TaxTMI 
TaxTMI 
2023 (4) TMI 521
X X X X Extracts X X X X
X X X X Extracts X X X X
....ases referred by the learned TPO was only due to technical reason or seeking clarifications by the A.E. 3. The learned Assessing Officer erred in upholding adhoc credit period of 60 days for export realization when the foreign exchange regulator, Reserve Bank of India allows a period of 1 year for realization of export consideration. 4. The learned Assessing Officer failed to appreciate the fact that the assessee is a debt free company and has not incurred interest expenses and entire working capital requirements were made by internal accruals and capital contributions and hence, there is no justification for charging notional interest on delayed realization of receivables. 5. The learned Assessing Officer erred in not considering the plea of the appellant that no separate bench marking is required for export dues realized beyond 60 days period as receivables ingrained in the sale. 6. The learned Assessing Officer erred in not appreciating the fact that the assessee had not charged any interest for delayed realization on sales receivables from non-AE as well as from AE and hence, charging notional interest from AE is not justified. 7. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....TPO (Transfer Pricing Officer) by the Assessing Officer, on 06.02.2021 after obtaining the approval of the Pr. Commissioner of Income-Tax. Accordingly, the TPO passed an order u/s 92CA(3) of the Income-tax Act. 1961 determining no upward adjustment u/s.92CA of the Act. Further, the TPO passed an order dt.06.08.2021 u/s 154 of the Act for AY 2018-19 determining an upward adjustment of Rs.10,62,036/-u/s 92CA(3) of the Act on account of interest on receivable. Accordingly, the income returned was enhanced by the AO, National Faceless Assessment Centre as per the provisions of Sec.92CA(3) of the Act by a sum of Rs. Rs.10,62,036/- towards arm's length price determined by the TPO u/s 92CA(3) of the Act. 4. Feeling aggrieved by the draft assessment order passed by the Assessing Officer, the assessee approached to the DRP for issuing appropriate directions to quash the interest notionally charged to assessee on account of delay in receivables. The DRP after considering the arguments of the assessee had upheld the draft assessment order. The reasoning of the DRP were mentioned in the directions in Para 2.2.16 to 2.2.22 to the following effect : "2.2.16 The assessee contended....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the AEs as regards credit period, the TPO has gone by the delay of interest payment by invoice wise. Consideri.ng the facts of the case, the approach of the TPO is quite reasonable in computing the delay invoice wise and also adopting the credit period of sixty days. Accordingly, we consider it appropriate to direct the TPO to allow reasonable credit period of 60 days and compute the interest adjustment to be made to the total income. 2.2.18 The assessee has also raised the objection that the learned AO has erred in including a notional interest amount of Rs. 122007/- pertaining to the invoices of AY 2017-18 realised during the AY 2018- 19 in the interest computation. On perusal of the annexure B to the TPO order, it is observed that the TPO has taken the number of days delayed during the FY 2017-18 in calculating the interest wherever the overall delay is more than 365 days. In view of the above, the TPO has computed the notional interest pertaining to all the invoices which were not realised within the credit period of 60 days adopted irrespective of the invoices pertaining to any financial year. Hence, the plea of the assessee is rejected. 2.2.19 A plea was rai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s been consistently applying this principle. Accordingly, the TPO is directed to adopt the SBI short term deposit interest rate for the subject year as the ALP interest rate and re-compute the adjustment to be made to the total income. .......... 2.2.22 Accordingly, the TPO is directed to adopt the SBI short term deposit interest rate for the subject year as the ALP interest rate and re-compute the adjustment to be made to the total income by applying credit period of 60 days or as per agreement or invoices." 5. Now the assessee is in appeal before us for the grounds mentioned hereinabove. The sum and substance of the grounds raised before us is whether the lower authorities had erred in making the addition of Rs.10,62,036/- towards the interest on receivables or not ? 6. In support of his case, the ld.AR had submitted that the finding recorded by the lower authorities is without any basis as there was no substantial delay in receiving the outstanding amount by the assessee from it's A.E. He had further submitted that there was delay in respect to 519 invoices out of total 3520 invoices for a total consideration of the said invoices valuing at Rs.62,38,68,94....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he DRP under section 143(3) read with section 144C(13) of - the Income Tax Act, 1961. 8. The learned AO / DRP failed to appreciate the submission of the petitioner that the petitioner is a debt free company and has not paid any interest and the entire working capital requirements were made by internal accruals and capital contributions and hence there is no justification for charging notional interest on delayed realisation of receivables as decided by this Hon'ble Tribunal in the case of M/s Value Labs Vs. ACIT Circle 8(1), Hyderabad in ITA No.1921/HYD/ 2018 (ITAT Hyderabad 'A' Bench) in order dated 04/09/2020 by following the ratio laid down by the Hon'ble Delhi High Court in the case of Pr. CIT -V Vs. Kusum Health Care Pvt Ltd in ITA No.765/2016 dated 25/04/2017. 9. Hon'ble Delhi High Court in the case of Pr. CIT Vs. Kusum Health Care Pvt Ltd [2017(4) TMI 1254, in ITA 765/2016 held that the inclusion in the Explanation to Section 92B of the expression 'receivables' does not mean that dehors the context every item of 'receivables', appearing in the accounts of an entity would automatically be characterized as an international ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ocess extending monetary benefit to its AE. 14. The assessee most respectfully submits that there is no justification in treating a delay in realization of export receivables ranging from 1 day to 25 days over a period of 60 days as a capital financing arrangement as specified in Explanation (c) to section 92B (2) of the Income Tax Act, 1961, as the intention of the legislature would not have been to re-characterize every transaction of delayed sales receivables as a loan arrangement. 15. The Hon'ble ITAT, Visakhapatnam in the case of M/s Devi Sea Foods Ltd., Vishakhapatnam Vs. DCIT, Circle 3(1), Visakhapatnam [2022(9) TMI 587 held that the delay in the collection of receivables even beyond the agreed time limits may be due to a variety of factors which has to be decided on a case to case basis. The Hon'ble Tribunal further held that when TNMM method is considered as the most appropriate method, the net margin thereunder would take care of such notional interest cost. 16. The Hon'ble ITAT, Chandigarh Bench 'A', in the case of Glaxo Smithkline Asia Pvt Ltd [TS-543-ITAT-2021(Chandi)-TP] by following the latest judgement by the Delhi High....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eted. 20. The Hon'ble DRP failed to appreciate the fact that the assesee had not charged any intertest for delayed realisation on sales receivables from Non ¬AE as well as from AE and hence, charging notional interest from AE is not justified. 21. The Hon'ble DRP failed to appreciate the fact that sales result in profit and that of lending money gives interest income and thus it is evident that interest income is associated only with lending or borrowing of money and not with sale. 22. Hon'ble Delhi Tribunal in the case of M/s Corbus India Pvt Ltd Vs. DCIT, Circle 3(1), New Delhi ((3) (2020(3) TM11192-ITAT Delhi) (date of order 05th March, 2020) held that re-characterisation of outstanding receivables as loan is impermissible unless the transactions are found to be substantially at ,Spriance with the stated form. Hon'ble Mumbai Tribunal in M/s Indo American Jewellery Limited (ITA No.5872/Mum/2009) held that early or late realisation of sales proceeds is only incidental to sale transaction and not a separate transaction itself. If the ALP in respect of international transaction of sale is determined, then there can be no question of tre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ables and decided the issue in favour of the Revenue by observing as under : "FINDINGS OF BENCH 34. We have heard the rival contentions and perused the material available on record including the documents and submissions made before us. Before we deal with the issue, we would like to record the three judgments passed by High Courts on this. 35. In the case of Kusum Health Care (P.) Ltd.* [2018] 99 taxmann.com 431 (Delhi), Delhi High court had held as under :- 10. The court is unable to agree with the above submissions. The inclusion in the Explanation to section 92B of the Act of the expression "receivables" does not mean that dehors the context every item of "receivables" appearing in the accounts of an entity, which may have dealings with foreign associated enterprises would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee will have to be studied. In other words, there has ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....'capital financing', if same is not charged at arm's length. Therefore, we reject the contention of the assessee that outstanding receivable is not an 'international transaction' and therefore, hence, according to us, interest on it requires to be imputed." Thus, this is a redundant contention, because as has been highlighted by the ITAT, by a plain reading of the (retrospectively applicable) amendment that introduced the Explanation to section 92B of the Act by Finance Act, 2012, it is determinable that if there is any delay in the realization of a trading debt arising from the sale of goods or services rendered in the course of carrying on the business, it is liable to be visited with transfer pricing adjustment on account of interest income short charged/uncharged. Hence, the assessee's contention that the ITAT erred in concluding that charging of interest on delayed receipt of receivables is a separate international transaction which requires to be benchmarked independently, is incorrect." 37. In the case of The Pr Commissioner Of Income-Tax vs M/S. Amd India Pvt. Ltd. in I.T.A.No.274/2018 DATED THIS THE 31ST DAY OF AUGUST 2018 Karnatka....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ture cost, manpower cost, raw material, bank financial charges for the purpose of manufacturing or delivering of the services/goods to its AE , failing to receive Rs.5.86 crores from AE in time had economic consequences , hence assessee is required to be compensated for delay in receiving its outstanding . It needs no business sense, if a person rendering services or supply the goods after making the afront payment, then the services/goods would be available at a lower rate and in case of converse situation of delayed payment goods/services would be available at higher value , as the cost of delay/ upfront payment would be factored in the price . In the present case, TPO as well as the assessee have determined the ALP of the international transactions after considering the price charged by the assessee from its AE, albeit without factoring in interest to be chargeable on the delay in receiving the outstanding amount from the associated enterprises. Therefore, we do not find any error in bench marking the interest to be charged on delayed outstanding by the lower authority. In the present case, the learned CIT (A) in the facts of present case, noticed that 60% of the total turnover ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Hyd/2014) reported in (2015) 64 Taxmann.com 470 (Hyd- Trib). In paragraph 17.3, the Tribunal had not granted the notional interest on the outstanding receivables. As a matter of fact, the said judgment pertains to the A.Y 2010-11 and by the Finance Act 2012 (Expenditure. i(c) was inserted with retrospective effect from 1.4.2002 whereby the international transaction shall include receivables or any other debt arising during the course of business. In our view, the Tribunal was not having the benefit of the said change in law while deciding the issue. Therefore, the said decision of the Tribunal is not applicable to the facts of the present case. The second judgment relied upon by the assessee is in the case of Bisazz India (P) Ltd vs. Dy.CIT by the ITAT Ahmedabad Bench on 8/8/2018, wherein the Tribunal in Para 9.1 has held that "such interest is includible in operating income and the operating income itself has been accepted as reasonable under the TNMM, there cannot be an occasion to make adjustment for notional interest on delayed realization of debtors". Admittedly, in the present case, it is not the case of the assessee before us that the delayed payment gets interest i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the present case, there is a delay of receiving consideration from the AEs and the total amount due to the assessee from the AEs is more than 60% of its total turnover. Therefore, the LIBOR+200 points rate cannot be applied to a transaction where the cases of delay in receivables from the AEs. Hence, the above judgment is also not applicable. The 7th judgment relied upon by the assessee is in the case of Open Text Corporation India (P) Ltd vs. Income Tax Officer reported in (2021) 127 taxmann.com 399 (Hyd.Trib), In this judgment at Para 2.2 had held that the short term deposit cannot take part with an international transaction. In our view, the issue before us is not with respect to short term deposit but is of receivables from the AEs to the assessee. Undoubtedly, the receivables from the AE have been held to be an international transaction in view of the decision of the Hon'ble Karnataka High Court in the case of CIT vs. AMD India (P) Ltd in ITA No.274/2018 decided on 31.8.2018 and also in the case of Mckinsey Knowledge Centre India (P) Ltd vs. CIT in ITA No.461/2017 wherein the Hon'ble Delhi High Court has held that the delay in realization of payment....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., the trade receivables were 5.84 crores and if the assessee is required to bear the cost of Rs.5,84,94,810 without any carrying cost, then the assessee would be rendering the services at ALP at a lower rate than the comparable cases. undoubtedly the assessee would be incurring the infrastructure cost, manpower cost, raw material, bank financial charges for the purpose of manufacturing or delivering of the services/goods to its AE, failing to receive Rs.5.86 crores from AE in time had economic consequences, hence assessee is required to be compensated for delay in receiving its outstanding. It needs no business sense, if a person rendering services or supply the goods after making the afront payment, then the services/goods would be available at a lower rate and in case of converse situation of delayed payment goods/services would be available at higher value, as the cost of delay/ upfront payment would be factored in the price. In the present case, TPO as well as the assessee have determined the ALP of the international transactions after considering the price charged by the assessee from its AE, albeit without factoring in interest to be chargeable on the delay in receiving the o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....requirements." 9. In our view, in the present case, the outstanding receivables by the assessee are required to be benchmarked. It is an admitted fact that the outstanding receivable by the assessee are more than 30 days as held by the DRP in para 3.1.9. In the light of the above, respectfully, following the decision of co-ordinate Bench of the Tribunal in the case of Zeta Interactive Systems (India) Pvt. Ltd. (supra), we modify the order passed by the DRP and direct the TPO to compute by applying 6% interest rate on outstanding receivable at the year end as against 14.75% on the analogy of Zeta Interactive Systems (supra) and recompute the adjustment to be made to the total income of the assessee." He accordingly submitted that the grounds raised by the assessee should be dismissed. 9. We have heard the rival submissions and perused the material on record. From the perusal of the order passed by the TPO, it is clear that both the lower authorities have given an elaborate reasoning for coming to the conclusion that the delay in receiving the receivables is an international transaction and is required to be bench marked in accordance with law. We are reproducing herei....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se, there is a delay in receiving the outstanding of Rs.62,38,68,941/- in respect of 519 invoices as mentioned hereinabove and there is no explanation given by the assessee for such a delay in receiving the amount. The very purpose of benchmarking the transaction is to ascertain whether assessee, who is similarly situated, would render the same kind of services at the same or similar price to a third party or not. If we examine the issue in the above-said context, it would be clear that the assessee would charge bank interest or any other interest with a view to compensate itself on account of delay in making the payment. Hence, we do not find any error in the same. 13. The reliance of the assessee in the case of Betchal India Pvt Ltd (supra) is also not correct as A.Y. in that case was 2010-11. By the Finance Act, 2012, the Explanation was inserted in Sec.92B of the Act and by virtue of which "payment or deferred payment or receivable or any other debt arising during the course of business" has been considered to be an international transaction which is required to be benchmarked. Following the above said Explanation, the co-ordinate Bench for the subsequent assessment years vi....