operating income, the operating margin of the comparable companies is 8.08% vis-à-vis the assessee at 12.15%. We find from the above working the assessee's margin is significantly higher than the operating margin of the comparable companies. There may be a delay in the collection of receivables even beyond the agreed time limits due to a variety of factors which has to be decided on a case to case basis. When TNM method is considered as the most appropriate method, which was also not disputed by Revenue, the net margin thereunder would take care of such notional interest cost. It was further explained by Ld.AR that the impact of the delay in collection of receivables would have a bearing on the working capital of the assessee. We find that these working capital adjustments on the ALP has been already factored in its pricing / profitability vis-à-vis that of its comparables. We therefore are of the considered view that any further adjustment to the mar....

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....bit-equity ratio of the AE, the banks would not be willing to grant loan unless it is guaranteed by the parent (ie., assessee) and providing such guarantee is an onerous responsibility of a shareholder. 3.9. The DRP/TPO/AO ought to have appreciated that the provision of corporate guarantee has not resulted in reduction of rate of interest and the AE has not derived any benefit which has an impact on its profits or loss or assets. 3.10. The DRP/TPO/AO erred in not adopting any of the prescribed methods for benchmarcking the corporate guarantee transaction. 3.11. Without prejudice to the above, the DRP/TPO/AO erred in considering the rate prescribed under Safe Harbour Rules as arms length price without appreciating that such rate is applicable only to parties who have resorted to safe harbor provisions. 3.12. The DRP/TPO/AO erred in holding that safe harbor rules is one of the prescribed methods, which is contrary to the provisions of the Act and as such unsustainable in law. 3.13. Without prejudice to the above, the DRP/TPO/AO ought to have adopted the rate of 0.5% as the rate of guarantee commission as held in various judicial precedents....

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....ven to AEs. Per contra, the Ld. DR referred to the Notification of the Central Board of Direct Taxes (CBDT) issued on 7/6/2017 wherein it is notified that the rate should not be less than 1% on the corporate guarantee given to AEs. The Ld. DR further submitted that the Ld. DRP has rightly considered the Notification (supra) and thereby upheld the ALP rate of 1.9% adopted by the Ld. TPO in respect of adjustment made to the corporate guarantee given to AE. The Ld. DR therefore pleaded that the order of the Ld.DRP / Ld.AO be upheld. 11. We have heard both the parties and perused the material available on record and the orders of the Authorities below. It is observed from the order of the Ld. TPO that the Ld. TPO has obtained from various banks the rate of fees charged by them on the issuance of financial guarantees for the computation of ALP. The Ld. TPO has thus concluded that the median of the ALP works out to 1.9% for the corporate guarantee of above Rs. 10 Crs. The Ld. TPO referred to section 92B of the Act which read as "any other transaction having a bearing on the profits, income, losses or assets of such enterprises" and thus concluded that in the instant case the corpor....