TMI Blog2015 (4) TMI 180X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the assessee of aggregating the international transactions pertaining to sale of goods to AE and receivables arising from such transactions which is undoubtedly inextricable connected is in accordance with established TP principles as well as ratio laid down by the Hon’ble jurisdictional High Court in the case of Sony Ericson Mobile Communication India Pvt. Ltd. (2015 (3) TMI 580 - DELHI HIGH COURT). - Decided in favour of assessee. - ITA No. 6814/Del/2014 - - - Dated:- 31-3-2015 - Shri J. S. Reddy And 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 y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red with the TPO and held that the TPO was justified in considering the impugned transaction as an international transaction and benchmarking its separately by applying comparable uncontrolled price (CUP) method. Further, in respect of rate of interest to be used, the DRP directed the TPO to apply SBI base rate (as on 30th June of the relevant previous year) plus 150 basis points instead of 14.88% applied by the TPO. The DRP also 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 outstanding beyond 180 days are as follows:- 1. A working capital adjustment takes into account the impact of outstanding receivables on the profitability Working capital yields a return resulting from a) higher sales price or b) lower cost of goods sold which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 charged from AEs as well as non-AEs on outstanding receivables, no addition on account of such interest can be made. - Indo American Jewellery Limited vs. DCIT [ITA No.5872/Mum/2009]- (upheld by the Hon'ble Bombay High Court ((ITA No. 1053 of 2012)) Tech Mahindra Limited (2011) 46 SOT 141 Lintas India Pvt. Ltd. Vs. ACIT-3(2), Mumbai [ITA No.2024/Mum/2007 Nimbus Communications Limited [(2010) 38 SOT 246] IV. Re-characterization of outstanding receivables as unsecured loans advanced by the Appellant 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 intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsequent period as well. Based on the aforesaid, non-charging of interest by the Appellant on outstanding receivable from its AE is prudent from a businessmen's perspective and does not warrant any adjustment. AE is one of the established distributors 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 placed on the ruling of Mastek Limited vs. Addl. ClT, Range 4, Ahmedabad [ITA No. 3120/Ahd/2010], wherein the Hon'ble Tribunal while deciding as similar issue, noted that a commercial consideration and market practice has to be taken into account. VII. Without prejudice to above contentions of the Appellant. if interest is to be imputed. then LIBOR rate should be applied for imputing interest. Without prejudice to the above contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order. He submitted that the order of the DRP may kindly be sustained. 7. We have heard rival submissions and perused the material on record. An uncontrolled entity will expect to earn a market rate of return on its working capital investment independent of the functions it performs or products it provides. However, the amount of capital required to support these functions varies greatly, because the level of inventories, debtors and creditors varies. High levels of working capital create costs either in the form of incurred interest or in the form of opportunity costs. Working capital yields a return resulting from a) higher sales 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 thereby necessitating appropriate adjustment. The appropriate ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. In this regard, we would also like to place reliance on the judgement of Micro ink Ltd [TS-216-ITAT-2013(Ahd)-TP] wherein the ITAT upheld the above principle and deleted 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 inbuilt in the sale price. 12. Accordingly, keeping in view the above factual position as well the judicial precedence, any separate adjustment on the pretext of outstanding receivables while accepting the comparables and transfer price of underlying transaction i.e. sale of goods by application of TNMM is unjustified. In this regard, the recent ruling of Hon ble Delhi High Court in case of Sony Ericsson Mobile Communication India Pvt. Ltd. and several other connected matters [TS-96-HC-2015(DEL)-TP], where the Hon ble ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justments/set off would be mandated to arrive at the arm's length price, if the AMP expenses are segregated as an independent international 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 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. 16. In this regard, reliance is placed upon the recent ruling of Hon'ble Delhi High Court in case of Sony Ericsson Mobile Communication India Pvt. Ltd and several other connected matters (Supra) in respect of aggregation of closely linked transactions. The relevant portion of the judgment is repro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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