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2015 (4) TMI 180 - ITAT DELHI

2015 (4) TMI 180 - ITAT DELHI - [2015] 42 ITR (Trib) 77 (ITAT [Del]) - TPA - Notional interest charged on receivables outstanding beyond 180 days - AO/DRP enhancing the income of the assessee - Held that:- A working adjustment appropriately takes into account the outstanding receivable. Therefore, the assessee has undertaken a working capital adjustment to reflect these differences by adjusting for differences in working capital and thereby, profitability of each comparable company. Accordingly, .....

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the pricing/profitability of the assessee which is more than that working capital adjusted margin of the comparables. Hence, any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified.

It is clear that assessee had earned significantly higher margin than the comparable companies (which have been accepted by the TPO) which more than compensates for the credit period extended to the AEs. Thus, the approach by th .....

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d Shri George George K.,JJ. For the Appellant : Shri Tarun Arora, CA For the Respondent : Shri J. James, Standing Counsel DR ORDER Per Shri George George K, JM: This appeal, at the instance of the assessee, arises out of the order of assessment passed u/s 143(3) r.w.s. 144C of the Act. The relevant assessment year is AY 2010-11. 2. The solitary issue that is raised in this appeal is whether the AO/DRP is justified in enhancing the income of the assessee by ₹ 93,69,275/-, on account of noti .....

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chmarked in the transfer pricing ( TP ) study using Transactional Net Margin Method ( TNMM ) as the Most Appropriate Method ( MAM ). The segmental profitability of the assessee from its manufacturing and trading segment was compared with margin earned by comparable companies engaged in performing similar manufacturing and trading functions respectively. The results of the benchmarking analysis undertaken by the assessee are provided in the table below: International Transactions Profit level Ind .....

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ssessee were accepted by the TPO at arm s length price. However, the TPO imputed a notional interest based on SBI Prime Lending rate + 300 basis points (resulting in interest rate of 14.88%), with regard to receivable outstanding for a period exceeding 180 days. Thus, the TPO made a transfer pricing adjustment of ₹ 1,57,54,943/-. The Assessing Officer incorporated the Transfer pricing adjustment in the draft assessment order. Against the draft assessment order, the assessee filed its objec .....

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directed to TPO to allow relief for interest forgone on outstanding receivable balances with non-AEs/third parties. Pursuant to the DRP directions, the TPO revised the addition to ₹ 93,69,275/- and the same was incorporated by the AO in the final assessment order dated 14.11.2014. 5. Aggrieved by the assessment completed the assessee has preferred the present appeal. The summary of submissions given by the assessee with reference to imputation of notional interest on the receivable outsta .....

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in the working capital investment of the Appellant and the comparables rather than looking at the receivable independently. • The above position is also supported by OECD, which prescribes that, "Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables with an assumption that the difference should be reflected in profits. " • In this regard, the Appellant would like to place reli .....

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ule in the transfer pricing analysis. This principle seeks to combine all functionally similar transactions wherein arm's length price can be determined for a number of transactions taken together. The said principle is enshrined in the transfer pricing regulation itself and has also been advocated by the OECD Guidelines. • Differential impact of working capital of the Appellant vis-a-vis its comparables has already been factored in the pricing! profitability of the Appellant and theref .....

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parties as is the case for outstanding receivables from AEs. It is also pertinent to mention that AE is the key customer of the Appellant and the sales made by Appellant to its AE amounts to 88% of the total turnover of the Appellant. Therefore, charging of interest on outstanding receivable from the AE is not warranted. • In support of the above contention, reliance is placed on inter alia, the following decisions by the Hon'ble ITAT wherein it was held that in case no interest is cha .....

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ant to its AE is not permissible under the Act • It is respectfully reiterated that the Ld. TPO/AO has re-characterised the outstanding receivables as unsecured loan extended by the Appellant to its AE and imputed a notional interest on the period of delay exceeding 180 days. In this regard, the Appellant humbly submits that computing notional interest on a fictional transaction is not permissible under the Act. The law only requires actual transactions to be at arm's length and does no .....

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d (ITA No. 7653/MUM/2011) CIT vs M/s Sutlej Cotton Mills Supply Agency Ltd (1975) 100 ITR 706 CIT vs Niraj Amidhar Surti - Tax Appeal No. 836 of 2009. V. Devaluation of foreign currency • The Appellant would also like to highlight that during the year 2009 the home currency of the AE i.e. Hryvinia ('UAH') had strikingly devaluated which resulted in increase of liability for AE towards the Appellant. It is respectfully submitted that the Appellant invoices its AE in the USD and its l .....

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needs to be appreciated • The business model of the Appellant and the geographic region where it sells its goods is such, where the revenue cycle is usually longer and it takes longer time to recover the proceeds. • Majority of the revenue earned by the Appellant is from AE (i.e. 88%, INR 70.09 crores during the year). Keeping in view the strong presence of and volume of business with AE, no third party would be willing to charge interest on amount receivable from such a key customer a .....

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ributors of medicinal products in Ukraine. Due to its major presence in the country, the AE is in a position to sell its products at a premium than its competitors. Keeping that in view, the Appellant is in position to sell its products to the AE at a premium in comparison to sales made to the nongroup company. This allows the Appellant to offer better credit terms to the AE in lieu of higher profits which the Appellant generates from the sales made to the AE. • In this regard, reliance is .....

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imputed interest on outstanding receivables based on SBI PLR plus 150 basis points is wholly unjustified and unwarranted. LIBOR rate should be applied on an international loan for computing interest, which has been upheld in the following rulings: • Kohinoor Foods Ltd. (TS-224-ITAT-2014(DEL)- TP) • Siva Industries & Holdings Ltd (ITA No. 2148/Mds/2010), • Four Soft Ltd. (ITA No. 1495/HYD/2010) • Varroc Engineering Pvt. Ltd. (I.T.A No. 2482/PN/2012) • Tricorn India L .....

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cterised is incorrect. He submitted that at the first instance itself, the TPO has characterised the amount due from the A.E. beyond 180 days, as a loan, for the reason that the agreement between the parties stipulate that the credit period shall be only for a period of 180 days. He referred to page 16 of the assessee's paper book and to page 249 as well as 255 to drive home his point that the assessee itself has characterised the dues from A.E. and Non-A.E. as debtors and that it is an inte .....

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d that the issue on hand is distinct and this judgement cannot be relied upon for the reason that interest free advances given to sister concerns, A.Es have been considered as separate international transactions by a number of decisions. He argued that CUP has been adopted as the most appropriate method. Without prejudice he relied on page 22 of the DRP's order. He submitted that the order of the DRP may kindly be sustained. 7. We have heard rival submissions and perused the material on reco .....

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s price or b) lower cost of goods sold which would have a positive impact on the operational result. Higher sales prices acts as a return for the longer credit period granted to customers. Similarly in return for longer credit period granted, a firm should be willing to pay higher purchase price which adds to the cost of goods sold. Therefore, high levels accounts receivable and inventory tend to overstate the operating results while high levels of accounts payable tend to understate them thereb .....

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bunals : • Mercer Consulting India Pvt. Ltd. [TS-170-ITAT-2014(DEL)] • Mentor Graphics (Noida) Private Limited [109 ITD 101] • Egain communication (P) Ltd. [ITA No. 1685/PN/2007] • Sony India (Pvt.) ltd. [2011-TII-43-ITAT-DEL-TP] • Capgemini India Private Limited [TS-45-ITAT-2013(Mum)-TP] 8. In view of the above, a working adjustment appropriately takes into account the outstanding receivable. Therefore, the assessee has undertaken a working capital adjustment to reflect .....

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receivables is not warranted. 9. The assessee had undertaken a working capital adjustment for the comparable companies selected in its transfer pricing report which was also submitted with the Ld. TPO. A snapshot of the result is provided below: Segment Name Appellant s Margin (OP/TC) Working capital adjusted margins of comparables (OP/TC) Manufacturing Activity 46.33% 11.84% Trading Activity 17.44% 8.36% 10. The above analysis empirically demonstrates that the differential impact of working cap .....

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the adjustment on account of alleged excess credit period allowed to AE. The Hon'ble ITAT observed the following in the judgment: "Para 20 - The only other ALP adjustment in appeal before us is with respect to what the authorities below have treated as, excess credit period allowed to Micro USA. This adjustment must be deleted for the short reason that it was part of the arrangement that specified credit period was allowed and thus the cost of funds blocked in the credit period was inb .....

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DEL)-TP], where the Hon ble jurisdictional HC while concluding the judgment held as under : "(v) Where the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly acc .....

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ad expense 300 300 Net profit 50 (5%) 50 (5%) The above illustrations draw a distinction between two distributors having different marketing functions. In case 2, a distributor having significant marketing functions incurs substantial expenditure on AMP, three times more than in case 1, but the purchase price being lower, the Indian AE gets adequately compensated and, therefore, no transfer pricing adjustment is required. In case we treat the AMP expenses in case 2 as ₹ 501-, i.e. identica .....

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al transaction ..... 14. As mentioned earlier, the differential impact of working capital of the assessee vis-a-vis its comparables has already been factored in the pricing/ profitability of the assessee and therefore, any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified. 15. Further, the principle of aggregation is a well-established rule in the transfer pricing analysis. This principle seeks to combine all functio .....

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