TaxTMI 
TaxTMI 
2023 (3) TMI 189
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....pellant with its AE wherein the AE's operate as a limited risk bearing marketing and distribution companies earning arms length return for their activities. 3 The TPO and MP has erred in rejecting Shrey Nutraceuticals & Herbals Private Limited as a comparable to your appellant by applying lower turnover filter of Rs.10 crores instead of Rs.1 crore which was consistently followed by your appellant and the TPO in the earlier years. 4 The TPO and DRP has erred in rejecting Sanat Products as a comparable to your appellant on the contention that it has failed the net worth filter though it had passed that filter. 5 The TPO and DRP has erred in rejecting Gujarat Organic Limited as a comparable to your appellant on the contention that it is functionally different. 6 The TPO and DRP has erred in rejecting Endo Amines Limited as a comparable to your appellant on the contention that it is- functionally different. 7 The TPO and DRP has erred in rejecting Tyche Industries Limited as a comparable to your appellant on the contention that it is functionally different. 8 The TPO and DRP has erred in rejecting Yasho Industries Limited as a comparable to your ....
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....ess. 22 The AO has erred in computing interest u/s 234A of the Act though there was no delay in furnishing the return of income by your appellant. 23 Without prejudice to the other grounds, the AO has erred in computing interest u/s 234B as Rs.4,20,07,491/- as against the correct computation of Rs.3,98,01,513/-. 24 For these and other grounds that may be adduced at the time of hearing, the order passed by the AO, TPO and DRP may be set aside to the extent appealed against. 25 Your appellant craves leave to add, amend, alter, vary and/ or withdraw any or all of the above grounds of appeal. 2. The brief acts of the case are that the assessee is engaged in business of manufacturing and export of standardized herbal extract, fine chemical, nutraceuticals, specialty chemicals, cosmeceuticals, phytonutrients and probiotics and was filed its original return of income for A.Y. 2017-18 on 29/11/2017 declaring total income at Rs. 41,89,10,390/-. Thereafter assessee company revised its return of income on 29/- 03/2018. The case was selected for scrutiny through CASS for examine the following reasons. i. Large deduction claimed u/s 35(2AA),35(2AB), 35(CCC) &....
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....e is treated as adjustment u/s 92CA for interest on delayed receivables Sl.No. Description Adjustment u/s 92CA(Rs.) 1 Manufacturing segment 19,63,67,067 2. Interest on delayed receivables 72,92,193 Total 20,36,59,260/- 3.4 Accordingly, an amount of Rs.20,36,59,260/-is proposed as the transfer pricing adjustment to arrive at arm's length price of the international transactions and he passed the order u/s 92CA(3) of the I.T.Act dated. 19/01/2021. 4. Thereafter, notice u/s 142(1) of the I.T. Act was issued to the assessee company for various details/documents on 02/02/2020 and asked to explain as to why no addition as per TP adjustment of Rs. 20,36,59,260/- should not be made as suggested by the TPO vide order u/s 92CA(3) of the I.T.Act. In response to said notice, assessee vide letter dated 10/02/2021 has submitted its submission . Relevant portion as under:- " ....... The TPO has proposed a Transfer Pricing adjustment of of Rs.20.36 crores. We do not agree to this adjustment proposed by the TPO since it contains patents error of facts and law. The TPO has not considered the various factual and legal matters while proposin....
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....d that it is in the process of filing a rectification application seeking rectification of above errors which are apparent on records. In this regard, it is submitted that, if TPO rectifies the order, effect of the same will be given accordingly. Now , in this regard TPO has proposed adjustment to arrive at Arm's Length Price of the international transactions entered by the assessee with Associated Entities amounting to Rs. 20,36,59,260/-. Accordingly, adjustment is made to total income of Rs. 20,36,59,260/- as suggested by the TPO. 4.2 The AO further observed that the assessee has claimed deduction u/s 35(2AB) of the I T Act. on weitaged average basis of Rs. 22.17 cr. But the Form 3Cl was issued after filling of the Income Tax Return & DSIR had certified a sum of Rs. 1104.60 lakhs, therefore there was difference of Rs. 3,85,000/- which was not accepted by the AO and added into the total income of assessee. 4.3 Aggrived from the Draft Assessment Order the assessee filed objections before the DRP , the ld. DRP after considering the objections paased his order on 28.12.2021. 5. Against the DRP order , assessee is in appeal before us, and filed written synopsis containg p....
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....propriate bench marking of arm's length price. Under the circumstances, if there is availability of sufficient data of internal comparables, the Ld.TPO first should have recourse to such internal compares before moving on to external comparables. Only on insufficiency of data in respect of internal comparables, support must be drawn from the external comparables 4.1 We therefore, direct the Ld.TPO to carry out detailed analysis of the international transactions using TNMM as MAM, based on the materials filed by assessee related to internal comparables. In the event the details filed are satisfactory, the determination must be confined to the internal comparables so filed by assessee. In the event, the details filed by assessee is not verifiable or not in accordance with law, the Ld.AO/TPO is open to carry out analysis in accordance with law. [Emphasis Supplied] 13. The Appellant is an Indian multinational company engaged in research, manufacturing, and sale of nutraceutical products. The Appellant's economic interests are predominantly in India and the manufacturing facilities are also set up in India. However, bulk of the products manufactured by the App....
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.... 17. In this regard the Appellant wishes to highlight the difference between nutraceuticals and pharmaceutical industry in the ensuring paragraphs and submits that considering both as similar is not appropriate. 18. It is important to understand that the comparable of nutraceutical industry are companies which are into extraction of contents from food based or plantbased sources and not companies involved in complex function of pharmaceutical industry. 19. Major difference between nutraceutical and pharmaceutical industry is furnished in Page 9 of DRP submissions. It is evident that the nutraceutical industry is drastically different from the pharmaceutical industry in terms of composition, market, research, regulatory requirement and intended use. 20. Specifically, the Appellant in the present case, is a nutraceutical product supplier. Thus, the Appellant is a Business to Business ("B2B") market player where, the nutraceutical products are supplied by the Appellant to a manufacturer who purchases and uses the Appellant's products as an input product for producing final product. This is the precise reason why the Appellant had compared the net operating....
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....TNMM preference should be internal or in-house comparables. 25. Based on the above referred judicial precedents including in the Appellant's own case for AY 2013-14 and AY 2014-15, we request this Hon'ble Bench to direct the TPO to consider internal TNMM as the MAM for bench marking international transactions with Associated Enterprises. round 19: Delayed receipts from AE's considered as unsecured loans and interest being calculated on it 55. The TPO has benchmarked the delay in receipt of the receivable and imputed interest of Rs.72,92,193/- based on the LIBOR rate during the year. 56. As per the explanation to Section 92B (inserted by Finance Act, 2012 with retrospective effect from 01.04.2002) of the Act, term international transactions includes "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", the TPO treats outstanding receivable as unsecured loan given to AEs and charges interest on overdue period if any. 57. The inclusio....
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....2. In this regard, the Appellant highlights the Hon'ble Bangalore Tribunal ruling in the case of Assistant Commissioner of Income Tax vs. Millipore India Limited [80 taxmann.com 12] wherein the Hon'ble Tribunal followed the decision of the Co-ordinate Bench of Mumbai in the case of M/s Goldstar Jewellery Limited Vs. JCIT (53 taxmann.com 353) and deleted the TP adjustment arising on account of notional interest on overdue receivables from AEs. The Hon'ble Tribunal noted that the transaction was an integral part of sale made by the Appellant to its AEs and therefore must be considered among with main transaction. The extract of the ruling is reproduced below for your reference: "However, this transaction of allowing the credit period to AE on realization of sale proceeds is not an independent international transaction but it is closely linked or continuous transaction along with sale transaction to the AE. The credit period allowed to the party depends upon various factors which also includes the price charged by the Appellant from purchaser. Therefore, the credit period extended by the Appellant to the AE cannot be examined independently but has to be considered along with ....
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...., but not a separate transaction in nature. Since we hold that the impugned transaction of interest on delayed realization of sale proceeds is not international transaction, it is not necessary to adjudicate upon the additional grounds raised by the Appellant Company. Hence, the appeal is treated partly allowed for statistical purposes. Respectfully following this decision, we hold that no ALP adjustment is permissible on this issue." (Emphasis supplied) 63. Further, reliance can also be placed in the case of Mastek Ltd. vs. ACIT [21 taxmann.com 173], the relevant extract of the ruling is provided below: "If the AEs are not recovering interests from third parties for late recoveries, then in the instant case it would be too much to expect the assessee to charge the interest from the AEs. There is no rationale to inflict upon the assessee, merely on presumption, that he ought to have charged the interest from it's AEs. We therefore hold that there was no justification to presume that there was a shift of profit to avoid tax in India." 64. Further, reliance can also be placed on the ruling of Hon'ble Bangalore Tribunal in the case of M/s Avnet Indi....
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.... no interest liability arises even if payment is made by the AE beyond the credit terms. The relevant extract of the ruling in Para 35 is provided below - "11.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decision cited and placed reliance upon. We find that the decision of the ITAT, Mumbai Bench, in the case of Evonik Degussa P. Ltd. V ACIT - 05D, Circle 3(1), Mumbai (ITA No.7653/Mum/2011, dt.21.11.2012) of ITAT, Mumbai Bench is squarely applicable to the facts of the case in the case on hand. In this decision the ITAT, Mumbai Bench at para 28 thereof has held as under: "28. After carefully considering the rival submissions and the orders of the TPO as well as the direction of the DRP, we find that the assessee has no interest liability and it does not have any external borrowings. Even if the payments have been made by the AE beyond the normal credit period, there is no interest cost to the assessee. Moreover, there is no such agreement whereby interest is to be charged on such a delayed payment. From the summary of payment submitted by the learned Counsel, it is seen that the....
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....he sale price and thus no separate compensation or transaction is undertaken. 69. While proposing the notional interest on receivables outstanding from AE, the TPO wants to bring it within the ambit of Section 92, a transaction that is non-existent. In the absence of any specific provision in the Act which seeks to tax any hypothetical income, the Appellant cannot be subject to tax in respect of 'hypothetical income', i.e., to say an income which ought to have been earned-or that the Appellant failed to earn. In the present case, since no income has been earned or can be said to have been earned by the Appellant in respect of interest chargeable from AEs, the question of applying the provisions of section 92 of the Act does not arise. 70. Section 92(1) of the Act provides that, "Any income arising from an international transaction shall be computed having regard to the arm's length price". Further, Section 92B(1) of the Act defines an "international transaction" as under: "For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of....
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....TR 315 1999 SC has held that only real income can be brought to tax and not hypothetical income. In this connection, the Appellant wishes to highlight to the judicial pronouncements in India by the Mumbai ITAT in the case of Nimbus Communications Ltd. (9 taxmann.com 26) wherein the ITAT has also held that debit balances are not an international transaction. ITAT in their order have specifically noted that the international transaction resulting in a debit balance and the debit balance itself should not be analyzed. The relevant extracts of the ruling have been provided as follows: "A continuing debit balance, in our humble understanding, is not an international transaction per se, but is a result of the international transaction. In plain words, a continuing debit balance only reflects that the payment, even though due, has not been made by the debtor. It is not, however, necessary that a payment is to be made as soon as it becomes due. Many factors, including terms of payment and normal business practices, influence the fact of payment in respect of a commercial transaction. Unlike a loan or borrowing, it is not an independent transaction which can be viewed on standalone....
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....i) or 37(1) of the Act 77. The AO and DRP has erred in law and on facts by not allowing the claim of Rs.3,86,332/- [out of the total disallowance u/s 35(2AB) of Rs.7,72,665/-] either u/s 35(1) or u/s 37 of the Act, without appreciating that the same was incurred for the purpose of business of the appellant even if it did not qualify for weighted deduction u/s.35(2AB). 78. The Appellant has a state-of-the-art in house research facility in Peenya, Bangalore. The Appellant has a modern R&D center supported by a full-fledged pilot plant, testing facilities. R&D facility is also equipped by the latest and modern Medium Pressure Liquid Chromatography's (LC's) and Preparative High-Performance Liquid Chromatography's (HPLC's) for isolation of bioactive molecules. To facilitate the increased demand for innovative application-based products, the company has established this state of the art research facility at Bangalore. Although this is attached to its corporate office in Peenya, it is a clearly demarcated area and the appellant company does not have any manufacturing facilities nearby. Their manufacturing facilities in Karnataka are located in Nelamangala....
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....It was explained in detail vide submissions to the AO dated 10th Feb 2021 (pages 202-208 of paper book I) that based on the DSIR certificate issued in Form 3CL, a sum of Rs.7,72,665/- is ineligible for weighted deduction of 200% u/s 35(2AB) of the Act. However, the same does not take away the right of the appellant to claim the same as an allowable expenditure u/s 35(1) of the Act to the extent of 100% of the actual revenue expenditure incurred, being Rs. 3,86,333/-, as the same represents revenue expenditure in the nature of research and development incurred wholly and exclusively for the purpose of business of the company. The appellant company has full details and documentary evidence for the full amount of claim made though they were unable to specifically identify the specific expenditure disallowed by DSIR. 84. The amount of Rs.1108.45 lakhs has been claimed on the basis of actual expenditure incurred towards R&D. Form 3CL is issued only after the ITR is filed by the appellant company, as a copy of the Acknowledgement for having filed IT Return is to be submitted to the DSIR in order to claim the deduction. Hence the ITR was filed on the basis of the certificate issu....
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.... (Page 3609 of Caselaw Compilation (PB VII)): ......Under these facts, we feel it proper to restore this matter to the file of AO for fresh decision with this direction that the disallowance should be in respect of weighted deduction only and not for the original expenditure to the extent of 100% of the expenses......... b) Coromandel International vs. ACIT [ITA No. 101/Hyd/2012, dated 28th August 2014]- Hon'ble Tribunal, Hyderabad Bench c) ACIT vs. Parabolic Drugs Limited [2013] taxmann.com 661 (Delhi - Trib.) d) PCIT vs. HSI Automative Ltd. [2020] 119 taxmann.com 445 (Madras High Court) e) Tata Chemicals Limited Vs. CIT (195 ITR 561) (Bom HC) f) DCIT Vs. Reliance Life Science (P.) Ltd. [2017] 82 taxmann.com 345 (Mumbai) 90. DSIR's approval requires many more conditions to be satisfied apart from being a revenue expenditure incurred for the purpose of business of the assessee. Even if such a strict test required for availing the weighted deduction is not satisfied, it would still qualify for normal deduction @ 100% of the revenue expenditure. In other words, the DSIR's approval ought to be confined only to the weighted....
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....o not object for the use of TNMM. Accordingly, ground no. 1 stands dismissed. However, she submitted that there are internal comparables available and sufficient data were filed before the DRP which were not considered for purpose of comparability analysis. She prayed that as against the external comparables used by the Ld.AO/TPO, the internal comparables submitted by assessee may be considered in order to bench mark the international transaction for the years under consideration. She submitted that all the details are available in order to assist the revenue authorities to use the internal comparables. 3.2 In support of her submission, she placed reliance on the decision of Hon'ble Special Bench, Mumbai in case of Tecnimont ICB (P.) Ltd. vs. Addl. CIT reported in [2012] 24 taxmann.com 28 (Mum.) (TM). Referring to the said decision, she submitted that when the data is available showing the profit margin of that enterprise itself from third parties, it is always safe and advisable to have recourse to such internal comparable case. The reason is patent that the various factors having bearing on the quality of output, assets employed, input cost etc. continue to remain by and....
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....e stands partly allowed for statistical purposes." 9. Respectfully following the above decision in the assessee's own case cited supra we also send back this issue to the file of AO/TPO for de-novo consideration in the above terms and decide the issue as per law. Needless to say reasonable opportunity of hearing to be given to the assessee and the assessee is directed not to seek unnecessary adjournments for early disposal of the case. 10. Accordingly ground No.1 is allowed for statistical purposes. 11. Ground No.2 to 18 is becomes academic in nature because entire transfer pricing issue is remitted back to the AO/TPO in the above terms for denovo consideration as per the directions herein above. Therefore, these grounds shall be considered by the AO/TPO afresh in the remand proceedings. The AO is directed to give sufficient opportunity to the assessee and the assessee is also directed to produce relevant documents/evidences in support of the case and not to seek unnecessary adjournments for early disposal of the case. 12. Ground No.19 to 20 relates to interest on delayed trade receivables from AEs . The ld.AR of the assessee has submitted detailed written submissions f....
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....n by way of amendment credit period was increased to 90 days - Whether since said fact had not been taken into consideration by DRP, TPO should compute ALP afresh and should consider credit period of 90 days while determining ALP of international transaction of interest on receivables - Held, yes [Paras 12 to 15] [Matter remanded]" 14.2. Respectfully following the above judgments, we also uphold that the interest on delayed receivables is an international transactions, accordingly the adjustment should be made on those receivables which were not realized within the agreements period.. During the course of hearing, it was brought into the notice of both the parties that in respect of rate for calculation of interest is to be considered by the AO/TPO/DRP at libor + 350 basis points considering the nature of business and location of the receivables with the consent of AR. Accordingly this issue is also remitted back to the file of the AO. Ground No.21. 15. During the course of assessment proceedings, it was observed that the assessee has claimed deduction u/s 35(2AB) of the Act of Rs.22,16,92,665/- as per the weighted average deduction allowed under this Act. As per the lette....