TaxTMI 
TaxTMI 
2024 (7) TMI 430
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.... provision of Research and Information ('R&I'), IT support and back office support services (,international transactions') and notional interest on inter- company receivables arising from the impugned international transactions. 3. On the facts and in the circumstances of the case, the learned TPO has incorrectly given effect (in his order dated 29 December 2021) to the directions of Hon'ble DRP by applying such directions proposed in the original transfer pricing order dated 30 January 2021 as against the rectified transfer pricing order dated 1 September 2021 (which was passed by the learned TPO before completion of proceedings before Hon'ble DRP). 4. On the facts and in the circumstances of the case, the learned AO/ TPO/ Hon'ble DRP have erred in passing orders which suffered from computational errors in determination of the Appellant's operating margin and consequently, erred in computing the amount of adjustment to be made in respect of the impugned international transactions. 5. On the facts and in the circumstances of the case, the learned AO / TPO/ Hon'ble DRP have erred in computing the operating margin of the Appellant wherein certain....
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.... Limited and Allsec Technologies Limited in the final set of comparables for benchmarking the impugned international transaction on the basis that it fails the export earning filter of 75% of revenue, even though the said companies are functionally comparable to the Appellant. 12. On the facts and in the circumstances of the case, the learned TPO/ AO / Hon'ble DRP have erred in including Teks Tech Inspection Private Pvt. Ltd., E-Infochips Pvt Ltd, Infobeans Technologies Ltd, Larsen & Turbo Infotech ltd, Tech Mahindra Business Services Ltd, Pagetraffic Web Tech Pvt Ltd and Infosys BPO Ltd in the final set of comparables for benchmarking the impugned international transaction, even though the said companies are functionally not comparable to the Appellant. 13. On the facts and in the circumstances of the case, the learned AO / TPO / Hon'ble DRP have erred in holding inter-company receivables arising from the impugned international transactions provided by the Appellant to its AEs as a separate international transaction under section 92B of the Act. 14. On the facts and in the circumstances of the case, the learned AO / TPO / Hon'ble DRP have erred in not appreciatin....
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....otal revenue generated (i.e. only 2% of revenue). Since the services provided by Appellant to third parties were minuscule, Appellant did not maintain any separate segmental for such revenue generated or cost incurred from third-party clients vis-a-vis its AEs. Finding by the Lower authorities. 1.2 During the proceedings before the Hon'ble Dispute Resolution Panel ('DRP'), the Appellant submitted that the TPO had incorrectly calculated the arm's length price (,ALP') by excluding the third-party revenue without proportionately excluding the expenses related to the services provided to third party while determining the Appellant's operating margin. Consequently, the Appellant urged the computation of adjustments to provide R&I, IT support, and other back- office services to be deleted. The DRP directed the learned TPO to verify the computations and make necessary corrections, as required, after examining the details provided by the Appellant and allowing the Appellant an opportunity to be heard. (Please refer to the objection no. 6 of the DRP directions - Page no. 33 of the Appeal set) 1.3 However, the learned TPO did not give effect to the directions of....
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....llant placed reliance on the Delhi High Court ruling in the case of Keihin Panalfa Ltd, [2016J 70 taxmann.com 328 (Delhi) (Order enclosed as Exhibit 1), wherein the Hon'ble HC held as follows: "12. The contention that the adjustment on account of expenses as determined by the TPO must be attributed entirely to the international transaction is bereft of any merits. During the Financial Year 2003-04 relating to the Assessment Year 2004-05, the Assessee had reported an operating income of Rs. 72,24,22,000/-. The total expenses for the said period amounted to Rs. 68,00,88,000/-. Admittedly, the international transactions in question amounted to Rs. 15,90,66,935/- which were only 23.38% in value of the total expenses. The TPO had determined the PLI (Operating Profit over Total Cost) of comparable cases at 8.29% against 6.22% as declared by the Assessee. Applying the PLI of comparable cases, the adjusted total expenses were computed at Rs. 66,71,17,924/-, thus, indicating an adjustment of Rs. 1,29,70,0761-. As is apparent from the above, the said adjustment related to entire expenses and not just the international transactions alone. Since the international transactions only consti....
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....h a median of 20.05% (determined by the learned TPO in the order giving effect to DRP directions), the transfer pricing adjustment proposed in the case of the Appellant ought to be deleted. 1.11 Therefore, the Appellant prays that the Hon'ble Members consider the revised computations for determining the ALP and, accordingly, delete the transfer pricing adjustment for the provision of R&I, IT support, and other back office services. 1.12 If the above Ground No.6 is allowed, Ground Nos. 7 to 12 on comparables will become academic. 2. Notional Interest on outstanding receivables [Ground No. 15] Finding of the lower authorities 2.1 The learned TPO recharacterized the outstanding receivables as unsecured loans advanced by the Appellant to its AEs and imputed notional interest thereon at the rate of LIBOR plus 400 basis points on inter-company receivables exceeding a credit period of 60 days. Consequently, the learned TPO made an upward adjustment of imputed interest on outstanding inter-company receivables. In doing so, the learned TPO made a one sided adjustment on delayed receivables while at the same time ignoring amounts from the AEs received in advance of 60 days. ....
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....is no dispute as far as the impugned transaction is an International transaction. He further submitted that though advance has been received on many occasions but in case of few transaction delay in receipt of outstanding receivables is more than 60 days and thus the lower authorities has correctly made at adjustment on account of interest on outstanding receivables. 5.7 We have heard the rival submission of the parties and perused the relevant material on record. The Tribunal in the case of Pegasystems Worldwide India (P) Ltd. (supra) has held as in case of a debt free company, there is no requirement for making transfer pricing adjustment on account of the interest on outstanding receivables. The relevant finding of the Tribunal is reproduced as under: "17.2 Ld. Counsel submitted that the issue of charging of interest beyond the period was not adjudicated and DRP reduced the rate of interest from 12% LIBOR plus 2.5 points. It was submitted that Assessee was a debt free company, AE takes care of funding, no interest was charged and there is no liability of interest and therefore, notional interest income cannot be brought to tax. Assessee relied on the principles laid down by ....
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....Finance Act, 2012 retrospectively. Even otherwise, as rightly held by the Logix Micro Systems Ltd v. ACIT [42 SOT 525] (supra), TPO should have allowed some interest free period for receiving the outstanding service charges. While acknowledging the order of the ITAT, TPO did not even bother to exclude the reasonable period and levied interest not only from the date of invoice to the date of realization during the year but also for the period beyond 31-03-2010 in later year. We were informed that no such addition was made in the later year on Assessee's receivables. We are of the opinion that both on the facts of the case and principles of law, there is no need for bringing to tax the notional interest on the outstanding receivables. Accordingly, we allow the grounds 7 & 8 of Assessee and direct AOITPO to delete the said addition made. " 5.8 We have verified the balance sheet of the assessee available on page 134 of the paper book along with notes on page 143 of the paper book and we find that the assessee has not borrowed any fund for its business activity and, thus, it being a debt free company, the ratio of the decision of the Tribunal in the case of Pegasystems Worldwide I....
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....bts resulting from sales of goods or services in the ordinary course of business. * IOMEDIA India Pvt. Ltd vs ACIT (ITA No.995IDeIl2021) The above ruling considers that the entity involved has opted for the Safe Harbour Regime for a period of 5 years. Further, it also considers the definition of Eligible International Transaction" as per Rule 10TC, which pertains to the applicability of Safe Harbour Rules only. Further, the order also addressed the adoption of interest rates. 2.9 Additionally, the learned DR mentioned that the Hon'ble Delhi High Court, in the Appellant's own case for AY 2014-15 [2021] 131 taxmann.com 253 (Delhi), left the question of law open regarding whether transfer pricing adjustment on 'delayed receivables' could apply to a debt- free company. . Rejoinder to DR's arguments: 2.10 As a counterargument, the Appellant Counsel submitted the following arguments: * The above rulings cited by the learned DR do not deal with the issues in Appellant's case. The Appellant's case is squarely covered by Hon'ble SC ruling in the case of Bechtel India Pvt. Ltd (supra) as well as in Appellant's own cases for AY 2014-15 and AY 20....
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....ference. 6. Ground of objection 6: The learned TPO has passed an order under section 92CA (3) of the Act which suffers from computational errors in determination of ALP, and consequently erred in computing the amount of adjustment to be made in respect of the subject transaction. (Kindly refer Annexure7) Directions by DRP: The TPO is directed to verify the computation and to do necessary corrections where ever required after affording an opportunity of being heard to the assessee and examination the details filed by the assessee. The Ld. Counsel stated that the TP I AO has not given effect to the directions of the DRP. Further the Ld counsel also submitted before the Hon'ble Bench calculations/computations with regard to the above noted ground which are enclosed as annexure (A). From the prima facie perusal of the order giving effect (OGE) of the TP / AO, it is seen that, on GoA no. 6, the TPO, OGE is silent about the directions by DRP. Thus on the Hon'ble Bench. Directions, it is submitted that the GoA 6. may please be remitted back to the TPO/ AO for giving effect. Also, the calculations/computations submitted by the Ld counsel also may be remitted to AO for fresh....
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....the Hon'ble Tribunal order is reproduced below:- 19. In the case of Ameriprise India (P.) LId. (supra), it has been observed that the working capital adjustment is in respect of international transaction of rendering services to the AE. Interest for credit period allowed as per the agreement is given in the price charged for rendering of services. Whereas the non-realisation of invoice value beyond the stipulated period is a separate international transaction whose ALP is required to be determined. Granting of working capital adjustment is confined to the international transaction of rendering of services, whose ALP is separately determinable. On the other hand, the international transaction of interest receivable from its AEs for late realization of invoices beyond such stipulated period is a separate international transaction. Allowing working capital adjustment in the international transaction of rendering of services can have no impact on the determination of ALP of the international transaction of interest on receivables from AEs beyond the stipulated period allowed as per agreement. In the case of Mckinsey Knwledge Centre (P.) Ltd. (supra), again, the Tribunal reiterate....
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....nt to section 92B has not been considered. Further the decision of Tribunal in Bechtel India is of 21 st December 2015 and the decision of Hon'ble High Court is also of 21st July 2016. However, the subsequent decision cited supra by department is of 16th may 2017 published in 85taxmann.com 121 (2017) and the issue of notional interest on receivables has been decided by Tribunal after considering everal decisions of Tribunals/ High Courts. (5) Further the issue of interest on receivables on debt free company and the application of decision of Bechtel India (cited by assessee) has also been discussed by various Tribunals and in that context, the Reliance is also placed on the recent decision of the Hon'ble IT AT Hyderabad in the case of Apache Footwear India Pvt. Ltd. v. ACIT (2023) 148 taxmann.com 371 (Hyderabad-Trib.), (copy of the order submitted during hearing) wherein the Hon'ble Tribunal after considering the various decisions including the Hon'ble Delhi High Court decision in the case of Kusum Healthcare Pvt. Ltd. and also Bechtel India Pvt. Ltd. have come to conclusion that outstanding receivables by the assessee from AEs are required to be separately benchm....
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....ecision 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 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 show that the assessee's transactions with it's A.E. were at Arms Length however, nothing has been br....
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.... benefit of ALP adjustment getting subsumed in the mark up of 25% offered under Safe Harbour Rules. However, in consistent with various Tribunal decisions across the country, we hold that adoption of interest calculated on outstanding receivables at the rate 0/ LIBOR + 200 basis points should be adopted as against LIBOR + 400 basis points. This in our considered opinion, would meet the ends of justice for both the sides. Accordingly, the grounds raised by the assessee are partly allowed. C. The assessee has also relied on the decision of Hon 'ble Delhi High Court in the case of Kusum Healthcare. From the perusal of the records, it is seen that though the TPO has mentioned the invoices raised during the year but ha evident from the DRP directions, it is clearly evident that this issue of interest on delayed receivables is recurring issue and additions have been made on notional interest in earlier years also in the case of assessee and accordingly, it clearly reflects a pattern which is spread over several years and it fulfils the condition laid down in Kusum Healthcare decision. Also, it is respectfully submitted that the decision of Kusum Healthcare has been distinguished by....
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....40. In view of the aforesaid, we are inclined to restore the issue to the Assessing Officer for de novo adjudication keeping in view the observations made by us (supra) and applying the ratio laid down by the Hon 'ble jurisdictional High Court in case of Kusum Healthcare Pvt. Ltd. The assessee must be provided reasonable opportunity of being heard before deciding the issue. Ground is allowed for statistical purposes. Thus it is respectfully submitted that in view of the above discussion, the adjustment made by the TPO/ AO on account of notional interest on receivables and duly confirmed by the DRP may please be upheld and assessee's application on this issue may be dismissed." 4. Upon careful consideration, we find that assessee in this case is only pressing for adjudication of Grounds No.6 & 15 on which both parties have given their submissions. 5. As regards Ground No.6 i.e. proportionate adjustment for third-party transactions is concerned, we find that it is undisputed that AO/TPO has not given effect to the directions of the DRP. In such situation, the request of the ld. DR for the Revenue that the matter may be remitted to the AO/TPO cannot be accepted and he cann....