TaxTMI 
TaxTMI 
2024 (7) TMI 430
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....t of INR 29,97,66,387 to the total income of the Appellant in respect of 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/ ....
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.... circumstances of the case, the learned TPO/ AO / Hon'ble DRP have erred in excluding Cosmic Global Limited, Cyfuture India Private 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 ....
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.... 1.1 The Appellant, primarily a captive service provider to its Associated Enterprises (' AEs'), also provided certain services to third- party clients. The revenue earned by the Appellant was a minuscule portion of the total 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 det....
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....tan Unilever Ltd [72 taxmann.com 325J. The Special Leave Petition has been dismissed by the Supreme Court [S.L.P No 28540/2018] 1.7 It is submitted that the courts have accepted the exclusion of income earned from third parties and the expenses incurred for services rendered to third parties on a proportionate basis. The Appellant 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 ....
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....ubmission made by the Appellant's Counsel. Further, it accepted that the Learned TPO failed to follow the directions of the DRP and requested that the computation provided by the Appellant only be set aside to verify the calculation. 1.10 In view of the above, the revised operating margin of 16.77% is well within the arm's length range of 16.06% to 24.03% with 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 ....
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....ansfer pricing adjustment on account of the interest on outstanding receivables. The Hon'ble Tribunal after considering the learned DR's argument on the amendment in Section 92B held as under:- "5.6. The learned DR, on the other hand, referred to Explanation (i)(c) of section 92B and submitted that transaction in dispute has been brought in ambit of International transaction by the Parliament of India w.ej01.04.2002 and, thus, there 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 Tribu....
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....s outstanding service charges receivables and as seen from the order of TPO, the outstanding is only from 31-07-2009. There seems to be no such delay in earlier months. Assessee has no interest liability at all so notional interest cannot be brought to tax under the provisions of TP. As rightly pointed out by the Ld. Counsel, the outstanding receivables on account of services cannot be equated with capital financing as provided for in the Explanation by the amendment by 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 out....
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....pective applicability of the amendment to explanation (i)(c) of Section 92B introduced by the Finance Act, 2012, citing the following judicial precedents to support his position: * Apache Footwear India (p.) Ltd. vs ACIT [2023] 148 taxmann.com 371 [Hyd-Trib.] In this ruling, the Hon'ble Tribunal confirmed the retrospective application of the amendment that introduced the Explanation to Section 92B of the Act by the Finance Act, 2012. It was determined that the amendment applies to delays in the realization of trade debts 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....
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....ssions, and in line with the directions, the written submissions are filed with the request to take it on record. It is also brought to the notice of the Hon'ble Bench that the submission filed by the assessee's counsel has been received in the office of the undersigned on 01.05.2024. Issue no. 1: Adjudication of ground of appeal no. 6 before DRP During the course of hearing, the Id. Counsel of the assessee has referred to the GoA no.6, taken before the DRP and stated that the AO has not followed the directions of the Ld. DRP. For ready reference, the GoA, No.6 and the DRP directions are reproduced below for ready reference. 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 t....
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....bmitted that the Hon'ble Tribunal in that case did not consider the amendment in section 92B by Finance Act 2012 inserted with retrospective effect from 01.04.2002. (3) In fact, in the subsequent case of Bechtel India Pvt. Ltd. vs. ACIT 4(2), 85 taxmann.com 121 (Delhi Tribunal 2017) for A.Y.2009-10, the Hon'ble Delhi Tribunal has after considering the amendment to section 92B with regard to notional interest on receivables has a clearly considered this issue i.e. whether interest could be attributable to debt free company or not and clearly held that interest is required to be computed separately for late realization of receivables and it has nothing to do with the debt free funds of the company. Being very pertinent, the relevant extract of 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 p....
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....d, therefore, requires separate benchmarking. It has nothing to do with the operations of the assessee company being with the debt free funds only. It is also submitted that in the above noted case of Bechtel India Pvt. Ltd, the Hon'ble Tribunal has arrived at the decision after analyzing the decision of the Hon'ble ITAT in the case of Kusurn Healthcare Pvt. Ltd. Vs (ITA 6814IDeV2014), ITAT, Delhi and also the decisions of the Hon'ble ITAT in the case of Ameriprise India Pvt. Ltd.(2015) 62 Taxmann.com 237 (Delhi Tribunal) and Mckinsey Knwledge Centre Pvt. Ltd. vs DCIT (2017) 77 taxmann.com 164 (Delhi Tribunal). (4) Thus it is respectfully submitted that the decision cited by the Ld. Counsel of Bechtel India is not applicable in the case as in that case the amendment 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 consi....
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....w 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 Betchel India (P.) 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 vide order dt.16-5-2017 in the case of Bechtel India (P.) Ltd. v. Asstt. CIT [2017} 85 taxmann.com 121 (Delhi - Trib.) 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 f....
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....of the Act has been introduced in the statute by the Finance Act 2012. (7) Reliance was also placed on the recent decision of Hon'ble Tribunal in the case of Iomedia India Pvt. Ltd. vs. ACIT, Circel-12(3), ITA no. 99S/DelJ2021 for A.Y. 2016-17 (copy of the order submitted during hearing), to emphasis on the remarks in the decision by Hon'ble Tribunal that interest is now charged on outstanding receivables by various tribunals across the country. For ready reference, operative part of the decision is reproduced below:- 6. This definition of" Eligible International Transaction" in Rule 1 OTC is for the purpose of applicability of Safe Harbour Rules only. Hence the international transaction of interest on outstanding receivables does not figure in any of the clauses (i) to (x) in the aforesaid list. Hence the assessee would not be able to get the 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 LIB....
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....rder for A.Y. 2017-18 has taken a contrary view and has restored the matter to the AO. Being pertinent, the operative part of the decision is reproduced below:- 39. Though we are conscious of the fact that in assessment year 2017-18, the co-ordinate Bench has decided the issue in favour of the assessee, however, we are of the view that in the impugned assessment year, the issue has not been examined in the context of principles laid down by the Hon 'ble jurisdictional High Court in case of Kusum Healthcare Pvt. Ltd. (supra). However, in all fairness, it must be said that there is delay in trade payable to AEs. Therefore, some benefit on account of delayed payables must have percolated to the assessee. Thus, it needs to be examined whether and to what extent the benefit received by the assessee on account of trade payables can be set off against the purported benefit given to the AEs on account of trade receivables. 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 i....