TaxTMI 
TaxTMI 
2026 (8) TMI 1645
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....97/-." 2. Succinctly stated, the assessee company, which was incorporated during the year 2012, is engaged in the business of manufacture and export of instant coffee. During the period relevant to AY 2016-17, the assessee company had commenced commercial production by establishing a spray-dried instant coffee manufacturing facility at Tada, Nellore District, Andhra Pradesh, having an installed capacity of 4,500 MT per annum. The assessee company, which is a subsidiary of a foreign group entity based in Singapore, had during the subject year undertaken various international transactions with its Associated Enterprises ("AEs"), which were reported in its TP Study Report (TPSR) in Form No.3CEB. 3. During the year under consideration, the assessee company, inter alia, entered into the following international transactions: Nature of transaction Amount (Rs.) Sale of instant coffee :Rs.21,64,68,864 Interest on External Commercial Borrowing :Rs. 5,01,27,145 Share application money :Rs. 2,18,25,444 Reimbursement of expenses :Rs. 28,214 4. The AO made a reference under section 92CA(1) of the Act to the Transfer Pricing Officer (for short, "TPO") for de....
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.... that the interest paid at six-month LIBOR plus 500 basis points was within the ceiling prescribed under the RBI Master Circular governing ECB borrowings and was also consistent with comparable third-party borrowings. However, the TPO observed that the RBI guidelines merely prescribed the maximum permissible borrowing cost for foreign exchange regulatory purposes and did not determine the Arm's Length Price (ALP) under Chapter X of the Act. According to him, the transfer pricing adjustment had to be determined independently, and the acceptable arm's length spread was only six months LIBOR plus 200 basis points. Accordingly, the TPO, based on his aforesaid observation, proposed an adjustment of Rs. 2,66,94,822/-. 9. Also, the TPO observed that an amount of Rs. 18,31,26,992/- remained outstanding towards the assessee company as receivables from its Associated Enterprises on 31.03.2016. The TPO, referring to "Explanation (i)(c)" to Section 92B of the Act inserted by the Finance Act, 2012, observed that the delayed realization of trade receivables constituted a separate international transaction requiring independent benchmarking. Accordingly, the TPO, after allowing a norma....
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....t the delayed receivables constituted a separate international transaction. However, instead of SBI short-term deposit rates adopted by the TPO for benchmarking the said transaction, the CIT(A) directed the AO/TPO to compute the adjustment by adopting LIBOR plus 200 basis points after allowing a normal credit period of sixty days. 15. Further, the CIT(A) deleted the addition relating to capitalization of interest earned during the pre-operative period. It was observed by him that as per the judgments of the Hon'ble Supreme Court in CIT v. Bokaro Steel Ltd. [(1999) 236 ITR 315 (SC)] and that of the Hon'ble High Court of Delhi in Indian Oil Panipat Power Consortium Ltd. v. ITO [(2009) 315 ITR 255 (Delhi)], the interest earned on temporary deployment of funds, which were inextricably linked with setting up of the manufacturing project, partook the character of a capital receipt and was liable to be adjusted against the pre-operative expenditure. 16. The Revenue being aggrieved with the CIT(A) order has carried the matter in appeal before us. 17. We have heard the Ld. Authorized Representatives of both parties, perused the orders of the authorities below and the materi....
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....of the present appeal by the Revenue has crept in for bona fide reasons and unavoidable circumstances, the same merits to be condoned. Our aforesaid view is supported by the recent decision of the Hon'ble Supreme Court in the case of Vidya Shankar Jaiswal vs. The Income Tax Officer, Ward-2, Ambikapur in Special Leave Petition (Civil) Nos. 26310- 26311/2024, dated 31st January, 2025. The Hon'ble Apex Court in its aforesaid order had observed that a justice-oriented and liberal approach should be adopted while considering the application filed by an appellant seeking condonation of the delay involved in filing the appeal. 21. Coming to the merits of the case, we shall now first deal with the grievance of the Revenue wherein it has assailed the deletion of the transfer pricing adjustment of Rs. 2,87,29,344/- relating to the export of coffee to the Associated Enterprises. 22. Ms. Uppaluri Meena, Ld. Senior Departmental Representative (for short, "Sr. DR") supported the order of the AO/TPO. It was submitted by her that the assessee company had adopted the Comparable Uncontrolled Price ("CUP") Method by taking the transactions entered into by its foreign Associated Enterpri....
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.... to four fundamental parameters, viz. (i) the specific characteristics of the property transferred or services provided; (ii) the functions performed, taking into account the assets employed and risks assumed by the respective parties; (iii) the contractual terms, whether express or implied, governing the allocation of responsibilities, risks and benefits between the parties; and (iv) the prevailing market conditions, including the geographical location, size of the market, level of competition, economic development and the regulatory environment. It is further stated that the CUP Method demands the highest degree of comparability amongst all the prescribed transfer pricing methods and that where material differences exist between the controlled and uncontrolled transactions, and such differences cannot be reliably adjusted, the CUP Method necessarily fails the statutory test and is liable to be rejected. 24. Elaborating further on her contention, the Ld. Sr. DR had referred to the Transfer Pricing Study Report ("TPSR") prepared by the assessee company, and submitted that during the relevant previous year the assessee company had carried out total sales of coffee amounting to Rs....
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....oducts dealt with by the assessee company and the alleged comparable were identical in terms of their intrinsic characteristics, the very foundation of the CUP analysis stood vitiated. Apart from the aforesaid, the Ld. Sr. DR had pointed out significant differences in the destination ports and the geographical markets of the transactions sought to be compared. Elaborating upon her said contention, it is stated that the respective transactions were destined for different geographical markets, viz., Malaysia in the case of the assessee company and Russia/UAE in the case of the alleged comparable. Consequently, freight charges, insurance costs, port handling expenses, local port duties, market demand and other economic conditions materially varied from one destination to another. According to the Ld. Sr. DR, any comparison of prices pertaining to shipments made to different geographical markets, without carrying out reliable and quantifiable adjustments for such differences, would be contrary to Rule 10B(2)(d) of the Income-tax Rules, 1962. 27. It was further submitted that the commercial invoices pertaining to M/s Vayhan Coffee Limited (supra) reflected the final destination as St....
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....latter effectively addressed the deficiencies inherent in the assessee's benchmarking analysis by, viz., (i) tolerating minor product variations; (ii) neutralising geographical and market differences; (iii) overcoming the absence of reliable third-party process and contractual data; and (iv) insulating the benchmarking exercise from market volatility. 31. The Ld. Sr. DR in her written submissions had further opposed the assessee's alternate plea seeking adjustment for under-utilization of capacity in the event the TNMM was upheld. It was submitted that Rule 10B(1)(e)(iii) permits only such adjustments as materially affect the net profit margin earned in comparable uncontrolled transactions. According to the Ld. DR, the assessee company could not seek an adjustment merely on the basis of its own operational profile as reflected in its TP Study Report. The Ld. Sr. DR had submitted that the CUP Method adopted by the assessee company be rejected and the TNMM adopted by the TPO be upheld. 32. Per contra, Sri. Vikram Vijayaraghavan, Advocate, Ld. Authorized Representative (for short, "AR") for the assessee company, supported the order of the CIT(A). It was submitted by him that the....
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....ion of the arm's length price than the TNMM wherever reliable comparables are available. 34. The assessee company has further stated in its rejoinder that complete documentary evidence was furnished before the TPO as well as the CIT(A) to establish direct product comparability, including invoice-wise details of its own transactions and the corresponding transactions between its AE and independent third parties. According to the assessee company, such internal CUP data constituted the most reliable benchmark for determining the arm's length price. 35. Responding to the Revenue's objections regarding differences in date, geography and volume, the assessee company submitted that the invoices relied upon for benchmarking pertained to transactions undertaken during the same period, namely October, 2015 to January, 2016, thereby ensuring that the prevailing market conditions and pricing cycles remained comparable in terms of the OECD Guidelines. 36. As regards geographical comparability, the assessee company in its rejoinder has stated that the exports made to its AE and the corresponding sales made by independent suppliers to the same AE originated from India and were destined ....
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....inarily commands a higher market price than conventional spray-dried instant coffee. On the basis of the aforesaid factual position, it was contended that the comparable invoices relied upon included both spray-dried instant coffee and agglomerated instant coffee, both of which were directly comparable with the products exported by the assessee company. 39. Elaborating upon its aforesaid submission, the assessee company had stated that, as per its internal product classification, "100% Pure Spray-Dried Instant Coffee" was designated as "Type-1A", whereas "100% Pure Agglomerated Instant Coffee" was classified as "Type-2D". It was, therefore, submitted that there existed no material product difference so as to warrant rejection of the CUP Method. It was stated that a perusal of the invoices clearly established that like products had been compared on a consistent basis and, therefore, the Revenue's objection regarding product comparability was wholly misconceived. 40. Summing up its submissions on the applicability of the CUP Method, the assessee company in its rejoinder had contended that the uncontrolled transactions relied upon by it satisfied the tests of comparability with ....
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.... utilization had materially distorted its cost structure and, consequently, its operating margins. 43. The assessee company had further submitted that the comparables selected by the TPO were long-established concerns having been in operation for more than two decades, whereas it was a newly established manufacturing entity in its first year of production. It was, therefore, contended that unless a suitable adjustment for under-utilization of capacity was granted while applying the TNMM, the comparison would not satisfy the mandate of Rule 10B of the Income-tax Rules, 1962, and would not result in a proper determination of the arm's length price. 44. We have given thoughtful consideration to the contentions advanced by the Ld. Authorized Representatives of both parties regarding the transfer pricing adjustment made by the AO/TPO relating to the export of coffee to the Associated Enterprises, which, thereafter, has been vacated by the CIT(A). 45. At the threshold, we may herein observe that Chapter X of the Act does not prescribe any precedence amongst the recognized methods for determination of the Arm's Length Price (ALP). In fact, Section 92C of the Act read with Rul....
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.... demonstrated how the alleged differences materially influenced the prices so as to render the CUP analysis wholly unreliable. In our view, the rejection of CUP cannot rest upon general observations regarding differences in geography, volume or timing without establishing that such differences materially affected the price and were incapable of adjustment, as Rule 10B itself contemplates reasonably accurate adjustments wherever differences materially affect comparability. 49. We also find considerable force in the observation of the CIT(A) regarding the peculiar facts involved in the case of the assessee company, viz. (i). the assessee company had admittedly commenced commercial production only during the relevant previous year; and (ii). it was operating at significantly lower capacity during its initial year of operations. We find that in transfer pricing jurisprudence it is well recognized that under-utilization of installed capacity constitutes an economically relevant factor affecting profitability. Accordingly, where TNMM is adopted for benchmarking, reasonable adjustment is ordinarily required so that abnormal fixed costs attributable to initial years of production do not....
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....ustment. At this stage, we deem it apposite to observe that it is a settled principle that determination of the ALP cannot proceed on mere suspicion or broad assumptions and thus, where the Revenue seeks to discard the transfer pricing methodology consistently maintained by the taxpayer, the burden lies upon the TPO to demonstrate, on the basis of cogent material, that the method adopted does not produce a reliable measure of the arm's length result. However, we find that in the present case before us, the reasons given by the TPO for rejecting the CUP Method are largely general in nature and do not establish that the benchmarking undertaken by the assessee company suffered from any such serious defects as to warrant complete substitution by TNMM. 52. Considering the totality of the facts and circumstances involved in the present case, we are of the considered view that the CIT(A) was justified in holding that the transfer pricing adjustment of Rs. 2,87,29,344/- could not be sustained. We, thus, in terms of our aforesaid observations, uphold the order of the CIT(A), who, in our view, has rightly deleted the said adjustment. 53. Before parting with this issue, it would be ....
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....e benchmarking adopted by the assessee. According to him, the RBI guidelines merely prescribed the maximum permissible ceiling under the foreign exchange regulations and could not be adopted for determining the ALP under the Transfer Pricing provisions. The TPO, proceeding on that premise, adopted LIBOR plus 200 basis points as the arm's length rate, which, according to him, was consistently being followed by the Department in similar cases. Consequently, the TPO determined an excess payment of interest amounting to Rs. 2,66,94,822/- and proposed adjustment under section 92CA of the Act. 56. As is borne from the record, the assessee company submitted before the CIT(A) that the borrowing was an unsecured long-term foreign currency loan carrying substantially higher risk. Elaborating further on its contention, it was submitted that the RBI Master Circular itself recognized that higher spreads were permissible depending upon the maturity period and risk profile of the borrowing. It was also submitted that the subject borrowing by the assessee company carried a tenure exceeding five years and the RBI permitted a spread of 500 basis points over LIBOR in such cases. The assessee c....
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....n of the jurisdictional tribunal, i.e., ITAT, Hyderabad in DCIT v. Devgen Seeds & Crop Technology Pvt. Ltd., (supra) wherein interest at LIBOR plus 500 basis points on similar borrowings had been accepted as being at arm's length. 60. We have given our thoughtful consideration to the contentions advanced by the Ld. Authorized Representatives of both parties on the aforesaid issue of determining the APLP of interest on ECB's. 61. Admittedly, it is a matter of fact borne from record that the loan in question was denominated in foreign currency. We find that it is well settled by a long line of judicial precedents that where the loan is advanced or borrowed in foreign currency, the arm's length rate of interest has to be determined with reference to the currency in which the borrowing is denominated and not with reference to domestic lending rates prevailing in India. Our aforesaid view is fortified by the judgments of the Hon'ble High Court of Delhi in CIT v. Cotton Naturals (I) Pvt. Ltd. (2015) 231 Taxman 401 (Delhi) and that of the Hon'ble High Court of Bombay in CIT v. Tecnimont (P.) Ltd. (2018) 96 taxmann.com 223 (Bom.). 62. We further find that the TPO h....
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.... 65. We shall now take up the Revenue's grievance that the CIT(A) has erred in vacating the TP adjustment made by the AO/TPO towards interest on delayed realization of receivables from the Associated Enterprises. 66. Ostensibly, the TPO observed that an amount of Rs. 18,31,26,992/- was outstanding towards the assessee company from its AEs as on 31.03.2016. It was observed by him that the assessee company had neither benchmarked the outstanding receivables nor charged any interest on the delayed realization of export proceeds. The TPO, referring to the "Explanation" inserted to Section 92B of the Act by the Finance Act, 2012 with retrospective effect from 01.04.2002, held that outstanding trade receivables constituted a separate international transaction requiring independent benchmarking. Thereafter, the TPO observed that although some invoices mentioned a credit period of 120 days, there was no uniformity in the contractual terms governing realization of sale proceeds. Accordingly, the TPO, following the decision of the ITAT, Bangalore Bench in Logix Micro Systems Ltd., Bangalore Vs. ITO, Bangalore, IT (TP) A No. 423 & 524/Bang/2009, dated 07/10/2010, observed that a reasona....
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....22 (Hyderabad - Trib.). The Ld. AR submitted that, as the receivables were admittedly denominated in foreign currency, they were therefore consistent with the law laid down by the Hon'ble High Court of Delhi in CIT Vs. Cotton Naturals (I) Pvt. Ltd. (2015) 55 taxmann.com 523 (Delhi) and the Hon'ble High Court of Bombay in PCIT Vs. In Tecnimont (P.) Ltd. (2018) 304 CTR 145 (Bom), the appropriate benchmark could only be LIBOR-based rates, not domestic deposit rates. 72. We have given thoughtful consideration to the aforesaid issue, i.e., determination of the ALP of the interest on the outstanding receivables. 73. At the outset, we find that the CIT(A) has followed the decision of the coordinate bench of the ITAT, Hyderabad in OSI Systems (P.) Ltd. v. DCIT (2024) 168 taxmann.com 22 (Hyderabad - Trib.), wherein after considering the "Explanation" to Section 92B as well as the decisions of the Hon'ble High Court of Delhi in CIT Vs. Cotton Naturals (I) Pvt. Ltd. (2015) 55 taxmann.com 523 (Delhi) and the Hon'ble High Court of Bombay in PCIT Vs. Tecnimont (P.) Ltd. (2018) 304 CTR 145 (Bom), it was held that delayed realization of receivables constitutes a separate internat....