TaxTMI 
TaxTMI 
TaxTMI 
2019 (5) TMI 2040
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....g to provision of SDS during the relevant previous year. Therefore, the case was referred to the TPO u/s 92CA of the Act for determination of Arm's Length Price (ALP) of the transaction. The TPO examined the TP study conducted by the assessee and observed that the assessee has adopted TNM method as the most appropriate method and has short-listed 26 comparables, whose average arithmetic mean was computed at 11.14% as against the PLI of the taxpayer at 15.07%. However, the TPO was not satisfied with the assessee's TP study and observed that the assessee has adopted some different filters which has resulted in selection of inappropriate comparables and rejection of companies that are appropriate comparables. He conducted an independent search and applied certain filters and arrived at certain set of comparables and after allowing working capital adjustment (WCA), the margin of the taxpayer was held to be within + / - 3% of the average margin of the comparables. Hence, he observed that no adjustment is necessary to be proposed with respect to provision of software services. 2.1. Further, from the RPT schedule, the TPO observed that the taxpayer has outstanding receivables of Rs. 29,5....
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.... margin hence there is no need of imputing interest on outstanding receivables again. (iv) Not appreciating the fact that the receivables are consequential / closely linked to the principle transaction of provision of IT services and hence have been aggregated for determination of ALP under TNMM. (v) Without prejudice to the above, not netting off the outstanding payable of Rs. 22,82,50,006/- against outstanding receivables from its AE while determining the interest amount. (b) Without prejudice to the above, not undertaking an objective economic analysis to determine the arm's length price of the outstanding receivables by (i) Not appreciating that the receivables due from overseas AE's are in foreign currency and hence interest, if any, is to be benchmarked with the rates prevalent in the international market for foreign currency loans (i.e. at USD "LIBOR Plus"). (ii) Determining the arm's length credit period as 30 days without any basis and imputing interest on credit period provided for the invoices raised relating to provision of services." 3. The Learned Counsel for the Assessee submitted that as recorded by the TPO, the impact of outstanding receivables on t....
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....lable on record, we find that the assessee has not charged interest on outstanding receivables. We have gone through the intercompany agreement and we do not find any such clause mentioning that only 30 days of credit period is allowed for making payments as recorded by the TPO his order. Therefore, in our opinion, fixing the credit period of 30 days is without any basis. We have gone through the details of outstanding receivables and we find that in certain cases, the period has exceeded to 600 days. In most of the cases, the period was below 100 days. The Hon'ble Delhi High Court in the case of Mckinsey Knowledge Centre India (P.) Ltd (supra) has considered the issue at length and has held that the Explanation to section 92B by Finance Act, 2012 is applicable retrospectively and therefore, the assessee can be visited with the Transfer Pricing adjustment. For the sake of ready reference the relevant paras 32 and 33 of the High Court order are reproduced hereunder: "32. Further, to address the contention of the Assessee that early or late realization of sale/service proceeds is incidental to the transaction of sale/service, and that there can be no question to benchmark the inter....
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....by the assessee before the TPO that it is not an international transaction, turns out to be bereft of any force. ** ** ** 25. The foregoing discussion discloses that non-charging or undercharging of interest on the excess period of credit allowed to the AE for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined." 33. It was similarly held in BT e-Serv (India) (P.) Ltd. v. ITO [2017] 87 taxmann.com 251 (Delhi - Trib.) as follows: "22...The argument that assessee is an interest free entity and does not pay any interest and therefore no interest shall be imputed in the outstanding invoices is also devoid of merit because it is not a case of allowance of interest expenditure in the hands of the assessee but an 'international transaction' to be benchmarked at arm's length. It is a case of determination of arm's length price of a transaction. Undoubtedly the receivable or any other debt arising during the course of the business is included in the definition of 'capital financing' as an 'international transaction' as per explanation 2 to section 92B of t....