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Asstt. Commissioner of Income Tax Circle–2 (2) , Aayakar Bhavan, Mumbai Versus Information Systems Resource Centre Private Limited

2015 (6) TMI 175 - ITAT MUMBAI

LIBOR based interest rate - whether such rate may be applied where Indian entities borrow loans from overseas whereas the position is totally reverse in the present case and the A.O. had correctly applied SBI PLR based interest rate? - Held that:- The issue of adopting the PLR of the public sector banks or LIBOR for the purpose of arm's length interest has been considered by this Tribunal in the series of decisions. See Micro Inc. Ltd. v/s ACIT [2013 (8) TMI 332 - ITAT AHMEDABAD] - Decided again .....

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irically demonstrates that the differential impact of working capital of the vis-a-vis its comparables has already been factored in 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. Thus set aside this issue to the record of the Assessing Officer / Transfer Pricing Officer and direct to re .....

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impugned order dated 9th October 2012, passed by the Commissioner (Appeals)-15, Mumbai, for the assessment year 2007-08. 2. We first proceed to dispose off the appeal filed by the Revenue being ITA no.7757/Mum./2012, for the assessment year 2007-08, vide which, following grounds have been raised by the Revenue. 1. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in applying the LIBOR based interest rate overlooking the fact that such rate may be applied where .....

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er observed that the assessee has provided additional credit period beyond 60 days mutually agreed for sale transaction without charging any interest on the same. The assessee was asked as to why the interest be not charged in computation of arm's length price in respect of such transaction. The assessee filed its submissions and justified that no interest adjustment was required considering the facts of the case and even any adjustment has to be made the same should be through working capit .....

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ore the learned CIT(A). The learned CIT(A) though confirmed the transaction of extending the credit period subject to transfer pricing provisions, however, instead of PLR as an arm's length interest, it was directed that LIBOR based interest rate should be taken as arm's length interest rate for the purpose of computing the adjustment. Thus, the Revenue as well as the assessee are aggrieved by the impugned order of the learned CIT(A), whereby the LIBOR based interest is applied for the p .....

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is Tribunal in the series of decisions. The decision of the Tribunal, Ahmedabad Bench, in Micro Inc. Ltd. v/s ACIT, ITA no.1668/Ahd./2006, vide order dated 6th August 2013, has considered an identical issue in Para-17 and 18, which is reproduced below:- 17. As is evident from the above discussions, the relationship between the assessee and its step down subsidiary Micro USA was simply that of a lender and a borrower. Not only the Micro USA was a significant part of the marketing apparatus of the .....

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ed and the LIBOR or other bank rate linked rate is generally taken as a rate for comparable uncontrolled transaction. As has been held in a large number of cases, including in VVF (supra) and Perot Systems (supra), in the cases of arm's length prices of loans and advances, costs of funds have no relevance and it is only the rate applicable for comparable uncontrolled transaction that is to be taken into account. However, even while applying CUP method, one has to bear in mind the fact that i .....

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ally affect the price in the open market: (ii) The adjusted price arrived at under sub-clause (ii) is taken to be an arms length price in respect of the property transferred or services proved in the international transaction; (Emphasis by underlining supplied by us) 18. Therefore, even when we take LIBOR plus rate as the base rate for an advance in step 1 of the above computation process, such base rate will have to adjusted inter alia for the differences........... (a) between the internationa .....

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m the Reserve Bank of India, a typical LIBOR plus rate transaction is the transaction in which banks gives secure advances, for making profits out of so lending the money, to its customers. Strictly -speaking, there is no parity between these two types of transactions. Secondly, we are dealing with a situation in which the two enterprises are mutually dependent for commercial reasons. While Micro USA is dependent on the assessee for its sheer existence, the assessee is dependent on Micro USA for .....

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tion for giving advance is earning interest. Clearly, thus, LIBOR plus rate cannot be adopted in this situation for two fundamental reasons - (i) first, that it is not a simplictor financing transaction between the assessee and Micro USA, as it is a transaction of investing in a step down subsidiary as quasi capital pending formal capital subscription with the approval of Reserve Bank of India; and (ii) second, that it is not a case of granting advance to a business concern without significant a .....

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ally affect the price in the open market". On account of these peculiar factors, the application of LIBOR plus rate or, for that purpose, any bank rate will be inappropriate to this case. 6. We further note that the number of other cases, the Tribunal has taken a similar view. Accordingly, to maintain the rule of consistency, we do not find any error or illegality in the order of the learned CIT(A). Accordingly, the grounds raised by the Revenue are dismissed. 7. In the result, Revenue s ap .....

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fact that for any disparity with respect to receipt of receivables within a stipulated credit period, working capital adjustments were undertaken by the assessee thereby eliminating the need to undertake separate interest adjustment. 2. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in upholding the levy of interest and using the London Interbank Offered Rate (LIBOR) based rate for selective receipts from trade receivables and not using the interest rate as .....

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refore, this transaction has to be considered along with the international transaction of the assessee in respect of sale with the A.E. In support of his contention, he has relied upon the following decision:- i) Goldstar Jewellery Ltd v/s JCIT, ITA no.6570/Mum./012, order dated 14.1.2015; and ii) Kusum Healthcare Pvt. Ltd. v/s ACIT, ITA no.6814/Del./ 2014, order dated 31.3.2015. 9. The learned Counsel for the assessee has submitted that the Tribunal in Gold Star Jewellery Ltd. (supra), while de .....

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the Tribunal, Delhi Bench, in Kusum Healthcare Pvt. Ltd. (supra), held that instead of making a separate adjustment on account of credit provided to the A.E. only working capital adjustment for the operating margin of the comparable company has to be worked out. Thus, the learned counsel submitted that only the differential impact of working capital has to be taken into account. 10. On the other hand, the learned Departmental Representative has submitted that insofar as the credit period provid .....

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tmental Representative has further contended that the assessee has not produced any evidence to show that the extension of the credit period is as per the terms of the sale between the parties. It has not been provided in the invoice of sale transaction, therefore, the assessee has failed to demonstrate from the record that the extra credit period provided by the assessee to the A.E. was part of the sale transaction. The interest on the credit is compensation for delayed payment and based on the .....

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he Transfer Pricing Officer has made the adjustment on account of credit period provided by the assessee to the A.E. on realisation of sale proceeds. At the outset, we note that an identical issue has been considered by the co-ordinate bench of the Tribunal, Mumbai Benches, in Goldstar Jewellery Ltd. (supra), vide Para-8, held as under:- 8. We have considered the rival submissions and relevant material on record. The assessee has reported international transaction in its TP report regarding sale .....

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the issue of international transaction, however, the adjustment was reduced by applying the interest rate of 7% instead of 18.816% applied by the TPO. The first issue raised by the assessee is whether the aggregate period extended by the assessee to the AE which is more than the average credit period extended to the non-AE would constitute international transaction. We are of the view that after the insertion of explanation to section 92B(1), the payment or deferred payment or receivable or any .....

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independent international transaction but it is a closely linked or continuous transaction along with sale transaction to the AE. The credit period allowed to the party depends upon various factors which also includes the price charged by the assessee from purchaser. Therefore, the credit period extended by the assessee to the AE cannot be examined independently but has to be considered along with the main international transaction being sale to the AE. As per Rule 10A(d) if a number of transact .....

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ons are closely linked or continuous so as to aggregate for the purpose of evaluation what is to be considered is that one transaction is follow-on of the earlier transaction and then the subsequent transaction is carried out and dependent wholly or substantially on the earlier transaction. In other words, if two transactions are so closely linked that determination of price of one transaction is dependent on the other transaction then for the purpose of determining the ALP, the closely linked t .....

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ended to the AE cannot be treated as a transaction stand alone without considering the main transaction of sale. The sale price of the product or service determined between the parties is always influenced by the credit period allowed by the seller. Therefore, the transaction of sale to the AE and credit period allowed in realization of sale proceeds are closely linked as they are inter linked and the terms and conditions of sale as well as the price are determined based on the totality of the t .....

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or aggregated with the sale transactions with the AE. Even by considering it as an independent transaction the same has to be compared with the internal CUP available in the shape of the credit allowed by the assessee to non AE. When the assessee is not making any difference for not charging the interest from AE as well as non-AE then the only difference between the two can be considered is the average period allowed along with outstanding amount. If the average period multiplied by the outstand .....

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proceeds from the AE. Therefore, the arm s length interest in any case would be the average cost of the total fund available to the assessee and not the rate at which a loan is available. Accordingly, we direct the Assessing Officer/TPO to re-do the exercise of determination of ALP in terms of above observation. 12. Thus, it is clear that the Tribunal has taken a view that the transaction of allowing the credit period to the A.E. on realisation of sale proceeds has to be considered along with th .....

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port 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 long .....

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ependently. Such working capital adjustment takes into account the impact of outstanding receivables on the profitability. In this regard, the reliance is placed on the following rulings wherein the need to undertake working capital adjustment has been appreciated by the Hon ble Tribunals : 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 .....

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