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2015 (7) TMI 473 - ITAT DELHI

2015 (7) TMI 473 - ITAT DELHI - TMI - Transfer pricing adjustment - exclusion of foreign exchange fluctuation gain/loss from the operating revenue/cost of the assessee as well as the comparables - Held that:- TPO has computed PLI of the assessee as well as comparables by ignoring the amount of forex gain/loss, we set aside the impugned order and remit the matter to the file of TPO/AO to recompute the assessee’s margin as well as that of the comparables by considering foreign exchange gain/loss a .....

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, namely, 2009-10

Bank interest treated as non-operating - Held that:- There is, as such, no bifurcation available of the bank interest and bank charges in the Annual accounts of the assessee. It is noticed that the assessee is not aggrieved against the treatment of bank interest as non-operating. We do not see much difference between the nature of bank charges and bank interest. As the amount of bank interest has been admitted as an item of non-operating expense, the amount of bank c .....

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able opportunity of being heard.

Provision for doubtful advances taken as operating in assessee case and as non-operating in the case of the comparables - Held that:- The assessee has not created any provision for `doubtful debts’. The only provision made by it is of `doubtful advances’. Both the provision for bad debts as well as doubtful advances are in the realm of the operations of the business. It is not the case of the either side that the assessee made any excess provision. In .....

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n, we find that the existence of risk to the assessee cannot be denied. Be that as it may, it is further found that though there is no Provision for doubtful debts (arising from realization of invoices) during the year, but, the assessee did create provision for doubtful debts in the preceding year amounting to ₹ 10,79,665/-. This provision for bad debts is from the revenue side. To contend that the assessee was not running any risk in providing the services is, therefore, patently incapab .....

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as comparable due to this extra-ordinary financial event. Accordingly, the same is directed to be excluded from the final list of comparables.

TCS E-Serve International Ltd. - There is no bifurcation available in respect of the revenues of this company from Transaction processing (which are in the nature of ITES, the same as provided by the assessee) and Technical services (which are in the nature of software development, absent in the assessee’s case). In the absence of the availabi .....

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been brought to our notice. Consequently, we hold that the authorities below were justified in including this company in the list of comparables.

i-Gate Global Solutions Sdn. Bhd. amalgamation took place with the approval of the members of the company on 12.8.2009 and subsequently sanctioned by the Hon’ble High Court by its order dated 24.2.2010. As the financial results of this company also include the results of amalgamating company, in our considered opinion, this is an extraordin .....

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fit or operating cost etc. for the relevant financial year are not directly available without any apportionment or truncation, then these companies should not be considered as comparable.

CG-VAK Software and Exports Ltd. (Seg.) - The quantum of turnover can be no reason for the exclusion of a company which is otherwise comparable.We, therefore, hold that a company cannot be excluded from the list of comparables on the ground of its low turnover. In principle, we direct the inclusion o .....

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onsidering the comparability of CG-VAK Software and Exports apply to this company as well. We, therefore, order for the inclusion of this company in the list of comparables.

Axis IT & T Ltd. - The only reason given by the TPO for the exclusion of this company is its failing export filter. Relevant details of the figures of this company have not been made available. We, therefore, set aside the impugned order on this score and remit the matter to the file of TPO/AO for examining the fu .....

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ent on account of interest to be charged on non-realisation of export proceeds - Held that:- The argument that the Agreement does not provide for charging any interest on late realization of invoice value and hence no interest can be charged, deserves the fate of dismissal under the transfer pricing provisions. Chapter X of the Act has been enshrined to determine the income from an international transaction at ALP, being in the same manner as is determined between two independent parties. It mea .....

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Hon’ble jurisdictional High Court in the case of Cotton Naturals (I) Pvt. Ltd. (2015 (3) TMI 1031 - DELHI HIGH COURT ), in which it has been held that it is the currency in which the loan is to be repaid which determines the rate of interest and hence the prime lending rate should not be considered for determining the interest rate. Under such circumstances, we set aside the impugned order and remit the matter to the file of TPO/AO for a fresh determination of addition on account of transfer pri .....

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Assessing Officer (AO) on 22.12.2014 under section 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called the Act ) in relation to the assessment year 2010-11. 2. The first major issue raised in this appeal is against the addition made by the AO on account of transfer pricing adjustment to the tune of ₹ 20,48,76,996/- in the international transaction of Provision of IT Enabled data conversion services (hereinafter also referred to as the ITES for brevity). Succ .....

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rimarily engaged in providing ITES to its associated enterprise (AE). Apart from certain reimbursement of expenses, the assessee reported an international transaction of Provision of IT enabled data conversion services with the transacted value of ₹ 129,58,11,907/-. The assessee adopted the transactional net margin method (TNMM) as the most appropriate method for demonstrating that this international transaction was at arm s length price (ALP). On a reference made by the AO to the Transfer .....

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ts (OP/OC) at 33.71%. By applying this profit margin to the operating costs incurred by the assessee in rendering the ITES, the TPO worked out a transfer pricing adjustment of ₹ 20,48,76,996/-. The assessee largely remained unsuccessful before the Dispute Resolution Panel (DRP). That is how, the AO made addition of ₹ 20.48 crore on account of transfer pricing adjustment in the international transaction of Provision of IT enabled data conversion services. The assessee is in appeal aga .....

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les. We find merit in the contention raised on behalf of the assessee about the inclusion of foreign exchange gain/loss in the operating revenue/costs of the assessee as well as that of the comparables. When we advert to the nature of such foreign exchange gain earned by the assessee, it prima facie appears that the same is in relation to the revenue earned from its AE in connection with the provision of the ITES. When the foreign exchange gain directly results from the consideration received fo .....

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hat the gain due to fluctuations in the foreign exchange rate emanating from export is its integral part and cannot be differentiated from the export proceeds simply on the ground that the foreign currency rate has increased subsequent to sale but prior to realization. It went on to add that when goods are exported and invoice is raised in currency of the country where such goods are sold and subsequently when the amount is realized in that foreign currency and then converted into Indian rupees, .....

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Bench held that such exchange rate gain arising from exports cannot be viewed differently from sale proceeds. 4.3. In the context of transfer pricing, the Bangalore Bench of the Tribunal in SAP Labs India Pvt. Ltd. Vs ACIT (2011) 44 SOT 156 (Bangalore) has held that foreign exchange fluctuation gain is part of operating profit of the company and should be included in the operating revenue. Similar view has been taken in Trilogy E Business Software India (P) Ltd. Vs DCIT (2011) 47 SOT 45 (URO) (B .....

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er and remit the matter to the file of TPO/AO to recompute the assessee s margin as well as that of the comparables by considering foreign exchange gain/loss as an item of operating revenue/cost. We want to make it clear that our finding in this regard is restricted to considering forex gain/loss from the transactions of the revenue nature as part of operating revenue/cost. If some part of forex gain/loss turns out to be relatable to transactions on capital accounts, then that part cannot be con .....

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ive comparison of the operating costs by considering such bank charges as non-operating in the case of comparables. 5.2. Having heard both the sides and perused the relevant material on record, it is obvious that the assessee incurred bank interest which has been treated as non-operating. There is, as such, no bifurcation available of the bank interest and bank charges in the Annual accounts of the assessee. It is noticed that the assessee is not aggrieved against the treatment of bank interest .....

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ank interest and bank charges in the case of the assessee s computation of ALP and that of the comparables is in accordance with our above observations. Needless to say, the assessee will be afforded a reasonable opportunity of being heard. III. PROVISION FOR DOUBTFUL ADVANCES 6.1. The ld. AR contended that the TPO erred in taking Provision for doubtful advances amounting to ₹ 17,11,167/- as operating in its case and provision for doubtful debts as non-operating in the case of the comparab .....

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nces are in the realm of the operations of the business. It is not the case of the either side that the assessee made any excess provision. In our considered opinion, the same has been rightly taken as an item of operating expense of the assessee. The TPO is directed to treat the amount of provisions for doubtful debts/advances as operating in the case of the comparables as well. IV. RISK ADJUSTMENT 7.1. The ld. AR vehemently argued that the TPO erred in not allowing any risk adjustment. It was .....

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ds some of the tribunal decisions, in which such an adjustment has been allowed. In fact, there cannot be a general rule of allowing or not allowing risk adjustment. Risk is nothing but a possible adverse perception in the given circumstances, which may or may not finally fructify. Generally, risks and rewards go side by side. Higher the risk, more the profit; and vice versa. Level of risk depends on the facts and circumstances of each case. Where the assessee succeeds in ably demonstrating that .....

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isk adjustment can be allowed provided the assessee places on record some appropriate material to demonstrate that the risks undertaken by the comparable companies were relatively more than it, warranting downward adjustment in their profit rates. Further, the variation in such risks, if any, should be capable of quantification on some reasonable and logical basis. 7.3. The ld. AR stated before us that the assessee was not having any risk at all inasmuch as its services were to be compensated by .....

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r due to reasons beyond his control, the possibility of realization of debts for the services already rendered, becomes a potential risk. Further, the fear of termination of agreement between such an enterprise and the solitary customer also poses a grave threat to the existence of such an enterprise. In that sense of the matter, an enterprise serving a single customer, also assumes marked risks. As the assessee is wholly dependent on its AE for securing business, its entire existence also depen .....

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AR submitted that this provision was created in respect of expenses incurred by the assessee in rendering the services to the AE and not on the realization of sale proceeds. We fail to appreciate the rationale of this contention that the assessee assumes no risk of realization of invoices from its AE, but there may be a risk of advances given for expenses incurred during the course of rendering services. Ultimately risk is risk, whether it is of realization of invoices or of advances given for .....

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To contend that the assessee was not running any risk in providing the services is, therefore, patently incapable of acceptance. Since the ld. AR has failed to objectively demonstrate the relatively higher risks undertaken by the comparables on an overall basis vis-à-vis the assessee, we are disinclined to grant any risk adjustment. V. SELECTION OF COMPARABLES 8. The assessee is aggrieved against the inclusion of five companies in the list of comparables and the exclusion of six companie .....

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irstly, we will deal with the companies which have been included by the TPO in the final set of comparables and the assessee claims them to be incomparable. A submission common to some of such companies was made by the ld. AR that certain Benches of the Tribunal in other cases have held them to be not comparable. In that view of the matter, it was urged that those companies, being ex facie incomparable, be automatically excluded from the list of comparables drawn by the TPO. 9.2. We express our .....

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sons as well. To cite an example, if company A , though functionally similar to company B , but has related party transactions (RPTs) breaching a particular level, then, such company cannot be considered as comparable to company A in the year in which the RPTs breach such a level. If, however, in the subsequent year, the related party transactions fall below that barrier, then such company would again become comparable. To put it simply, if company A has been held to be incomparable vis-a-vis co .....

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her relevant reasons. If company A passes the same reasons vis-a-vis company C , then company A will find its place in the list of comparables of company C , notwithstanding the fact that it was held to be incomparable to company B . The crux of the matter is that the mere fact that company A has been held to be not comparable in a judicial order passed in the case of company B , does not per se make it incomparable in all the subsequent cases to follow. Not only company A held to be incomparabl .....

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ascertained only after matching the functional profile and the relevant reasons of the other company. Ergo, this contention raised on behalf of the assessee cannot be accepted. With the above parameters and the factual matrix, we will distinctly examine the companies chosen by the TPO to ascertain if they are really comparable. i) Accentia Technologies Ltd. 10.1.1. The assessee objected to the inclusion of this company in the list of comparables on several reasons including peculiar economic cir .....

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as been placed on page 435 onwards of the paper book. Notes to Accounts of this company, which have been placed on page 443 of the paper book, indicate about the amalgamation of Asscent Infoserve Pvt. Ltd. with it as approved by the shareholders in the court convened meeting held on 25.4.2009 and, subsequently, sanctioned by the Hon ble High Court on 21.8.2009. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176, has held that a company cannot be conside .....

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nary financial event. Accordingly, the same is directed to be excluded from the final list of comparables. ii) TCS E-Serve International Ltd. 10.2.1. The assessee objected to the inclusion of this company on the ground that it provided financial information processing and customer contact services with high level of foreign expenditure and abnormal profits. The TPO noticed that this company was also offering ITES. He did not treat high turnover of this company as a relevant factor in considering .....

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ransaction processing and technical services. Transaction processing includes the broad spectrum of activities involving processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities. It is manifest that this company is engaged in rendering BPO services to the banking an .....

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ee, though not specifically similar. However, the Technical services involve software testing, verification and validation of software item, implementation and data centre management activities. The Technical services rendered by this company are in the nature of servicing and maintenance of software. At this stage, it is relevant to note that a company providing software services may be of two types, viz., a company providing software development services and a company providing software servic .....

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company using, inter alia, a software for obtaining the desired results, is called a company providing non-development software services. Thus, it is crystal clear that there is a phenomenal difference between a company providing software development services and a company providing software non-development services in terms of expertise, professional qualification and experience required for rendering such services. A company providing software non-development services performs a relatively low .....

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ained with the help, inter alia, of a software. From the above discussion, it is overt that a company providing software development services is distinct from and incomparable with a company providing non-development software services. 10.2.3. We find that the assessee is a company providing nondevelopment software services, in the nature of conversion of data from hard copy or files into electronic format. The assessee is not providing any software development services to its AE. On the other h .....

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d by the assessee) and Technical services (which are in the nature of software development, absent in the assessee s case). In the absence of the availability of any such segregation of the total revenue of this company, it is not possible to separately consider its profitability from rendering of Transaction processing services . As such, the entity level figures render this company as unfit for comparison. Ergo, we order for the removal of this company from the final set of comparables. iii) T .....

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the Annual report of this company is available on page 466 of the paper book. The company s overview has been discussed on page 467 of the paper book, which divulges that this company : is in the business of providing business process management services in the banking and financial services (BFSI), vertical ( i.e. industry vertical) to help its customers achieve their business objectives by providing innovative best-in-class services. We find that this company is also providing ITES. Unlike TCS .....

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. We are disinclined to sustain this objection. Matching of the exact functional similarity is dispensed with under the TNMM, which is not so under the Comparable uncontrolled price method. The TNMM approves comparability on the basis of broader overall similarity. When we consider the nature of services provided by this company, being the ITES, which is similar to that of those rendered by the assessee, again the ITES, we cannot order its exclusion simply for the reason that the verticals of IT .....

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similarity and not the peculiar similarity, as has been now contrastly contended for the exclusion of this company. This argument, therefore, fails. 10.3.3. In so far as the objection of the ld. AR about the high profit/high turnover of this company is concerned, we find that the Hon ble Delhi High Court in ChrysCapital Investment Advisors (India) P. Ltd. Vs. DCIT has held , vide its judgment dated 27.4.2015, that high profit or high turnover is not a criteria to exclude an otherwise comparable .....

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ed Satyam Computer only. The Tribunal excluded only Infosys Technologies Ltd., by impliedly retaining L&T Infotech Ltd. as a good comparable. On appeal by the Revenue, the Honourable High Court upheld the Tribunal order excluding Infosys on the strength of certain relevant distinguishing features including its giantness in terms of sales, nature of work and other factors. Thus it follows that L&T Infotech Ltd., which is otherwise a vast company with much higher turnover, finally found th .....

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ded this company in the list of comparables despite the assessee s objections about such company offering both IT and ITES services and the peculiar circumstance of amalgamation of i- Gate Global Solutions Sdn. Bhd., with this company during the financial year 2009-10. 10.4.2. We have gone through the Annual report of this company which is available on page 446 onwards of the paper book. Notes to accounts of this company indicate amalgamation of i-Gate Global Solutions Sdn. Bhd. This amalgamatio .....

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ich it has been held that a company loses the tag of comparability due to amalgamations, mergers, etc., taking place during the year in question. Adopting the same reasoning, we order for the exclusion of this company from the list of comparables. v) Infosys BPO 10.5.1. The TPO included this company in the list of comparables. The assessee s objections against its inclusion were overturned. 10.5.2. After considering the rival submissions and perusing the relevant material on record, we find from .....

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e companies. 11. The assessee is aggrieved against the exclusion of six companies from the final set of comparables by the TPO. We will deal with these companies hereinafter. i) R. Systems International Ltd. (Seg.); Jindal Intelicom Pvt. Ltd.; and Caliber Point Business Solutions Ltd. 12.1.1. The assessee included these three companies in its list of comparables. However, the TPO eliminated R. Systems (Seg.) on the ground that it was following different year ending, namely, 31st December and, he .....

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figures were for more than 12 months in contrast to the assessee following financial year ending 31st March. It was, however, submitted that these three companies should not have been excluded for this reason alone when they were otherwise functionally similar, a fact which has not been disputed by the TPO. The ld. DR opposed this contention by submitting that the data for the year ending of these companies was not similar to that of assessee company and hence such companies were rightly exclude .....

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an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction had been entered into. It is obvious from the language of sub-rule (4) that the comparability of an uncontrolled transaction can be analyzed only with the data relating to the financial year in which the international transaction has been entered into. In other words, if the tested party has March year ending, then, the comparables must also have t .....

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ee companies was either different or financial year included results for 15 months, yet, the assessee was in a position to put forward the data of these three companies for the financial year 1.4.2009 to 31.3.2010 from their Annual reports only. It was so stated on the basis of the availability of the quarterly data from the Annual reports of these companies, which could be adjusted for the financial year ending 31.3.2010. If the contention of the assessee is correct, that the relevant data for .....

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es for the concerned financial year on the basis of the information available from their Annual reports only, the TPO should include these companies in the list of comparables by considering their OP/OC on the basis of the financial year ending 31.3.2010. If however, even though their quarterly data is available and can be compiled for the relevant financial year, but the amounts of operating profit or operating cost etc. for the relevant financial year are not directly available without any app .....

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he functional comparability of this company on segmental level. The ld. DR was also fair enough to candidly accept the functional similarity of the relevant segment of this company. In such circumstances, the question arises as to whether the relevant segment of this company can be excluded from the list of comparables merely on the ground that the revenue from this segment is only ₹ 83 lacs? In our considered opinion, the quantum of turnover can be no reason for the exclusion of a company .....

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of its low turnover. In principle, we direct the inclusion of the relevant segment of this company in the list of comparables. The TPO is directed to include the operating profit/operating costs of the ITES segment of this company in the list of comparables, after due verification of the necessary figures for determination of the operating profit margin etc. iii) Micro Genetics Systems Ltd. 12.3.1. The TPO excluded this company from the list of comparables by observing that its turnover was onl .....

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sion in the set of comparables. iv) Axis IT & T Ltd. 12.4.1. The TPO excluded this company by mentioning that it failed export filter as the total exports of this company were only 43.16% of the total operating revenue. Here again, we find that the only reason given by the TPO for the exclusion of this company is its failing export filter. Relevant details of the figures of this company have not been made available. We, therefore, set aside the impugned order on this score and remit the matt .....

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ersion services to the file of TPO/AO for a fresh decision in accordance with our above observations/directions and also the interest aspect as discussed infra. Apart from the issues discussed in this order, the decision of the TPO on all other aspects of the determination of the ALP of this international transaction should be considered as final, as no other issue has been agitated before us. VI. INTEREST ON DELAYED/NON-REALIZATION OF EXPORT PROCEEDS 13.1. On going through the Master Service Ag .....

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to be compensated with interest @ 1.5% to 2% per month on the outstanding amount. The assessee was required to give working of interest on late realization or non-realization of export proceeds during the financial year 2009-10. Such working given by the assessee has been made Annexure-1 to the order of the TPO. On a perusal of the statement of non/late realization of export invoices furnished by the assessee, the TPO held that the assessee ought to have charged @ 15% p.a. on receivables as on 1 .....

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he assessee is aggrieved against this addition. 13.2. The ld. AR contended that the Agreement between the assessee and its AE does not provide for any charging of interest and, hence, there can be no question of any notional/hypothetical interest income as has been determined by the TPO. To support the non-charging of interest, he relied on the judgment of the Hon ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. Vs. Union of India and Others (2014) 368 ITR 1 (Bom.). He butt .....

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ate of dismissal under the transfer pricing provisions. Chapter X of the Act has been enshrined to determine the income from an international transaction at ALP, being in the same manner as is determined between two independent parties. It means that if an income is not charged or under charged by an Indian entity from its foreign AE, which ought to have been properly charged if the transaction had been between two independent parties, then such under charged or uncharged income needs to be brou .....

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e of shares. It is on this excess share premium short received, that the amount of interest was also charged. The Hon ble Bombay High Court overturned the opinion of the TPO by holding that the amount of less share premium received over and above the actual premium received cannot be added as TP adjustment because the receipt of premium itself, being a capital receipt, is not chargeable to tax. When the amount of premium is a capital receipt, the Hon ble High Court held that the so called short .....

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different from those considered in the case of Vodafone India Services Pvt. Ltd. (supra). The base amount on which interest was calculated by the TPO in the case of Vodafone India (supra) was itself a capital receipt not chargeable to tax and not a trading debt arising during the course of business, which issue has been discussed in the immediately succeeding paras. Instantly, we are concerned with the late realization by the assessee of trading debt from its AE which is otherwise a revenue rec .....

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ubts, it is hereby clarified that- (i) the expression "international transaction" shall include- (a) ………… (b) ……….. (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;…. 13.6. On circumspection of the relevant part of .....

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circumstances as mentioned in this clause of the Explanation, also become international transactions, requiring the determination of their ALP. If the payment of interest is excessive or there is no or low receipt of interest, then such interest expense/income needs to be brought to ALP. The expression debt arising during the course of business in common parlance encompasses, inter alia, any trading debt arising from the sale of goods or services rendered in the course of carrying on the busine .....

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llowing question of law:- (c) Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises? 13. .....

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e AE for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined. 13.10. In so far as the reliance of the ld. AR on the judgment in Cotton Naturals (I) Pvt. Ltd. (supra) is concerned, we find the facts of that case to be distinguishable. In that case, a loan was advanced by that assessee to a wholly owned subsidiary in the USA. The assessee selected the Comparable Uncontrolled Price (CUP) method to benchmar .....

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lso to be repaid in the same currency, i.e., US Dollars. In that view of the matter, it was held that the currency in which the loan is to be repaid normally determines the rate of return on the money lent and the interest rate applicable to loans granted and to be returned in Indian rupee would not be a relevant comparable. The prime lending rate was, therefore, held to be not applicable. From the above narration of facts, it is clear that, firstly, in the case of Cotton Naturals (I) Pvt. Ltd. .....

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c issue of chargeability of interest. Be that as it may, the amendment to section 92B made with retrospective effect from 1.4.2002 sets the controversy to rest inasmuch as it provides in unambiguous terms that any other debt arising during the course of business is an international transaction. Ex consequenti, transfer pricing adjustment on account of interest income is mandated in case of late/non realization of invoice value from AE. The view canvassed by the ld. AR on this issue is, therefore .....

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ng adjustment for the period in excess of 60 days. In our considered opinion, transfer pricing adjustment on account of interest for the entire period of delay beyond 60 days cannot be treated as a separate international transaction of trading debt arising during the course of business. It is noticed that the assessee entered into an agreement with its AE for realization of invoices within a period of 150 days. This implies that the interest amount on non-realization of invoices up to 150 days w .....

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manifested that in certain cases these invoices have been raised on 31st August, 30th or September or 31st October, 2009. In all such cases, the period of 150 days already stood expired as on 31st March, 2010 and the assessee ought to have charged interest on the delay in realizing such invoices along with the first three and a half pages in which there is an absolute and identified delay in realization of invoices beyond the stipulated period. When the interest for realization of trade advances .....

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rable companies with the amount of interest for the period between that allowed by them in realization of invoices and 150 days as allowed by the assessee, so as to bring such comparables at par with the assessee s international transaction of provision of the ITES. To illustrate, if the comparables have allowed credit period of, say, 60 days and the assessee has realized its invoices in 180 days, then interest for 90 days (150 days minus 60 days) should be added to the price charged by the comp .....

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