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2015 (7) TMI 602 - ITAT MUMBAI

2015 (7) TMI 602 - ITAT MUMBAI - TMI - Transfer pricing adjustment - adjustment by charging notional interest for delayed recovery of export receivables and delayed recovery of expenses from AEs till the date of transfer pricing order - Held that:- The addition on account of interest should be computed only till the end of financial year (i.e. till 31 march 2009 and not till the date of passing of transfer pricing order (i.e. 28 January 2013). It is trite law that income tax has to be computed .....

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We also found that during the year under consideration, the assessee has received advances from AE's for the purpose of export, therefore computation of interest, if any, on delayed recovery of export receivables should be after reducing the advances received from AE's for the purpose of export. From the record, we found that so called delay repatriation from foreign AE's, TPO/ AO, while working out deemed notional interest has considered interest rate of 12.25% p.a. (SBI PLR). As per our .....

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erest thereon. We found that the recovery of expenses was beyond the normal period of 60 days. Recovery of expenses beyond the normal period was in the nature of deemed loan in the hands of AEs and require transfer pricing adjustment. Accordingly, we do not find any infirmity in the transfer pricing adjustment made. However, we direct the AO to charge interest by applying LIBOR rate. - Decided partly in favour of assesse statistical purposes. - ITA No.487/Mum/2014 - Dated:- 8-7-2015 - Shri .....

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ferred to as 'TICB is engaged in the business of execution of turnkey project services particularly in the field of petrochemicals, oil and gas, fertilizers and instrumentation and electrical erection. It is also engaged in activities like EPC lump sum turnkey contracts, engineering design services, supervision services, translation services and feasibility studies. It also renders onshore/ offshore design and engineering services and field construction supervision services. During AY 2009-1 .....

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& instrumentation work 34,41,48,917 2 Tecnimont Arabia Ltd Electrical & Instrumentation work 139,43,12,063 3 TWS SA Project Services 11,92,62,993 4 Sofregaz SA Project services 1,74,404 5 Tecnimont ICB Qatar WLL PO Project services 4,09,28,739 Transaction with AE s PE in India 6 Tecnimont SpA India Project office Execution of EPC Project 156,69,36,279 Reimbursement of expenses to AEs Recovery of expenses from AEs *All transactions were aggregated and benchmarked using TNMM at segment le .....

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ber 2013 was issued assessing the assessee at total income of ₹ 67,96,55,391, thereby confirming the transfer pricing adjustment of ₹ 10,36,49,646 on account of notional interest for delayed recovery of export receivables and delayed recovery of expenses from AEs by applying interest rate of 12.25% (i.e. SBI PLR). Assessee is aggrieved by this addition of notional interest. 3. It was contended by ld. AR that assessee company does not charge any interest on outstanding advances to AE& .....

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ules as prevailing at that point of time and therefore the transfer pricing regulations do not apply to the same. Further contention of ld. AR was that while transacting with group entities/ third parties, it is a common practice to extend certain credit period. Assessee provides services to AEs and hence inter-company balances (debit! credit receivables) are unavoidable. AO/TPO failed to appreciate that AEs were facing financial difficulties in the relevant assessment year, which has resulted i .....

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e Income Tax Rules. As per the ld. AR similar proposition was also upheld by Delhi Tribunal, specifically dealing in transfer pricing scenario. In this regard, reliance is placed on the Delhi Tribunal ruling in the case of Bharti Airtel Ltd (ITA No.5816/DeI/2012) dated 11 March 2014 (Del) (PB pg 389- 445) wherein the following has been observed: "(34). There is more than one aspect of the matter. The Explanation to section 928 has been brought on the statute by the Finance Act 2012. If one .....

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is, is not primarily a source of revenue as it mainly seeks compliant behavior from the assessee vis-a-vis certain norms and these norms cannot be given effect from a date earlier than the date norms are being introduced. However as we have decided the issue in favour of the assessee on merits and even after taking into account the amendments brought by the Finance Act 2012 we need not deal with this as aspect of the matter in greater detail." 4. It was also the contention of ld. AR that si .....

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same is reduced from such total profit so as to exclude such notional interest income from the total income, the margin earned by the assessee even after reducing such amount is still much higher than the margin earned by the comparable companies. 5. It was also contended by ld. AR that AO/TPO failed to consider that transaction between TICB and Tecnimont SpA India Project Office ('TIPO') (PE of foreign AE in India) is a transaction between two resident entities and therefore such trans .....

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ed as a separate business entity, similar to any other corporate entity doing business in India. In the present case, the business activities of TIPO are conducted in India and the establishment is maintained in India. As a separate business unit, TIPO has its own audited accounts prepared in terms of Indian accounting standards for submitting to the Indian Tax Authorities for the purpose of tax proceedings in India. Therefore, the legal status of the PE being an extension of a foreign company, .....

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ed outside India) and the argument taken by the assessee was that its entire profit is exempt from tax (due to tax deduction) and hence, there is no intention of base erosion and hence transfer pricing is not applicable. As against, in the facts of the present case, the transaction entered by the assessee (located in India) is with PE or its AE (located in India) and hence, it was held by Hyderabad Tribunal in the case of IJM (India) Infrastructure Ltd., 28 ITR (trib) 176 that any transaction of .....

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y in recovery of export receivable beyond the normal credit period of 60 days. 7. We have considered rival contentions, carefully gone through the orders of the authorities below. We have also deliberated on the judicial pronouncements cited at bar by ld. AR and ld. DR in the factual matrix of instant case. From the record we found that the assessee company had provided EPC services to its AEs, and as the concerned AEs were going through financial difficulties certain payments by the AEs to the .....

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ed recovery of expenses. Thus, a total adjustment of ₹ 10,36,49,646/- was proposed by the TPO and incorporated in the assessment order. 8. From the record we found that assessee has not charged interest in respect of services rendered to non-AEs, payment of which was received beyond normal credit period of 60days. We also found that assessee was having advances from AE. Charging of interest by TPO in respect of amount received beyond 60 days is correct as per the amendment brought in by th .....

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ear insofar as Section 92(1) of the Act specifically provides to tax not income arising from any international transaction which is to be computed with regard to the arms length price for the year under consideration. Accordingly, we restore the matter back to the file of AO to recompute the interest in terms of the above direction. 9. It was also brought to our notice that while fixing the sale price the assessee has already considered the delay, if any, in recovery of the price. Accordingly, w .....

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argin earned on its non-AE transactions. Since the transactions are intrinsically linked and the assessee under the TNMM fits within the arm's length, the assessee should be given due credit for the same while computing chargeable interest for delayed payment. 11. The Mumbai Tribunal in the case of Goldstar Jewellery Limited Vs JCIT (ITA No 6570/Mum/2012) held that since sale price of the product or service was always influenced by the credit period allowed by the seller, the transaction of .....

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as pronounced a ruling dated 31 March 2015, in the case of Kusum Hea care Pvt Ltd (ITA No 6814/DeI/2014) (Delhi Tribunal), on similar facts. The Tribunal therein followed the ratio laid down by Sony Ericsson (supra) and held as under: "(14) .... the differential impact of the 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 o .....

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th established transfer pricing principles ... " 12. The addition on account of interest should be computed only till the end of financial year (i.e. till 31 march 2009 and not till the date of passing of transfer pricing order (i.e. 28 January 2013). It is trite law that income tax has to be computed with reference to previous year and as per Section 5 of the Act explains the scope of total income to be considered earned by any person during the previous year. In the present case, the TPO .....

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y of export receivables should be after reducing the advances received from AE's for the purpose of export. Reliance is placed on the Mumbai Tribunal ruling in the case of Boston Scientific International BV India (40 SOT 11) (2010) wherein it has been held that interest income on accounts receivables of an assessee from its AE should be examined after considering the outstanding payables from that AE. 14. From the record, we found that so called delay repatriation from foreign AE's, TPO/ .....

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