AI Drafter 
TaxTMI 
TaxTMI 
2024 (5) TMI 1108
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....the action of the T.P.O. and the A.O. in restricting the retention by AEs to 5% of consideration derived against supply of dossier. (i) The CIT(A) ought to have considered the fact that the T.P.O. cannot make any adjustment when there are no comparables and when no such adjustment was made in the earlier years. (ii) The CIT(A) ought to have considered the fact that the AE makes efforts in selling the dossier which is more advantageous to the appellant company. (iii) The CIT(A) ought to have noticed and considered the fact that the action of the TPO is without making any Transfer Pricing Exercise in determining ALP for the services. 2(a) The learned CIT(A) erred in confirming the action of the Assessing Officer in holding that any adjustment can be made in respect of corporate guarantee provided to Pharmed Health Care Company SAE and Hetero FZC0, UAE. 2(b) The learned CIT(A) ought to have Same as in 2(a) above seen that Pharmed Health Care Company SAE is a Joint Venture company wherein the appellant is holding equity shares and the bank guarantee was provided for 30.50% of the borrowings, and is in accordance with Joint Venture agreement.....
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....s in the cases of M/s. Mylan Laboratories Ltd., Vs.ACIT (2015) ITA No. 2123/Hyd/2011 and Rain Commodities Ltd., (2016) 65 taxmann.com 240. 3. Whether on the given facts and circumstances of the case and in law, the CIT(Appeals) is correct in directing to charge the corporate guarantee fee at 0.53% contravening the India Transfer Pricing regulations, which prescribe that the data to be used for the purpose of comparability analysis should relate to the year in which the international transaction has taken place. 4. Whether on the facts and circumstances of the case, the CIT(Appeals) was justified in directing to adopt corporate guarantee fee @ 0.53% relying on the decisions of the earlier years without appreciating the fact that TPO has conducted a comparability analysis and arrived at arm's length rate @ 1.9%. 5. Whether on the facts and circumstances of the case, the CIT (Appeals) is justified in directing to adopt rate of interest @ LIBOR+200 basis points on account of interest on delayed receivables without giving any direction with regard to the benchmarking of the transaction which has to be benchmarked as per section 92B of the Act. 6. ....
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.... the CIT(A) is justified in directing to exclude R&D expenses and Marketing expenses from the comparable companies while working out the PLI without appreciating the fact that the eligible unit has worked out the 'profits and gains derived from the export of such article or thing' as mandated u/s. 10AA wherein no such expenses were attributed to these units and thus none of these expenses are attributable to the eligible units. 13. Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in directing to exclude R&D expenses and Marketing expenses from all the comparable companies while working out the FL! without appreciating the fact that the assessee company also has R&D expenses and Marketing expenses at entity level (which includes both ineligible and eligible units) similar to that of comparable companies and the assessee's eligible unit per-se did not have R&D expenses and marketing expenses attributable to it. 14. Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in directing to exclude R&D expenses and Marketing expenses from all the comparable companies while working out the PL....
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....ricing Officer (TPO) for determination of Arm's Length Price (ALP) in respect of both the international transactions as well as the specified domestic transactions. The TPO, vide his Order u/s 92CA(3) of the I.T Act dated 31-07-2021 determined the Arms Length Price (ALP) adjustments of the International transactions pertaining to transactions i.e., availing of marketing Services at Rs. 18,53,42,817/-, Corporate Guarantee Fee at Rs. 1,50,00,000/- and Interest on delayed receivables at Rs. 56,86,90,526/- totalling to Rs. 76,98,33,343/-. Thus, the adjustment of Rs. 76,98,33,343/- on account of international transactions determined u/s 92CA(3) by the Transfer Pricing Officer (TPO) was added to the total income of the assessee. Thereafter, the ALP adjustments on account of specified domestic transactions was proposed at Rs. 34,15,08,428/-. The Assessing Officer also disallows Rs. 1,88,12,419/- u/s 35(2AB) of the Act. Thus, the Assessing Officer passed the order assessing the total income at Rs. 280,42,75,540/-. 5. Ground Nos.1 raised by the Revenue in ITA No. 348/Hyd/2023 for A.Y. 2017-18 are general in nature and requires no adjudication. 5.1. Ground No. 1 and 5 raised by the....
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....r providing such guarantee on behalf of the AE. From the above information furnished by the assessee, it is seen that the assessee has not charged (from its AEs) any fee towards the Corporate Guarantee issued by it on behalf of the above mentioned AEs. The Corporate guarantee provided by the assessee is in the nature of services rendered and it has a bearing on the profits or income or losses or assets of the assessee as well as its AE. In an arm's length situation, no independent party would render such services at free of cost. Further, as per the explanation inserted w.e.f. from 01/04/2002 in Section 92B by Finance Act, 2012, it has been clarified that guarantee is an international transaction and hence, Arm's Length Price has to be determined as per the provision of Section 92C of the Act. In view of the above, show cause notice dated 21.12.2020 was issued to the assessee asking it to show cause as: to why a fee of 1.9% should not be charged on the amount of corporate guarantee issued by it on: behalf of its AEs. The relevant extracts of the show-cause notice is reproduced as follows, "For the determination the ALP of the. Fee on the corporate....
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....ntile 2.2 2 1.8 Median 2.6 2.5 1.9 65th Percentile 3 3 2 From the above, it could be seen that the various banks charge fee, ranging from 1.8% to 2%. Hence, for the computation of the ALP, the various rates (data) were arranged in ascending order and the median of the same was adopted as the ALP as provided in Rule 108 of the Income Tax Rules, 1962. Thus, the ALP works out to 1.9% for the corporate guarantee of above Rs. 10 Crores....." 5.3. The ld.DR has also drawn our attention to page 98 of the order of ld.CIT(A). "3.4 Issue of Corporate Guarantee by the assessee on behalf of foreign AE During the year under consideration, the company has not extended any Corporate Guarantee to the AEs. However, guaranteed extended in the earlier years and outstanding loans as on 31.03.2017 are as under: Name of the Company Currency in which Corporate guarantee provided Outstanding As on 31- 03-2017 Hetero FZCO, UAE US$ 9,000,000 Pharmed Healthcare Company, SAE, Egypt, US $ 9,305,376 The taxpayer has extended corporate guarantee in connection with term loan of USD 10 million during the year 2012-13....
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....[Clause 14(6)1. Similarly, the assessee extended corporate guarantee in connection with loan of USD 15 million obtained during the year by Hetero FZCO, UAE from Bank of Baroda and Indian Bank. Hetero FZCO is a joint venture between the assessee company and Medsy FZE, UAE and the assessee company holds 95% shareholding as on 31-03-2017. The corporate guarantee agreement was executed on 07-03-2014 and loan was disbursed on 31.03.2014. The salient features of the deed of corporate guarantee are - i. The guaranteed liability is limited to a maximum of USD 15 mn. ii. The assessee company to pay to the lender on demand and in the currency of which the same falls due for payment, every and all sum and sums of money which are now or shall at any time be owing by the foreign AE as a borrower to the lending bank(s), anywhere on any account whatsoever, from borrower, the said monies which the foreign AE is liable to pay the lender and remain unpaid to the lender under the financial arrangement. iii. The guarantee shall be a continuing guarantee for the purpose of securing the whole of the monies and shall remain in full force and effect till such t....
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....rate guarantee transaction cannot be determined based on bank guarantee rates. Relying on the decisions of Hon'ble ITAT in the cases of Mylan Laboratories Ltd. and M/s. Rain Commodities Ltd. held that the corporate guarantee commission rate should be adopted @0.53%. Further, the CIT(A) on perusal of deed of guarantee for Corporate Guarantee advanced to AE, observed that the taxpayer provided corporate guarantee to the extent of 30.50% only to Pharmed Healthcare Company, Egypt. In view of this, the CIT(A) directed to calculate corporate guarantee @0.53% of 30.50% (taxpayer's share on outstanding loan balance of US $ 7,499,880). The decision of the CIT(A) to calculate corporate guarantee fee in respect of corporate guarantee extended to Pharmed Healthcare Company @0.53% of 30.50% and not on full value of guarantee was accepted by the Department. However, the decision of the CIT(A) with regard to guarantee fee rate to be applied 0.53% is not acceptable. The rate of guarantee commission/ fee changes with time i.e., year to year. Therefore, the rate adopted for earlier years may not be appropriate for the year under consideration. Further, as can be seen from o....
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....39;s length situation, no independent party would render such services at free of cost and accordingly, the TPO determined the Arm's Length Price of fee on corporate guarantee @ 1.9% on the outstanding loan by taking into consideration the median of Bank Guarantee rates for the FY 2016-17 of commercial banks and proposed adjustment of Rs. 2,25,54,621/- (1.9% of Rs. 118,70,85,328/-) u/s 92CA(3) of the Act. During the course of appellate proceedings, the appellant submitted that corporate guarantee does not fall under the definition of 'guarantee' under international transaction unless such transaction have a bearing on profits, in income, losses or assets of the enterprise and in the present case, the guarantee does not have a bearing on profits, in income / losses or assets of the appellant. In this regard, it is necessary to go through the provisions of Sec. 92B of the Act, the relevant extract of section 92B of the Act along with explanations is reproduced as below: "92B. (1) 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....
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....et development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; (e). a transaction of business restructuring or reorganization, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date;" On plain reading of the Explanation (i)(c) to section 92B of the Act, it is seen that it merely reads 'lending or guarantee' but does not make any distinction i.e. specify as to whether it is a guarantee by bank or by any corporate. The word 'guarantee' should be read along with main provisions of the section 92B(1) of the Act which reads 'any other transaction having a bearing on the profits, income, losses or assets of such enterprises'. Thus, the word 'guarantee' covers the corporate guarantee given by any assessee on behalf of its AE, if it has a bearing on profits or income or losses or assets of the assessee as well as its AE. It is to be noted here that the phrase 'such enterprises&#....
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....aceuticals Ltd (ITA No. 1302 of 2014 dated 02-02-2017). Further, the SLP filed by the Department against the said decision was dismissed by the Hon'ble Supreme Court on merits vide its order dated 11.12.2018 (CIT(LTU) Vs. Glenmark Pharmaceuticals Ltd, Civil Appeal No. 12632/2017). Thus, it is a settled matter by the Hon'ble Supreme Court that the corporate guarantee cannot be compared with the bank guarantee. In view of the above decision, it is concluded that the TPO is not correct in comparing corporate guarantee with the bank guarantee and determining the Arm's Length Price of corporate guarantee based on bank guarantee rate. To summarize the above paragraphs, the corporate guarantee is covered well within the meaning of international transaction and Arm's Length Price for corporate guarantee transaction cannot be determined based on bank guarantee rates. Regarding the quantification of the Arm's Length Price for corporate guarantee advanced by the appellant to its AEs, the reliance is placed on the decisions of Hon'ble ITAT, Hyderabad in the cases of Mylan Laboratories Ltd. Vs. ACIT [2015] ITA No. 2123/Hyd/2011) and Rain Commod....
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...., and are for the purpose of promoting its business interests in UAE and Egypt, the assessee did not charge any corporate guarantee fee from the foreign AEs. (iii) Even if such guarantee is an international transaction, no separate fee is required to be paid by foreign subsidiary / Joint Venture, as corporate guarantees are given to protect the assessee company as a shareholder in these foreign associated enterprises and thus form part of shareholder activities and don't require fee at arm's length. (iv) The corporate guarantee agreements and also the business transactions carried out by the assessee with these foreign AEs, it is very clear that the corporate guarantees are given by the assessee, not as service to foreign AEs, but to protect its own interest as a shareholder of these foreign AEs and also to promote its own business. Since, the revenue from these foreign AEs is a paramount importance of the assessee, the guarantee was given in a way to protect assessee's own business interest in such subsidiaries. 8.1. The ld.AR in his written arguments submitted that the corporate guarantees extended to its foreign AEs are in the nature of shareholder activitie....
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....ection 92B of the Act itself had made it abundantly clear that if the assessee is providing the capital financing, including any type of long term or short term borrowing, lending or "guarantee", purchase or sale etc., then such transaction shall be considered as international transaction. Undoubtedly, the assessee has given Corporate Guarantee on behalf of its AE, which fact has not been disputed by the assessee either before the TPO or before the DRP and, therefore, we are of the opinion that the corporate guarantee given by the assessee is an international transaction and, therefore, the same has rightly been held so by the lower authorities. 8.1 Having held that the corporate guarantee issued by the assessee on behalf of its AE is an international transaction, the sequator to that is whether the corporate guarantee estimated by the DRP to the tune of 1% on the amount guaranteed as a corporate guarantee commission as against 0.10% was justified or not. 8.2 In this regard, the assessee had made elaborate submissions which are reproduced elsewhere and submitted that the assessee is taking the financial facilities from the SBI and is paying 0.10% as schedule of fe....
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....guarantee commission @ 0.53% would be appropriate. Furthermore, the Revenue cannot be worsen of thereby reducing the corporate guarantee commission from 0.53% to 0.50% in its appeal. Accordingly, the appeal of the Revenue on this aspect is without any basis. 9.2.1 The other aspect on which the Ld.CIT(A) has granted relief is that the assessee has only provided the corporate guarantee to its AE to the extent of 30.50% on the outstanding loan balance of US $ 10 million advance to its AE. In our view, the pro rata corporate guarantee is required to be calculated as directed by the Ld.CIT(A) on the amount for which the assessee has sought which would be 30.50% of the total amount of US $ 10 million advanced to its AE. Therefore, the corresponding corporate guarantee commission @ 0.53% is required to be computed on the amount of 30.50% of assessee's share on the outstanding loan balance of US $ 93,05,376. Accordingly, grounds 2 to 4 of the Revenue appeal are dismissed. 9.3 Coming to the assessee's appeal in ITA No. 312/Hyd/2023 for A.Y. 2017-18, written Submissions filed by Revenue with regard to Assessee's appeal are to the following effect: I. Ground No. 1 & 2 Corporate....
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....ing a comparability analysis arrived at the arm's length margin/PLI rate of corporate guarantee @1.8%. Moreover, the case of M/s. Mylan Laboratories Ltd. which was relied upon by the CIT(A), the AY is 2008-09 whereas the AY involved in the present case is AY 2018-19. Hence, application of guaranteed fee rate for AY 2008-09 to AY 2018-19 is not logical and appropriate. Hence, the CIT(A) is not justified in directing the TPO to restrict the corporate guarantee fee @0.53% without any reasoning. 9.4. The written submissions filed by the assessee in ITA No. 312/Hyd/2023 for A.Y. 2017-18 with respect to ground nos.2 and 3 are to the following effect : "The assessee submitted detailed reply before Ld. CIT(A) which is reproduced at Pages 98-106 of the order of the CIT(A). The summary of contentions of the assessee regarding charging of any corporate guarantee fee is as follows:- (i) The Corporate Guarantee fee does not fall under the definition of 'guarantee' under international transaction as such transaction does not have a direct or indirect bearing on profits, income, losses or assets of the assessee company. (ii) As these corporate guarantees extended....
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....to 22A had decided the issue and has held that the grant of corporate guarantee to its AE would constitute international transactions. After holding the grant of corporate guarantee as international transaction, the Ld.CIT(A) has adjudicated and determined the corporate guarantee @0.53% instead of @1.90% on the outstanding amount of the corporate guarantee. Hence, we do not find any reasons to interfere with the findings given by the Ld.CIT(A) and accordingly, the grounds 2(a) to 2(c) and 3 raised by the assessee for A.Y. 2017-18 are dismissed. GROUNDS 5 TO 7 - OUTSTANDING TRADE RECEIVABLES 11. Grounds 5 to 7 are with respect to interest on outstanding Trade Receivables. In this regard, the ld. DR has drawn our attention to pages 178 to 187 of the order of ld.CIT(A), which is to the following effect : "4. Interest on Outstanding Trade Receivables: As it can be seen from the TP study report, outstanding receivables were not benchmarked separately, in this regard, during transfer proceedings the appellant was asked to furnish invoice wise aging details of outstanding receivables, in respect of all invoices raised during the FY 2016-17 as well as the invoices w....
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....eivables, the interest rate on delayed receivables are to be benchmarked with LIBOR (London Interbank Offer Rati, rather than Indian interest rates, as the exports are denominated predominantly in US dollars. Alternatively, interest rate @2.46% p.a. based on the rate charged by the banker to the appellant for short-term (6 months) foreign currency loan extended towards exports known as packing credit foreign currency (PCFC) loan can be taken into consideration. Now the question arises whether outstanding trade receivables constitute separate international transaction and should be benchmarked separately or not. To answer this, the explanation (i)(c) to section 92B and section 92F(v) are referred, which are reproduced as below: Explanation (i)(c) to section 928: "Capital financing, including any type of long-tern 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". Section 92F(v): "Transaction" includes an arrangement, understanding or action in concer4- A. whether or not....
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....n a later order dated 6.7.2015 passed by the Tribunal in the case of Techbooks International Pvt. Ltd. (supra), in which the transfer pricing adjustment on account of the delayed realization of invoices from AEs has been upheld. The Id. DR contended that the order in the case of Kusum Healthcare Pvt. Ltd. (supra), has been passed without considering the amendment to section 92B carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002, which has been duly taken into account by the Tribunal in its later order in Techbooks International Put. Ltd. (supra). 21. After considering the rival submissions and perusing the relevant material on record, it is noticed as highlighted above, that the assessee argued. before the TPO that interest on receivables 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 (0 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 i....
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....allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?" 24. While answering the above question, the Hon'ble High Court noticed that an amendment to section 92B has been carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside the view taken by the Tribunal, the Hon'ble High Court restored this issue to the file of the Tribunal for fresh decision in the light of the legislative amendment. 25. The foregoing discussion discloses that noncharging or undercharging of interest on the excess period of credit allowed to the AB for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined." Similar views have been taken by the Hon'ble ITAT, Bangalore in the case of Ingersoll Rand (I) Pvt. Ltd. (dated 10.11.2017) and ITAT Delhi in the case of BT e- serve India Pvt. L....
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.... of Hon'ble ITAT, Hyderabad in the case of Albany Molecular Research Vs. DCIT, Circle-1(1), Hyderabad dated 26.11.2020 in which it was held that assessee had to receive its outstanding receivables from its AE in foreign currency, it would be just and fair to adopt LIBOR rate + 200 basis points as the applicable ALP interest rate for the purpose of imputation of interest on outstanding receivables from AEs. The relevant portion of the said decision is reproduced as under: "5.5. For the A Yrs 2013-14 and 2014-15, there is no dispute that assessee had realised its receivable from its AEs after abnormal delay beyond the agreed credit period. This, in our considered opinion, tantamount to indirect funding made by the assessee to its AEs by allowing the AE to utilize funds of the assessee as per its whims and fancies. Merely because the assessee is a debt free company except BCE loan, it cannot allow its funds to be utilized by its AB for an indefinite period of time beyond the agreed credit period. We find that Clause-C of Explanation to Section 92B of the Act has been introduced in Albany Molecular Research Hyd. Research Center Pvt. Ltd. & Anr. the statute by the Finance A....
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....deration but beyond the agreed credit period, imputation of interest by applying LIBOR + 200 basis points is to be made from 1st day of April of the relevant years till the date of realization of debts. In respect of invoices raised during the respective years, where the amounts were realized during the respective years itself, but beyond the agreed credit period, imputation of interest by applying LIBOR +200 basis points is to be made from the date of expiry of agreed credit period from the date of raising the invoice and the same is to be charged till the date of realization of debts. We hold that the decision of the Hon'ble Delhi High Court in Kusum Healthcare talks about only outstanding receivables at the end of the year i.e. to say when working capital adjustment is given to the assessee, no separate adjustment need to be made on the outstanding receivables at the end of the year. In our considered opinion, the decision of Hon'ble Delhi High Court does not speak about the invoices that Albany Molecular Research Hyd. Research Center Pvt. Ltd. 83Anrwere realized from the AE beyond the agreed credit period during the year. Hence, it could be safely concluded that the decision of....
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....llant with regard to its transactions with unrelated parties nor any explicit invoices regarding the same have been produced. The credit period of 60 days allowed by the TPO is found reasonable as this is the prevalent credit period allowed in the line of business of the appellant unless specifically proved otherwise by the appellant in the peculiarity of its own operations and transactions with non-AEs for similar product/ transactions. The credit period of 60 days was also found reasonable in the decision of Mumbai Bench of the ITAT in the case of Tecnimont ICB House Vs. DCIT in ITA No. 487/Mum/1014 vide order dated 08.07.2015. Accordingly, ground No. 5(b) and 5(c) are dismissed and 5(a) is partly allowed to the extent of relief granted on the basis of LIBOR plus 200 basis points." 11.1. The written submissions filed by the ld.DR with respect to Interest on Outstanding Trade receivables are to the following effect : "The TPO during the course of TP proceedings treated the outstanding receivables as separate international transactions and computed interest of Rs. 56,86,90,526/- on delayed receivables @ SBI short term deposit rates. The CIT(A) directed....
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....e ITAT in the case of Tecnimont ICB House Vs. DCIT in ITA No. 487/Mum/1014 vide order dated 08.07.2015. 11.3. Per contra, the ld. AR has made the following written submissions : "The assessee's main argument is that it did not charge any interest whatsoever on the similarly delayed foreign Non-AE debtors. In this regard, the assessee submitted a summary of invoices realised with various delays from AEs and non-AEs and was submitted before the Ld. CIT(A), which is available on Page 110 of the order of the CIT(A) for AY 2017-18. This is further expanded as under by including the amounts involved in respect of these invoices:- Further, the assessee also submitted Annexure-L in physical form before CIT(A) in respect of invoice details of realisation of AE and Non-AE exports from two plants. However, the CIT(A) rejected this ground by simply stating that (at Pages 183 & 184 of the order) that the appellant did not furnish the invoice-wise realisation details of sales proceeds w.r.t. AE and Non_AE. As can be seen from the above table, the assessee has exported goods worth 3223 crores during FY 2016-17 (mistakenly written as Rs 3003.11 Cr in the written submi....
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....r foreign AEs and Non-AEs. So, it is commercial decision of the assessee out of its business expediency to give extended credit facility for both the foreign AEs and Non-AEs equally. In summary, as the assessee did not charge interest for equal delay in realisation of Non-AE exports, under internal CUP method, the assessee is justified in not charging interest on delayed receivables from foreign AEs. Credit Free Period:- Without prejudice to the above argument that non-charging of interest on delayed receivables from foreign AEs is justified in view of the fact that the assessee is not charging any interest for such equal delay of realisation of receivables from foreign AEs, the assessee submits that even if interest is chargeable on delayed receivables, the interest-free credit period must be allowed for 180 days, rather than 60 days as allowed by the Ld. CIT(A) mainly for the following reasons:- (i) There are significant number of export invoices raised against foreign AEs with 180 days credit period. A sample list is enclosed herewith as Annexure-I. (ii) There are also significant number of export invoices raised against fore....
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..... 2018-19 Particulars Total Number of Invoices during the A.Y. 2018-19 Amount Export Invoice value in Rs. % of invoices realized to total invoices raised during the year A) Realised within credit period 3,001 6,48,15,77,864 91.22 B) Realised beyond credit period of 60 days <10 days 241 36,27,20,363 5.10 10-20 days 204 18,88,04,889 2.66 20-30 days 45 7,11,80,351 1.00 30-45 days -- -- -- 45-60 days -- -- -- >=60 days 29 11,63,338 0.02 Sub total (B) 519 62,38,68,941 Total (A) + (B) 3520 7,10,54,46,805 10. From the perusal of the Chart, it is absolutely clear that there were 519 invoices valued at Rs. 62,38,68,941/- for which the payments were due beyond the credit period 60 days. In our view,....
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....) had decided the issue against the assessee. In view of the above, the decision relied upon by the assessee is of no help to assessee. 14. So far as the argument of the assessee that the assessee is a debt free company and therefore, no borrowed fund was used for making supplies to it's A.E. and therefore, is not liable to be compensated for the delay in receiving the receivable is concerned, the same in our view, suffers from inherent flaw as in the T.P. analysis, the TPO is required to examine whether the assessee had supplied the product / services to it's A.E. at Arm's Length Price or not ? If by providing the services / goods at a discounted rate or permitting the assessee to receive the payment after a long period of 60 days or 90 days, then it will amount to permitting the A.E. to use the working capital of the assessee for the purposes of earning the profit. No prudent business man would venture into 22 Apache Footwear India Pvt.Ltd. this kind of activity and permit a third party to use the working capital of the assessee and earn profit thereon. In the present case, though the assessee was required to maintain the T.P. Study and file the same before the TPO to sh....
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....oted that the TPO has allowed credit period of 60 days while calculating interest on outstanding trade receivables and the appellant is seeking the credit period of 90 days which has not been substantiated by the appellant with regard to its transactions with unrelated parties nor any explicit invoices regarding the same have been produced. The credit period of 60 days allowed by the TPO is found reasonable as this is the prevalent credit period allowed in the line of business of the appellant unless specifically proved otherwise by the appellant in the peculiarity of its own operations and transactions with non-AEs for similar product/ transactions. The credit period of 60 days was also found reasonable in the decision of Mumbai Bench of the ITAT in the case of Tecnimont ICB House Vs. DCIT in ITA No. 487/Mum/1014 vide order dated 08.07.2015. Accordingly, ground No. 5(b) and 5(c) are dismissed and 5(a) is partly allowed to the extent of relief granted on the basis of LIBOR plus 200 basis points."( emphasis supplied by us ) 12.7 Surprisingly, the assessee before us in the written submissions had sought the credit period of 180 days as against 90 days claimed before the l....
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....ssessment year 202-23, the TPO at Para 6.5.6 to 6.5.9 has held as under : "6.5.6 With regard to the contention of the taxpayer that if at all any interest is to be charged the same is to be computed with reference to credit period allowed to Non-AEs. The contentions of the taxpayer were examined. Considering the facts of the case and submissions of the taxpayer and keeping in view of the fact that credit period allowed to most of the Non-AEs is 180 days, a credit period of 180 days is considered as internal CUP and thereby considered for the purpose of working of interest in respect of receivables from AEs. 6.5.7 In view of the above, SBI short Term deposit rates as applicable for F Y 2021¬22 is considered as appropriate Other Method to determine ALP of 'Outstanding receivables. The details of SBI Term deposit rates are as under: 6.5.8 Accordingly, interest is computed by adopting the short term deposit rate of SBI for F.Y. 2021-22 after allowing a credit period of 180 days as under: Description Amount (Rs.) Interest on delayed trade receivable in respect of invoices raised during the F.Y. 2021-22. 8,69,73,742 f - Add : Interest on ....
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....lso in the same of line of business. No special treatment can be given to the assessee. Furthermore, once the assessee failed to justify and substantiate the credit period of 90 days before the lower authorities, it is preposterous to claim 180 days credit period before the Tribunal. Hence, we do not agree with the contention of the assessee. With respect to the submission that assessee has not charged any interest from the non-AE and therefore, the non-AE should be considered as an internal comparable. This contention of the assessee is without any basis and the assessee failed to establish that the assessee has not charged any interest from its non-AE before the lower authorities and further, the assessee failed to prove that the non-AE were operating in the same segment, product, region and with the same terms and conditions of sale and purchase of Pharmaceutical products. 12.11 In the light of above, the grounds 5 to 7 with respect to outstanding trade receivables raised by the Revenue are partly allowed and the grounds relating to this issue i.e., 4(a) to 4(d) raised by the assessee in ITA No. 312/Hyd/2023 for A.Y. 2017-18 are dismissed. GROUNDS 8 AND 9 13. Grounds 8 ....
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....s and M/s. Macleods Pharmaceuticals Ltd by the ld.CIT(A) as comparables. 14. We have heard the rival submissions and perused the material on record. 14.1 The assessee in the T.P Report has given the details of units, which are eligible for different deductions. (The table under page 189) Sr. No. Name of the Unit Section under which Deduction/Exemption claimed Amount of Deduction/ OP/OC OP/OR 1 Unit V - (SEZ Jedcharla) Sec. 10AA 26,21,39,692 14.06% 12.33% 2 Unit VA - (SEZ Jedcharla) Sec. 10AA 75,54,69,091 67.60% 40.33% 3 Unit IX -(SEZ Nakkapally) Sec. 10AA 2,41,02,756 15.27% 13.25% 4 Unit IV - Baddi Sec 80IC 28,74,27,849 34.61% 25 71% 14.1.1. Out of 4 units, the TPO noted that the Unit No. 2 & 4 are showing the higher profit (OP/OR) at 40.33% and 25.71% respectively. The appellant had chosen itself as a testing party and applied TNMM as the most appropriate method. The TPO has found that the method conducted by the assessee was not appropriate. Therefore, the TPO has conducted its own study by adopting TNMM as MAM and by applying the following filters : (a) Use of current year....
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....boratories Ltd. 38310 27773 10537 27.5 1413.85 14.3. Based on the above comparables, the TPO computed the ALP of the specified domestic transaction at 12.74%. 14.4 Feeling aggrieved with the same, assessee filed appeal before the ld.CIT(A), who examined the filters and found that the filters applied by the TPO for calculating Arm's length price of specified domestic transactions and however applying the turnover filter of greater than Rs. 1 crore was inappropriate. However, it was observed that the assessee has requested 1/10 to 10 times turnover filter. Based on the above said filters, the ld.CIT(A) had found that following 17 comparables have qualified for 1/10th turnover of more than 100 crores. (17 comparables list page 193). S. No. Company Name Turnover for FY 16-17 (Rs Cr) 1 Cadila Pharmaceuticals Ltd 1604.07 2 Iridoco Remedies Ltd 1094.06 3 Cipia Ltd 10637.08 4 Granules India Ltd 1374.16 5 VasudhaPharmaChem Ltd 601.77 6 Micro Labs Ltd 2598.76 7 Centaur Pharmaceuticals Pizt. Ltd 553.38 8 Unichem Laboratories Ltd 1413.85 9 Bajaj Healthcare Ltd. 230.67 10 Bharat ....
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....le 21 Macleods ' Itic Pharmaceuals Ltd 5134.43 Assessee's comparable 14.6 The Revenue is in appeal for wrong inclusion of the above said two companies namely M/s. Sun Pharma Laboratories and M/s. Macleods Pharmaceuticals Ltd in ground nos.8 and 9 before us on the pretext that these two companies fall on RPT filters. The ld. DR contended that on examination of annual reports of these companies, we may know that these companies had been wrongly included. 14.7 In response thereto, the ld. AR for the assessee has submitted that the assessee has no objection if these companies are excluded from the list of comparables. As both the parties have agreed for exclusion of these two companies namely, M/s. Sun Pharma Laboratories and M/s. Macleods Pharmaceuticals Ltd and therefore, we direct the TPO / Assessing Officer to exclude these two comparables. Accordingly, we allow the grounds of Revenue. GROUNDS 10 TO 15. 15. Grounds 10 to 15 are inter-connected and are with respect to R & D Expenses, Head Office & Marketing Office Expenses while computing the PLI of the comparable companies. 15.1 The ld.DR for the Revenue had submitted that the TPO, while computing the....
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....> 25%, RPT filter < 25%, manufacturing sales > 75% of Revenue along with other filters selected by the TPO, the final comparables that need to be considered to the appellant company for specified domestic transactions are as under: S. No. Company Name Turnover for FY 1617 (Rs Cr) Remarks 1 Cadila Pharmaceuticals Ltd 1604.07 TPO's Comparable 2 Indoco Remedies Ltd 1094.06 TPO's Comparable 3 Cipla Ltd 10637.08 TPO's Comparable 4 Granules India Ltd 1374.16 TPO's Comparable 5 VasudhaPharmaChem Ltd 601.77 TPO's Comparable 6 Micro Labs Ltd 2598.76 TPO s Comparable 7 Centaur Pharmaceuticals Pvt. Ltd 553.38 TPO's Comparable 8 Unichem Laboratories Ltd 1413.85 TPO's Comparable 9 Bajaj Healthcare Ltd. 230.67 TPO's Comparable 10 Bharat Parenterals Ltd. 122.14 TPO's Comparable 11 Celon Laboratories Pvt. Ltd. 107 TPO's Comparable 12 Kopran Ltd. 181.66 TPO's Comparable 13 Lee Pharma Ltd. 205.07 TPO's Comparable 14 Lincoln Pharmaceuticals Ltd. 308.06 TPO's Comparable ....
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....and marketing expenses under separate heads, but don't show head office expenses as a separate head. Therefore, only R&D and marketing expenses are to be allocated and nok head office expenses while computing margins of the units of the appellant company. In view of the above, to maintain consistency, the comparison of PLI should be made at same level of comparable companies with the appellant company, so that comparison of profitability is proper. Based on the information available in annual reports of the comparable companies, the PLIs of the final 21 comparable companies computed before interest, tax, R&D expenses and marketing expenses, are as under: S. No. Name of the Company Total Income for FY 16-17 Total OR Total OC Total OP Wt. Avg (Rs Cr) for 3 Yrs For 3 Yrs for 3 Yrs OP/OR (%) (Rs. Cr) (Rs. Cr) (Rs. Cr) 1 R P G Life Sciences Ltd. 306.81 844.17 809.45 34.72 4.11% 2 Bharat Parenterals Ltd. 122.14 390.20 363.36 26.84 6.88% 3 Kopran Ltd. 181.66 703.97 647.10 56.87 8.08% 4 Celon Laboratories Pvt. Ltd. 107.38 254.07 2....
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....actions (SDT), the TPO has considered the following financials:- Description Unit VA, Jadcherla Unit IV, Baddi Amount (Rs Crore) Percentage of total purchases Amount (Rs. Crore) Percentage of total SDT Purchases 31.28 11.28% 113.76 40.42% Other purchases 246.14 88.72% 167.69 59.58% Total Purchases 277.42 100% 281.45 100% The TPO made transfer pricing adjustment under TNMM at the enterprise (unit/undertaking) level of the appellant company, without considering the above fact that all purchases of the eligible units were not made from associated enterprises. As can be seen from above, the SDT purchases constituted only about 11.28% in Unit VA, Jadcherla and 40.42% in Unit IV, Baddi. So, at best only 11.28% and 40.42% of the operating profit of the respective units can be attributed to raw material acquired from appellant's associated units / enterprises. However, the TPO has calculated the operating profit on the entire sales of the appellant's eligible units, which is incorrect, when it is admitted position that only 11.28% and 40.42% per cent of raw material has been acquired by the appellant from it....
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....n from the international transaction with the A.E. has to be seen in relation to the uncontrolled transaction with the independent parties. What is to be compared is the international transactions of the assessee with its related parties and not for its entire transaction with non-related parties also. Therefore, ALP has to be seen only with regard to international transaction with A.Bs and not on the entire turnover / sales. We, thus, agree with the contentions of the learned Sr. Counsel that bench marking should be done only on A.E. transactions and not for the entire turnover." The Department has filed against the said decision of ITAT, Mumbai in High Court. While adjudicating the same appeal, the Bombay High Court in the case of CIT Vs. Hindustan Unilever Ltd (ITA No. 1873 of 2013 Dated 26.07.2016) also supported the said view of ITAT. Even the matter is now res integra as SLP filed by the Department in the case of CIT Vs. Hindustan Unilever Ltd. (SLP(C) No. 22381 of 2017 Dated 29.10.2018), against the said decision of Bombay High Court was dismissed by the Hon'ble Supreme Court. In view of the above Supreme Court Decision, the Arm's length price of sp....
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....omparable companies with the taxpayer, so that comparison of profitability is proper. The decision of the CIT(A) is not acceptable for the following reason that Section 10AA clearly mandates the 'profits and gains derived from the export of such article or thing'. Since these expenses were not included in the Profit & Loss Account of these units for the purpose of working of 'profits and gains derived from the export of such article or things it is clear that none of these expenses are attributable to these units. Had it been the case that these expenses are attributable for these eligible units claiming deduction u/s. 10AA, then the assessee should have included these expenses also in the respective P & L Account and claims the balancing figure only as deduction. Hence, there is no need for exclusion of these expenses from the comparable companies for working of PLI. It is further submitted that at the entity level there are R&D and Marketing expenses in the case of taxpayer company as well as comparable companies. Further, as discussed in preceding para, no such expenses are attributable to the eligible units of the taxpayer as the taxpayer has maint....
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.... assessee before CIT(A) is also clear from pages 130 to 134 of the order of Ld. CIT(A). It is also very pertinent to mention here that neither the assessee nor the Ld. CIT(A) allocated any R&D and Marketing expenses to eligible units of the assessee. Further, what is benchmarked under transfer pricing is profitability results of the undertakings or units as submitted by the assessee for the eligible units based on audited financials of these undertakings. The TPO considered the unit level PLI for the two units of the assessee company as under:- Sl. No Description Unit V A, Jadcherla Unit IV, Baddi 1 Operating Revenues 420 385.21 2 Operating Cost 326.93 267.75 3 Operating Profit 93.07 117.46 4 Margin (OP/OR) 22.16% 30.49% The above financials are based on audited financial statements submitted for the above two units. However, it was brought to the notice of the Ld. CIT(A) that the following expenditure is not allocated by the assessee to these units, while preparing the financial statements of these units:- i) R&D Expenditure - Rs. 80.37 cr ii) Head Office & Marketing Office Expenses - R....
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.... activities are substantial and have an impact on net profit margin of the comparable companies. In the case of assessee, the above R&D expenses and Head Office & Marketing Expenses contribute around 1.2% and 1.85% respectively of assessee's turnover of Rs 6,567 Crores at the entity level. As these expenses have material impact on margins of the comparable companies as well and in view of Rule 10B(1)(e), which says that the net profit margin arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market. Thus, the Ld. CIT(A) has correctly recomputed the margins of the comparable companies after excluding R&D Expenses and Marketing expenses as these differences between the eligible unit of the assessee company and comparable companies materially effecting the net profit margin of the comparable companies. It is once again reiterated that the Ld. CIT(A) neither disturbed or reconstituted the profit margin d....
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....arms length. The learned TPO mentioned the case of the assessee at page 55 as under : Name of the Associated enterprise Nature of Specified Domestic Transactions Method selected Hetero Labs limited (Tested Party) Comparable Data Transfer Price (INR) Rate/ Margin Type of comparable data Arm's Length price/Margin Difference between transfer price and ALP Goods held for the purpose of any other business carried on by Hetero are transferred to the eligible business Purchase of raw materials CUP Method/TNMM 647,13,78,934 TNMM OP/OR 24.10% Indian companies engaged in providing similar business TNMM OP/OR 24.90% NA Goods held for the purpose of the eligible business are transferred to any other business carried on by Hetero Sale of materials CUP Method/TNMM 894,06,98,331 TNMM OP/OR 24.10% Indian companies engaged in providing similar business TNMM OP/OR 24.90% NA 15.8 The TPO was not satisfied with the submissions of the assessee and asked the assessee to furnish segmental accounts of the exempt and non-exempt units in respect of the following 4 eligible units at page 57 of the TPO order. Sr. No. Name o....
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....8.23 122.14 4 Lee Pharma Ltd. 5647 5135 512 9.07 205.07 5 Cadila Pharmaceuticals Ltd. * * 46273 42029 4244 9.17 1604.07 6 Bajaj Healthcare Ltd. 6768 6058 710 10.48 230.67 7 Mangalam Drugs & Organics Ltd. 8415 7473 941 11.19 312.67 8 Celon Laboratories Pvt. Ltd. 2626 2329 297 11.31 107.38 9 Kopran Ltd. 7448 6571 877 11.77 181.66 10 Indoco Remedies Ltd. 30183 26339 3844 12.74 1094.06 11 Lincoln Pharmaceuticals Ltd. 8701 7591 1110 12.76 308.06 12 Cipla Ltd. 339890 287315 52575 15.47 10637.08 13 Granules India Ltd. 40005 33709 .6296 15.74 1374.16 14 Shree Ganesh Remedies Ltd. 539 454 85 15.86 20.00 15 VasudhaPharmaChem Ltd. 16417 13678 2739 16.68 601.77 16 Malladi Drugs 86 Pharmaceuticals Ltd. 8997 7437 ;1560 17.34 330.80 17 Micro Labs Ltd. 81643 66981 14662 17.96 2598.76 18 Centaur Pharmaceuticals Pvt. Ltd. 15832 12913 ' 2919 18.44 ....
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.... 2. Further, with regard to the Baddi Unit IV, the taxpayer has furnished some sample copies of invoices for the products evidencing the prices charged by other business of the company to Baddi Unit and the prices charged to the third parties and claimed that the products are sold by the other businesses of the company to third parties during the year are at similar or nearest prices (considering the volumes). The taxpayer requested to consider CUP method for benchmarking the transactions with Baddi Unit." 16.5 However, the TPO was not agreeing with the objections raised by the assessee and the TPO rejected the objections of the assessee and proposed the addition of Rs. 164.56 crore under section 92 CA(3) of the Act in respect to specified domestic transaction. 16.5.1 Feeling aggrieved, the assessee preferred the appeal before the ld.CIT(A). The ld.CIT(A) at page 191 of his order had mentioned the list of filters applied and the list of final set of comparable by the TPO, which are reproduced above. The ld.CIT(A) noted that 17 comparable companies out of 19 comparable companies qualified the turnover filter were greater than Rs. 100 crore and two companies namely, Medico Re....
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.... 246.14 88.72% 167.69 59.58% Total Purchases 277.42 100% 281.45 100% The TPO made transfer pricing adjustment under TNMM at the enterprise (unit/undertaking) level of the appellant company, without considering the above fact that all purchases of the eligible units were not made from associated enterprises. As can be seen from above, the SDT purchases constituted only about 11.28% in Unit VA, Jadcherla and 40.42% in Unit IV, Baddi. So, at best only 11.28% and 40.42% of the operating profit of the respective units can be attributed to raw material acquired from appellant's associated units / enterprises. However, the TPO has cakulated the operating profit on the entire sales of the appellant's eligible units, which is incorrect, when it is admitted position that only 11.28% and 40.42% per cent of raw material has been acquired by the appellant from its associate concerns / units for the purpose of manufacturing items. Further, whenever TNMM is to be applied at entity level or enterprise (unit) level, the arm's length price (ALP) of international transactions or specified domestic tiansactions needs to be determined proportionat....
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.... 16.10 The ld.CIT(A) had determined the ALP of the 21 companies at 17.87% (OP/OR%) instead of 12.74% as calculated by the TPO, after excluding interest, tax, R & D expenditure, Head Office and Marketing Office Expenses without affording any opportunity to the Assessing Officer/TPO and the without confronting the annual report of the comparable, which is in violation of Rule 46A of the Income Tax Act. 16.11 In our view, the grievance of the Revenue before us is that the ld.CIT(A) while excluding R & D expenses, Head Office and Marketing Office Expenses had not given the opportunity to the AO while computing the margins of the comparables after excluding the R & D expenditure, Head Office and Marketing Office Expenses. In our view, the law requires the ld.CIT(A) to grant the opportunity to the Assessing Officer/TPO before making any adjustment on account of excluding R & D expenses, Head Office and Marketing Office Expenses in the financials of the comparable. The ld.CIT(A), has not done the same and has thus violated the principle of natural justice under 46A of I.T. Rules. 16.12 In the light of the above we deem it appropriate to remand back the entire issue of TP adjustment....