TaxTMI 
TaxTMI 
2026 (7) TMI 685
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.... of this case in different from the facts in the case of Bechtel India Private Limited vs DCIT where the issue was interest on receivable and not working capital adjustment. 2. Whether the Hon'ble CIT(A) was justified in directing the TPO to verify if assessee is debt Free company and therefore, setting aside the issue to TPO which is not working capital adjustment. 3. Whether the Hon'ble CIT(A) was justified in holding that interest u/s 234D of the Income Tax Act, 1961 is not applicable in present case considering the Explanation 2 to section 234 D of the Income Tax Act, 1961. 4. Whether the Hon'ble CIT(A) was justified in deleting interest u/s 234B of the IT Act, 1961." 3. With regard to above grounds of appeal, the relevant facts are, the assessee filed its return of income declaring income of Rs. 357,02,246/- on 30.10.2002 along with audit report in Form 3CD. The return was processed under section 143(1) of the Income-tax Act, 1961 (for short 'the Act') on 28.03.2003. The case was selected for scrutiny and accordingly, notices u/s 143(2) and 142(1) of the Act were issued and served on the assessee. In response, ld. AR of the assessee attend....
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.... Since the invoices were raised upon the assessee, any contractual obligation, deduction of TDS, making timely payment etc. were borne by the assessee. The payment was first made by the assessee and then realized from the AE i.e. assessee's substantial funds were deployed for making such payment. He observed that assessee has recovered these payments from its AEs after substantial delays i.e. after 537 days. This fact is evident from the fact that closing balance of sundry debtors was Rs. 115 crores as against total consultancy fees of Rs. 46.33 crores. After analyzing the Balance Sheet of the assessee, he observed that the opening and closing of sundry debtors for the year under consideration is Rs. 110.13 crores and Rs. 115.7 crores respectively as against the total consultancy fees of Rs. 46.33 crores during the year. During the course of proceedings, assessee was asked to explain why it has allowed long interest free credits to its group companies. In response, assessee submitted as under :- "Reasons for not charging interest from Associated Enterprises As per the arrangement between CCI and the Associated Enterprises, CCI incurs expenses and charges them back....
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....ed by the tested party, relative to comparable companies. * Next discounting the above difference by an interest rate to derive a figure representing the implicit interest benefit/expense borne by comparable, due to different net working capital requirement. The Prime Lending Rate (PLR) for the financial year 2001-02 for major Banks was around 11.00 - 12.00% (source; CMIE Monthly review of Indian Economy, May 2002: Therefore, on a conservative basis a PLR of 11 % has been considered for carrying out the working capital adjustment. The formula for computing the adjustment to the operating profits of comparables companies is given below: Adjustment to Profit of Comparable Companies = PLR x {Net Working Capital of comparable Companies - [(Sales of Comparable Companies/360) x Holding in days of tested party]} * The operating profits of the comparable companies are increased/decreased by the amount of adjustment computed above and finally Operating Profit/Total Cost margin of the comparable companies is computed on the basis of such adjusted operating profit. 10. And he proceeded to make following adjustment to the comparable companies and finally proceeded....
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.... Aggrieved with the above order, assessee preferred an appeal before the ld. CIT (A)-44, New Delhi. With regard to the grounds raised by the Revenue, assessee has submitted chart showing issue of working capital adjustment as under :- * Working capital adjustment not warranted in the instant case. The Learned TPO has alleged that since the amount of reimbursement was locked up in sundry debtors and interest needs to be imputed on this amount. The Learned TPO has alleged that the funds of the Appellant is getting blocked as there is a gap 537 days from the day 0/ rendering the service and the day of receipt of payments against such services and therefore, proposed a working capital adjustment while computing the arm's length price of the Appellant. In this regard. we wish to submit as follows: * All working capital needs of the Appellant are met by the Head Office and therefore, the appellant is not required to borrow funds from outside parties/banks. Accordingly, there is no opportunity cost to the appellant on account of extended credit to the AEs and therefore, the need for a working capital adjustment does not arise. In support of....
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....g capital adjustment where an Indian company is taken as the tested party in cases where the tested party is a branch of a foreign company, the opportunity cost of holding working capital is not the PLR. As per the regulations in place during the year ended March 31, 2002, a branch/office in India of foreign firm/company may keep funds, which are rendered surplus temporarily, in term deposits with a maturity not exceeding three months. The Rate of Interest for these term deposits the financial year 2001-02 was around 5.5 percent. Accordingly, the revised working capital adjustment is enclosed as Annexure - 2 for your Honour's kind reference." 12. After considering the above submissions, ld. CIT (A) held as under :- "17.7 The appellant has submitted that as per the agreement under the Mutual Agreement Procedure for the year under reference, it had been held that income should be computed under normal provisions of the Act after deducting the expenses incurred and hence the above ground had been withdrawn vide letter dated 12.11.2009. 17.8 For statistical purpose, the Grounds of Appeal No. 10 & 19 are dismissed as the said grounds have been withdrawn by the appel....
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....sfer pricing documentation as evident from Annexure 6 of the said document. The TPO has given a categorical finding regarding the same at para 9.5 of his impugned order. Hence, no grievance has been caused to the appellant. In view of the above, Grounds of Appeal No.11 to 14 are dismissed. Ground No. 15 17.12 Ground No.15 pertains to the contention of the appellant that the AO had erred in including reimbursement of expenses to the cost base for the purpose of charging markup. The main contention of the appellant is that the payments made for salary paid to its employees, staff welfare expenses, moving and relocation of employees and service charges for the use of assets i.e. depreciation were charged back to the Indian group companies as service fees with a markup of 5% as agreed between the parties and as approved by the RBI. The appellant has stated that this is done because this is in view of the fact that the appellant provided services exclusively to its Indian group companies. 17.13 It has further been stated that during the course of providing business support services it had incurred some third party expenditure through "brought out" resources wh....
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....nses to AEs - TNMM was used and the value of the transaction was Rs. 2,239,503/-; (c) Reimbursement of expenses from AEs - CUP method was applied and the value of transaction was Rs. 138,837/-. 5. During the AY in consideration, the Assessee received from its AEs Rs. 13,67,95,7241- as "cost recharge on account of spare capacity ". The Assessee did not route this amount to its profit and loss account as it was only a reimbursement. The stand of the TPO, on the other hand, was that the Assessee had not placed any evidence in support of the claim that the expenditure was towards maintenance of spare capacity at the instance of the AEs. The Dispute Resolution Panel ("DRP") held that the ALP of the receipts from the AEs should include all the costs and that the Assessee did not give sufficient reasons for excluding certain costs for the purposes of computing the ALP. 6. An application for rectification was moved by the Assessee before the DRP under Section 154 of the Act but pending the said application, a draft assessment order was passed by the AO consistent with the decision of the DRP. The Assessee filed an appeal before the ITAT. The controversy before th....
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....me Tax-I v. Cushman and Wakefield (India) (P.) Ltd. (2014) 367 ITR 730 (Del) where, in similar circumstances, this Court had agreed with the Revenue and remanded the matter to the TPO for re-determination of the transfer pricing adjustment. 11. This Court has examined carefully the aforementioned decision in Commissioner of Income Tax-I v. Cushman and Wakefield (India) (P.) Ltd. (supra). The Court finds, to begin with, that the said case was an instance of reimbursement by the Indian entity i.e., the Assessee of the costs incurred by the AE whereas the situation in the present case is the converse. Secondly, and more importantly, in the said case there was no categorisation of the reimbursement costs as cost of infrastructure and cost of services on which there was a mark-up. Ultimately, each case will have to turn on the peculiar facts considering the clauses of the agreement and the arrangement between the Indian entity and its AE. There can be no parallels drawn "where the terms of the agreement would by themselves be different. 12. In the present case, as is evident from the passage extracted hereinbefore from the impugned order of the ITAT, after the examinat....
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....t of Rs. 29,99,08,330 is being considered as part of the total cost for the purpose of transfer pricing analysis and computation of arm's length price". As the appellant itself has considered such reimbursement as part of its total cost in its transfer pricing documentation, hence, the contention of the appellant that such reimbursements should not form part of the total cost while calculating the arm's length price, is not accepted. The contention of the appellant is dismissed. 17.17 The appellant has further stated that working capital adjustment was not warranted in its case. The TPO, in his impugned report, had held that the closing balance of Sundry Debtors was approximately 537 days of average daily receipts of the assessee during the year. The TPO held that the appellant was realizing its fee after a gap of 537 days. In view of the same, the TPO pointed out that substantial money was locked up in Sundry Debtors which in this case were associated enterprises and hence, the working capital requirement had increased by a corresponding amount. It was also pointed out that the entire amount of Sundry Debtors appearing in the balance sheet was due from group companies....
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....d the Hon'ble Supreme Court referred to above, the AO/TPO is directed to delete transfer pricing adjustment after verifying that the appellant is a debt free company on the basis of the Audit Report of the appellant,. The contention of the appellant is accordingly dispose. 13. Aggrieved with the above order, Revenue is in appeal before us. 14. At the time of hearing, ld. DR of the Revenue brought to our notice detailed findings of the TPO and findings of the ld. CIT (A). He submitted that assessee is getting reimbursement from its head office as well as from its AEs. There is no change in terms of payment with its Head Office as well as AEs. He submitted that assessee has not charged any interest for such delay in settlement towards payment for services. Invariably, the delay is more than 530 days. In this regard, he relied on the decision of coordinate Bench in the case of Bechtel India (P.) Ltd. vs. ACIT (2017) 85 taxmann.com 121 (Delhi-Trib.). 15. Further he brought to our notice page 7 of the TP order and the relevant detailed findings. Further he brought to our notice page 49 of the paper book which is the TP analysis submitted by the assessee as per which assesse....
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....nditures on behalf of the AEs. The above expenses include expenses incurred by it and charges markup of 5% on the above reimbursement of expenses and third party expenses which are reimbursed, are not marked up. The issue under consideration is the assessee recovers the above reimbursement with abnormal delay like with the delay of about 530 days. The Ld TPO was of the view that the working capital of the assessee was locked up for such long period and it amounts to foregoing opportunity cost of using such money or could have deployed the same in other productive options and accordingly, he made the TP adjustment by adopting the method of making adjustment to the operating profit of the comparable companies by the formula (as per the discussion at page 11 of the TPO order) and accordingly determined the TP adjustment of average of margin of comparables companies at 21.83%. 21. We observed from the submissions made before us that the assessee had extended the credit period to its own sister concerns and all the working capital requirement are met from the head office and there is no requirement as such to borrow funds from outside the present set up, also there is no cost of capi....