TaxTMI 
TaxTMI 
2025 (8) TMI 1799
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.... of the case. 2. Transfer Pricing grounds - adjustments to arm's length price. 2.1 The Dispute Resolution Panel /the Transfer Pricing Officer (hereinafter referred to as the DRP / the TPO) erred in making adjustments to the value of international transactions without any further examination of the facts and submissions made by the Appellant. Adjustment to the margins: 2.2 The Final Assessment order read with the Transfer Pricing order passed in pursuance of directions issued by the Dispute Resolution Panel (DRP) - 1, is erroneous in so far as determining and quantifying an adjustment of Rs. 3,99,45,682/- to the value of international transaction relating to the margin. Adjustment for Basic Customs Duty: 2.3 The AO/TPO/DRP erred in not allowing customs duty adjustment. 2.4 The AO/TPO/DRP erred in not appreciating that the percentage of imported goods consumed by the Appellant is 52.18% as against 47.22% by comparable companies and as such differential adjustment for basic customs duty ought to be granted. 2.5 The AO/TPO/DRP ought to have appreciated that the non-cenvatable portion of BCD is an additional cos....
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....cing adjustment 2.16 The AO/TPO/DRP erred by considering incorrect range of the comparable companies and consequently making an adjustment without appreciating that the operating margins of the Appellant were within the range of comparable companies proposed by the TPO. TP adjustment: Interest on Outstanding receivables: 2.17 The directions of the Dispute Resolution Panel (DRP) - 1, and the consequential final assessment order is erroneous in so far as determining and quantifying an upward adjustment to the value of international transaction relating to interest on outstanding receivables. 2.18 The AO/TPO/DRP erred in facts and in law by holding that the delay in realization of receivables from AEs as an international transaction ignoring the fact that the same is not explicitly recognized as an international transaction in terms of section 92B of the Act. 2.19 The AO/TPO/DRP failed to take cognizance of the guidance note issued by The Institute of Chartered Accountants of India (ICAI) on Report under Section 92E of the Income-tax Act, 1961 (Transfer Pricing) in respect of the disclosure of the international transactions in the Accountan....
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.... the above grounds, he AO/TPO/DRP has erred in law and on facts in using the SBI short term deposit rates as against using the LIBOR rates for computing notional interest on outstanding receivables. 2.30 The AO/TPO/DRP failed to appreciate that if the AE had availed any loan in its jurisdiction, the opportunity cost of interest for the AE would have been EURIBOR/LIBOR in the respective country and therefore the interest ought to have been computed on outstanding loan on LIBOR rates. Incorrect Benchmarking of Interest Paid on ECB 2.31 The AO/TPO/DRP failed to appreciate the fact that with respect to the Interest rate adopted, the Appellant had relied upon the exchange control regulations (RBI ECB guidelines) prevalent at the time of receipt of loan. 2.32 The AO/TPO/DRP erred in concluding that the RBI Master directions on External Commercial Borrowings, Trade Credits and Structured Obligations was not applicable to the Appellant. 2.33 The AO/TPO/DRP erred in ignoring the terms of the ECB loan agreement of the Appellant from which it is evident that the loan obtained by the Appellant for the purpose of purchase of capital goods and expansi....
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....ered for the purpose of working of profit margin of the assessee. In this regard, the Ld. AR submitted that the assessee is seeking an appropriate adjustment to its margin on account of higher basic customs duty paid by the assessee due to its greater dependency on imported raw materials. It was submitted that the import consumption to total consumption in the case of the assessee was 52.18%, whereas the average import consumption in the case of comparable companies stood at 47.22%. The Ld. AR submitted that the assessee could not fully localise its purchases and was compelled to import a substantial portion of its raw materials, incurring Rs.16,42,64,453/- towards basic customs duty. Since the non-cenvatable portion of the duty could not be passed on to customers due to the nature of the industry being highly competitive, the duty burden remained loaded in the assessee's cost base, thereby impacting its margins. It was submitted that comparable companies, which sourced materials largely from domestic suppliers, were not similarly impacted, and hence, in the interest of fair comparability, the assessee should be granted an adjustment limited to the non- cenvatable portion of....
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....ture in its own case vis-a-vis the comparables and has merely made a ground in this respect, it is also our opinion that this industry is significantly dependent on imports and the assessee's is not a singular case. Hence, we do not find any merit in this plea of the assessee. Ground rejected." 8.1 We have also gone through the page no. 232 of the paper book, where the assessee had provided a computation of customs duty adjustment, which is to the following effect : Computation of customs duty adjustment Particulars Amount (in INR) Total imports consumption during the year A 2,024,597,526 Total Consumption during the year B 3,880,066,787 Customs Duty of Doowon India C 164,264,453 Consumption ratio of Tested party D 52.18% Consumption ratio of Comparable companies E 47.22% Difference in customs duty between tested party and F = D - E 4.96% Comparables Customs duty of Doowon India based on total consumption G = C/B*A 314,806,790 Customs duty adjustment H = G*F 15,625,485 Workings: FY 2020-21 Name of the company Imports Consumption Total Consu....
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....ences in working capital levels between the assessee and its comparables. It was submitted that the WCA was calculated by the assessee in accordance with the OECD guidelines, using average opening and closing balances of working capitals. The Ld. AR contended that the adjustment methodology was well accepted in international transfer pricing standards and had also been followed by various benches of the Tribunal. In particular, reliance was placed on the decision of the coordinate bench of Tribunal in the case of Doowon Automotive Systems India Pvt. Ltd. Vs. DCIT and ACIT Vs. Doowon Electronics India Pvt.(supra), wherein a similar adjustment was allowed. The Ld. AR submitted that non-grant of WCA leads to an incorrect arm's length margin and is contrary to the principle of comparability under Rule 10B(1)(e)(iii) of the Income Tax Rules, 1962 ("the Rules"). 10. Per contra, the Ld. DR relied on the findings of the Ld. AO/TPO, and submitted that working capital differences could not be accurately measured, as the financial statements of comparables only disclose year-end balances of working capitals, and do not reflect their movement or average levels during the year. The Ld. D....
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.... TPO to examine the issue and consider working capital adjustment. Whereas, the Ld. TPO observed that the assessee company is actually buying the parts from the AE and working capital adjustment to be allowed if the assessee demonstrates with AE of allowing the credit period to the assessee and DRP confirm the action of the TPO and the Ld. AR demonstrated the Arithmetic Mean of 4.58% of seven comparables selected at Page 41 of paper book and referred to the working capital adjustment PLR of 12.26% with the comparables current assets being sundry creditors, sundry debtors and inventories at Page 42 and supported working capital adjustment of comparables company based on the financial statements. The Ld. DR relied on the order of TPO and prayed for no adjustment is required. Considering the facts and material on record the financial statements and the paper book, there is necessity for working capital adjustment and accordingly we remit the issue to the file of AO to consider the material for fresh consideration." 5.3 By giving effect to the order of the ITAT, vide order dated 28.10.2018-, the TPO had examined and allowed the benefit of working capital adjustment. Thus, resp....
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....2(3) of the Act. 12.1 The Ld. AR further submitted that the approach of the Ld. DRP is flawed. The factual finding that the assessee has not paid any interest on trade payables, which far exceed the receivables, must be given due consideration. If no interest is paid on significant outstanding payables, then charging interest on relatively small receivables is not warranted. It distorts the true arm's length nature of the transactions. The Ld. AR placed reliance on the decision of this Tribunal in the case of Shakti Hormann Pvt. Ltd. vs. ACIT in ITA No. 451/Hyd/2022, wherein at para nos. 20 to 22, this Tribunal, after considering similar facts, directed the Ld. TPO to delete the adjustment made on account of interest on trade receivables where interest-free payables to the AEs were found to be substantially higher than the receivables. Based on these submissions and the judicial precedent, the Ld. AR prayed for deletion of the adjustment made on account of interest on trade receivables. 13. Per contra, the Ld. DR opposed the submissions of the Ld. AR and supported the orders of the Ld. AO/TPO. It was contended that trade receivables and trade payables are distinct interna....
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....ayables to the AEs, which are more than the receivables from the AEs, then the adjustment made on this account is uncalled for. At the outset, we note that for the A.Y.2014-15, this Tribunal, in assessee's own case, vide order dated 07.05.2021 (supra) considered an identical issue in para 6 as under : "6. We have heard the rival submissions and carefully perused the materials on record, and we find merit in the arguments advanced by the Ld. AR. Since, the transactions are cross-border, it would be appropriate to adopt LIBOR rate of interest while computing the notional interest on receivables from the AEs. This Bench of the Tribunal has held so on various earlier occasions with respect to the same issue. Further, it will also be appropriate for netting off the notional interest with respect to the debit and credit transaction with the assessee's AEs because when notional interest is charged on receivables the same should also be charged on payables. Therefore, in the case of the assessee we hereby hold that LIBOR rate of interest shall be adopted while computing the notional interest on receivables and payables for the transaction with AEs. Further, on considering ....
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.....9 of the Ld. TPO's order, where the Ld. TPO, despite accepting that the loan was taken for purchase of capital goods and expansion of facilities, erroneously concluded that the loan was for working capital purposes and accordingly applied LIBOR + 200 bps for benchmarking the interest. Hence, the Ld. AR submitted that the said conclusion is factually incorrect and contrary to the evidences on record. The interest rate of 4.60% is consistent with the rate allowed under RBI guidelines applicable to ECBs for capital expansion. In support, the Ld. AR relied on the decisions of this Tribunal in the case of Shakti Hormann Pvt. Ltd. vs. ACIT (Supra) and Devgen Seeds & Crop Technology Pvt. Ltd. vs. DCIT - ITA No. 399/Hyd/2016, wherein, under the similar issue, this Tribunal has held the issue in favour of the assessee. Accordingly, the Ld. AR submitted that the adjustment made by the Ld. TPO on incorrect factual assumptions must be deleted. 16. Per contra, the Ld. DR supported the order of the Ld. AO/TPO and submitted that the Ld. TPO had considered the overall facts and correctly applied LIBOR + 200 bps for benchmarking. The Ld. DR invited our attention to page 8 of the Ld. TPO'....