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2015 (5) TMI 546 - ITAT BANGALORE

2015 (5) TMI 546 - ITAT BANGALORE - TMI - Transfer pricing adjustment - Adjustment to the manufacturing segment - TPO considered the international transactions of Air Solutions Segment consisting of sales of ₹ 84,50,33,854 as part of the infrastructure segment while making the adjustment - Held that:- In the T.P. order passed by the TPO under Section 92CA of the Act dt.28.10.2009, it is seen that there is neither any mention whatsoever about the two segments nor is there any finding whethe .....

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rastructure Group Segment and has not proposed any T.P. Adjustment for the Air Solutions Segment. That being the case, it is but appropriate that only those transactions pertaining to the infrastructure group segment are considered for making the T.P. Adjustment. In this factual matrix, we hold and direct that the adjustments are to be made only on those transactions pertaining to the Infrastructure Group Segment, as decided by the TPO in his order under Section 92CA of the Act, and that the com .....

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hat the adjustments are to be made only on AE transactions related to the Infrastructure Segment and not only the entire transactions of the segment - Held that:- The assessee had raised the issue before the TPO in the rectification application dt.2.2.2010, but we find that the TPO has not rendered any specific finding on the same in the order under Section 154 of the Act passed by him on 29.6.2010. Detailed examination is required to ascertain the extent of the transactions that pertain to the .....

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Error in computation of operating margin in Infrastructure Segment - treatment of excise duty while computing the margins - Held that:- Following the afore cited decision of the co-ordinate bench of ITAT, Bangalore in the case of Toyota Kirloskar Motors Ltd. (2013 (1) TMI 86 - ITAT BANGALORE ), we hold and direct that excise duty shall be excluded from sales as well as costs for both the assessee and the comparable companies while computing the margins.

Exclusion of Escorts Ltd. .....

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f maintaining the prescribed documentation under Section 92D(i) of the Act r.w. Rule 10B of the I.T. Rules, 1962. However, such non-availability will not dispense with the mandatory requirement of Rule 10B(4) for using current financial year data in conducting comparability analysis and in determining the ALP in accordance with section 92C(1) and 92C(2) of the Act. As it is mandatory requirement of law to utilise data of the current financial year to conduct the comparability analysis at the tim .....

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f the current financial year - Decided against assessee.

Interest on Receivable - Held that:- Following the decision of Evonik Degussa India P. Ltd. (2013 (1) TMI 60 - ITAT MUMBAI), we hold that the addition on account of notional interest relating to alleged delayed payment in collection of receivables from AEs is not called for. However, as can be seen from the extract of the decision reproduced above, the above decision has been rendered in the factual context that there has been n .....

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ntial, mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala (2001 (10) TMI 4 - SUPREME Court ) and we, therefore, uphold the action of the Assessing Officer in charging the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable u/s. 234C of the Act, if any, while giving effect to this order. - Decided against assessee. - I.T.(T.P) A. No.1529/Bang .....

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irections of the Dispute Resolution Panel, Bangalore ( DRP ) issued under Section 144C(5) rws 144C(8) of the Act vide order dt.28.9.2010. 2. The facts of the case, briefly, are as under :- 2.1 The assessee, a company engaged in the business of manufacturing and/or trading in air compressors, feeder crushers, loaders, vibratory compactors, light towers, utility vehicles and pavers, filed its return of income on 21.11.2006 declaring total income of ₹ 47,43,31,466. Subsequently, the assessee .....

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fficer made a reference under Section 92CA of the Act to the Transfer Pricing Officer ( TPO ) for determination of the Arm s Length Price ( ALP ) of the international transactions reported by the assessee in the period relevant to Assessment Year 2006-07 after obtaining the approval of the CIT-I, Bangalore. The TPO passed the order under Section 92CA of the Act vide order dt.28.10.2009 proposing on T.P. Adjustment of ₹ 34,40,77,835 which comprised of the following :- i) Adjustment to the m .....

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assessee filed its objections thereto before the DRP. The assessee also preferred an application under Section 154 of the Act before the TPO vide letter dt.2.2.2010. The TPO passed an order under Section 92CA(5) rws 154 of the Act dt.29.6.2010 wherein the T.P. Adjustment was revised to ₹ 11,84,66,758; the break up of which is as under :- i) Adjustment to the manufacturing segment : Rs.11,28,38,758. and ii) Adjustment towards interest on debts outstanding : Rs.56,28,000. In the course of p .....

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nal order of assessment for Assessment Year 2006-07 under Section 143(3) rws 144C of the Act vide order dt.25.10.2010 wherein the income of the assessee was determined at ₹ 59,10,63,612 which included the T.P. Adjustment of ₹ 11,84,66,758. 3. Aggrieved by the final order of assessment for Assessment Year 2006-07 dt.25.10.2010, the assessee is now in appeal before the Tribunal assailing the T.P. Adjustments made, both in respect of manufacturing sector and also towards interest on out .....

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the fact that the appellant has conducted an exhaustive and elaborate benchmarking analysis, to arrive at a set of companies that are broadly comparable with the appellant in respect of functions performed, assets employed and risks assumed, and benchmarked the average net margins earned by the independent comparables with the net margins earned by the appellant. Error in arriving at the International Transactions of the Infrastructure Segment: Ground No. 3 (i): The Honourable DRP and the learne .....

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nt instead restricting himself only to the international transactions entered into by the Infrastructure segment of the business. Ground No. 3 (iii): The Honourable DRP and the learned AO have erroneously erred in not appreciating the fact that the learned TPO has included a sum of 845,033,854 pertaining to the sale of finished goods by the Air Solutions segment as part of the sale of goods made by the Infrastructure segment. The aggregate revenues derived by the Infrastructure segment with refe .....

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Price proposed by the learned TPO is not only disproportionate, but also irrational and illogical. Ground No. 4(ii): The Honourable DRP and the learned AO ought to have appreciated the fact that while the aggregate value of the sale made to the Associated Enterprises in the Infrastructure segment amounted to a mere 4.5% of the total Infrastructure segment revenue, the adjustment proposed by the learned TPO amounted to 128% of the total revenues earned from international transactions with the Ass .....

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the appellant originally. Use of Contemporaneous Data: Ground No. 5: The Honourable DRP and the learned AO erred in concluding that the appellant ought to have employed contemporaneous data in the preparation of the Transfer Pricing report. This argument of the Honourable DRP is not valid on the principle of fairness and natural justice, as the appellant cannot be expected to use data that is unavailable in the databases at the time of preparing the documentation. The Honourable DRP and the lea .....

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ppreciated the fact that the objective underlying the use of multiple-year data was to ensure that the outcomes of the international transactions for the year under consideration were based on all the earlier periods which were relevant for determination of transfer price. Moreover the data of the preceding two financial years gives a clear indication of the business and economic conditions prevailing at the beginning of the relevant financial year i.e. the time when the transfer prices are set .....

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ion from Escorts Ltd regarding the financial results for the 12 month period ending 31st March 2006. Ground No. 6(ii): The Honourable DRP and the learned AO ought to have appreciated the fact that the learned TPO has not disputed the selection of Escorts Limited on the basis of any functional parameter, but solely on the ground that the financial results for the 12th month period ending 31st March 2006 were not available. Ground No. 6(iii): The Honourable DRP and the learned AO ought to have app .....

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ellant s business. While the learned TPO has included a sum of ₹ 69,500,000 from the other income portion as income relating to services, the actual amount embedded in the other income component but relating to the services amounted to ₹ 80,815,726 Adjustments to be done only for International Transactions only: Ground No. 8(i): Without prejudice to the aforementioned grounds, the appellant wishes to emphasise that in the event the learned TPO was of the opinion that an adjustment ne .....

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arranted, the learned TPO ought to have bifurcated the costs on a rational, scientific and systematic basis between the transactions entered into between the Associated and non Associated enterprises. Safe Harbour provisions as postulated under the Proviso to Section 92C(2): Ground No. 9: Without prejudice to any of the appellant s other grounds of appeal, if at all any adjustment is made, the same should be made only to the lower limit of the 5% range set out u/s 92C (2). Error in computation o .....

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rated as BBB by credit rating agencies. Ground No. 12:Also the learned AO/DRP/TPO have failed to appreciate the fact that on a consolidated basis, the outstanding payable of the appellant due to the holding company and other fellow subsidiaries is more than the outstanding receivable from the holding company and fellow subsidiaries. Ground No.13: Without prejudice to the above, we respectfully submit that should the learned Transfer Pricing Officer propose to impute interest on such advances, wh .....

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lant craves leave to add to, alter, vary, omit or substitute the aforementioned grounds of appeal or add a new ground/(s) of appeal at any time before or at the time of hearing of the appeal. In the course of appellate proceedings, the assessee had filed various details in paper book, detailed notes on arguments and compilation of case laws which have been taken on record and are duly considered. 4. The Grounds at S.Nos.1 & 2, being general in nature and not urged before us are dismissed as .....

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the adjustment. (ii) In Grounds No. 4 and 8, the assessee's contentions are that adjustments are to be made only in connection with AE transactions of the assessee rather than the entire infrastructure segment. (iii) In Grounds at S.No.3, 4 & 7, the assessee contends that there is an error in computing the operating margin of the infrastructure segment since - (a) Other income has been considered incorrectly. (b) Excise duty is to be removed from sales and costs. (iv) Ground No.6 is in .....

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t of components and spares. 51,97,13,905 2. Import of finished goods 13,01,31,245 3. Export of finished goods, components and spares. 86,87,23,023 4. Rendering of CAD/CAM services 6,05,05,588 5. Co-ordinating sales for commission. 39,85,518 6. Recovery of expenses 1,83,55,185 7. Reimbursement of expenses 38,54,136 Adjustment only on the Infrastructure Segment. 6.3 The assessee had undertaken its T.P. Study with respect to the following two segments separately :- (i) Air Solutions, and (ii) Infra .....

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achinery & Engineering Ltd. ii. Bharat Earth Movers Ltd. iii. Elcon Engineering Co. Ltd. iv. TRF Ltd. The TPO, however, rejected the fifth comparable company, i.e. Escorts Ltd, on the ground that the company has different accounting year i.e. ending in September and therefore it cannot be considered for comparability analysis. 6.4 The TPO worked out the margins of the other four comparables, listed at (i) to (iv) (supra) by considering the current years data and computed the mean margin of t .....

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a) - (d) Rs.126,90,63,964 Shortfall being adjustment u/s.92CA (f) = (e) - (c) Rs.33,58,49,835 The above shortfall of ₹ 33,58,49,835 is treated as transfer pricing adjustment u/s.92CA. 6.5.1 The first issue raised by the assessee against the adjustment of ₹ 33,58,49,835 was that the Assessing Officer / TPO had erroneously considered the international transactions of Air Solutions Segment consisting of sales of ₹ 84,50,33,854 as part of the infrastructure segment while making the .....

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er book; and specifically to pages 66 to 74 of the T.P. Study, at pages 185 to 193 of the assessee's paper book to establish that separate bench marking was done for both segments separately; different comparables were chosen for the two segments and ALP was drawn up separately for both the segments. The learned Authorised Representative also drew the attention of the bench to the fact that the comparables adopted by the TPO for making the adjustment were the 4 comparables related to the inf .....

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under Section 92CA rws 154 of the Act wherein the value of the international transactions has been taken at ₹ 93,32,14,129. It was contended by the learned Authorised Representative that out of this amount of ₹ 93,32,14,129, a sum of ₹ 84,50,33,854 pertains to the air solutions segment and only an amount of ₹ 8,81,80,275 pertains to the infrastructure group and only this amount of ₹ 8,81,80,275 ought to be considered for adjustment as against the amount of ₹ 9 .....

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horised Representative also mentioned that the assessee had filed a rectification application dt.6.1.2011 before the DRP on this issue and a further rectification application dt.20.6.2011 was filed before the TPO which is not yet disposed off. 6.5.4 The learned Authorised Representative also submitted a chart giving the details of the international transactions relating to the infrastructure and Air Solution Segments and also the transactions between Associated Enterprises (AEs) and non-AEs to s .....

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used and carefully considered the material on record. The assessee had adopted TNMM as the Most Appropriate Method (MAM) and the Op Revenue / Op Cost as the Profit Level Indicator (PLI), which has been accepted by the TPO. From the T.P. Study, it is seen that the assessee has reported two segments merely, Infrastructure Group and Air Solutions Group and has bench marked the two segments separately. As regards the international transactions related to the Infrastructure Group, the assessee has se .....

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dt.28.10.2009, it is seen that there is neither any mention whatsoever about the two segments nor is there any finding whether the TPO accepts or rejects the segmental details furnished by the assessee. However, for the computation of the ALP of international transactions, the TPO has adopted four out of five of the comparables chosen by the assessee in its T.P. Study for its infrastructure group and also adopted the current year margins of these comparables for determining the mean margin of th .....

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ining to the Infrastructure Group Segment, as decided by the TPO in his order under Section 92CA of the Act, and that the computation is to be decided accordingly. 6.7.3 In respect of the contention about the quantum of international transactions to be considered for determination of ALP, it is seen that the assessee had raised the issue before the TPO in the rectification application dt.2.2.2010 but the TPO has not rendered any finding on the same in the order passed thereon under Section 92CA .....

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PO with the details placed before us in the chart submitted by the learned Authorised Representative. 6.7.4 Even otherwise, the segmental details made to be examined in detail to decide how much of it relates to the Infrastructure Group Segment and how much to the Air Solutions Segment. As the TPO has not examined the same and rendered any finding in this regard, we deem it appropriate to remand this issue back to the file of the TPO to examine the matter and determine the quantum of internation .....

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e details and submissions in this regard. It is ordered accordingly. Consequently, Ground No.3 of the assessee's appeal is treated as allowed for statistical purposes. 7. Ground Nos.4 & 8 - Adjustment only on AE transactions. 7.1.1 In the Grounds at S.Nos.4 & 8, the assessee contends that the adjustments are to be made only on AE transactions related to the Infrastructure Segment and not only the entire transactions of the segment. It was submitted by the learned Authorised Represent .....

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goods 2,36,89,169 1,67,68,06,203 1,70,04,95,372 Rendering of services 6,05,05,588 6,05,05,588 Sales Commission 39,85,518 39,85,518 8,81,80,275 1,67,68,06,203 1,76,49,86,478 7.1.2 It was therefore submitted by the learned Authorised Representative that the transactions with AEs works out to only about 5% of the total revenue from infrastructure segment and that if at all any adjustment is warranted to the ALP, the same ought to be restricted only to the AE transactions amounting to ₹ 8,81,8 .....

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etails of AE transactions have been reported in the Form 3CEB which was before the TPO in TP proceedings. 7.2.1 We have heard both the learned Authorised Representative of the assessee and the learned Departmental Representative in the matter and perused and carefully considered the material on record; including the judicial pronouncements cited by the assessee in support of the proposition that the T.P. Adjustments have to be carried out only on the international transactions of the infrastruct .....

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on which adjustments have to be made. As the TPO has not examined the same or rendered any finding thereon, we are of the opinion that it would be appropriate to remand the issue back to the file of the TPO to examine and determine the quantum of AE transactions on which the T.P. Adjustment has to be made. We, therefore, restore this matter to the file of the TPO with the direction that the adjustment may be made only on the AE transactions related to the Infrastructure Group Segment after affo .....

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rastructure segment to be ₹ 6,95,00,000 instead of the correct figure of ₹ 7,89,27,267 for computing the operating profitability of the Infrastructure Segment while computing the T.P. Adjustment. (ii) that the excise duty being pass through costs, the same should be excluded from the sales as well as from the operating expenses while computing the operating profitability of both the assessee as well as comparable companies. 8.2 Before us, the learned Authorised Representative submitt .....

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ld be excluded from the sales as well as from the operating expenses while computing the margin. In support of this proposition, the learned Authorised Representative cited and placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Toyota Kirloskar Motors Ltd. V ACIT in ITA No.828/Bang/2010 dt.22.11.2012. 8.3.2 We have perused and carefully considered the material on record in regard to this issue. We find that the decision of the co-ordinate bench of this Tribu .....

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it element involved in collecting the same and remitting it to the Government. Excise duty is a pass through cost and financial statements are prepared net of excise duty and based on this the profitability is worked out. TP regulations are based on the actual margins and pass through items like excise duty are not to be considered while computing margins as is also the case with the comparable companies. The learned Departmental Representative too did not appear to have serious objections to th .....

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hall be excluded from sales as well as costs for both the assessee and the comparable companies while computing the margins. 9. Ground No.6 : Escorts Ltd. should not be excluded as a comparable. 9.1 In the TPO s order under Section 92CA of the Act, while the TPO accepted four out of the five comparables selected by the assessee for the infrastructure segment, he rejected one of the comparables, namely Escorts Ltd., on the ground that it had a different year ending. In this regard, as per the ass .....

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d. 10. Ground No.5 - Multiple year data should be accepted. 10.1 The assessee has used Multiple Year Data while computing the margins of comparable companies. The TPO, however, while accepting four of the five comparables chosen by the assessee, has considered the current year s data for these comparable companies while computing the margins thereof. The only contention put forth by the assessee against this decision of the TPO is that the assessee cannot be expected to use data that is unavaila .....

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national transaction, which reads as under :- Rule 10B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction 56a[or a specified domestic transaction] shall be the data relating to the financial year in which the international transaction 56a[or the specified domestic transaction] has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such .....

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he proviso to Rule 10B(4) that makes an exception in allowing the use of data of the two preceding years, if and only, if it is established that the data reveals facts which could have an influence on the determination of the transfer price. The mandatory requirement of law for the use of data of the current financial year cannot be disposed with even if the relevant data was not available to the assessee in the public data base at the time of preparation of its T.P. Study. Non-availability of i .....

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tory requirement of law to utilise data of the current financial year to conduct the comparability analysis at the time of transfer pricing proceedings, the TPO is not only empowered but is also duty bound to determine the ALP using such contemporaneous data for this purpose even if such data was not available to the assessee in the public data bases at the time of preparation of its T.P. Study report. Further, we are also of the view that the TPO has rightly rejected the use of earlier year s d .....

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t the delay in collection had impacted the profits of the assessee and therefore an adjustment towards notional interest on net receivables (deducting payables from the receivables) outstanding from its AEs was necessary. Accordingly, the TPO made the adjustment as under :- Particulars Amount (Rs.) Receivables from AEs 32.50 Crores Payable to AEs 28.48 Crores Net outstanding 4.02 Crores Arm s Length Price of interest @ 14% 56,28,000 Interest charged NIL T.P. Adjustment 56,28,000 11.2.1 In the ap .....

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Without prejudice, notional interest is to be computed on the net receivables after netting off payables to all the AEs considered in the aggregate (Ground No.12). 5) The interest rate adopted at 14% is wrong. 11.2.2 On the first issue of taxability of notional income, the assessee submitted that the TPO has tried to bring within the ambit of Section 92, a transaction that is non23 IT (T.P) A No.1529/Bang/2010 existent and in the absence of any provision in the Act, the tax-payer cannot be subje .....

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TA No.7653/Mum/2011) of ITAT, Mumbai Bench. 11.2.3 It was also submitted by the assessee that it had not charged any interest for delayed realisations even in the case of Non-AE transactions. It was submitted that the debts were outstanding with both the AEs and Non-AEs for a period exceeding the credit period purely because of business reasons and that this is a common business practice prevailing in the industry and the delay if any in the payment is not due to extension of credit period by th .....

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e total amount of receivables. In this regard, it was submitted by the learned Authorised Representative that there were no receivables from AEs outstanding for more than 6 months. (ii) It was submitted that if at all any adjustment had to be made, the notional interest is to be computed on the net receivables after netting off payables to all the AEs and not only to the holding company, as taken by the TPO. (iii) It was submitted that the TPO has erred in adopting an interest rate of 14% by sta .....

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have heard the rival contentions and perused and carefully considered the material on record, including the judicial decision cited and placed reliance upon. We find that the decision of the ITAT, Mumbai Bench, in the case of Evonik Degussa P. Ltd. V ACIT - OSD, Circle 3(1), Mumbai (ITA No.7653/Mum/2011, dt.21.11.2012) of ITAT, Mumbai Bench is squarely applicable to the facts of the case in the case on hand. In this decision the ITAT, Mumbai Bench at para 28 thereof has held as under :- 28. Aft .....

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that the billing is done on quarterly basis and, accordingly, the payment is being received. Therefore, the delay is not wholly on account of late payment by the AEs only. Moreover, the T.P. Adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. Thus, on the facts and circumstances of the case, we are of the opinion that addition an account of notional interest relating to alleged delayed .....

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