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2016 (11) TMI 975 - ITAT MUMBAI

2016 (11) TMI 975 - ITAT MUMBAI - TMI - Addition on account of notional interest chargeable on the outstanding debtors (associated enterprises) balances - Held that:- Without going into the controversy as to whether the overdue receivables from associated enterprises constitute an ‘international transaction’ within the meaning of Sec. 92B of the Act or not, the assessee deserves to succeed on its alternate plea. The aforesaid discussion clearly shows that after factoring in the notional interest .....

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hus, on the aforesaid limited aspect, we hold that the addition of ₹ 15,82,891/- on account of notional interest chargeable on the outstanding debtors (associated enterprises) balances is not tenable and is directed to be deleted - ITA No. 1145/Mum/2014 and ITA No. 1136/Mum/2014 - Dated:- 31-10-2016 - SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, JUDICIAL MEMBER. Assessee by : Shri Ronak Doshi Revenue by : Shri N.K. Chand and Shri Mohammed Rizwan ORDER PER G.S. PANNU, AM : The .....

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S LENGTH ADJUSTMENT ₹ 15,82,891/- 1. On the facts and in circumstances of the case and in law, the ld. CIT(A) erred in confirming the action of Income-tax officer - 9(2)(3) * the AO"+ by treating the outstanding debtors balance as at the year end as an international transaction u/s 92B and thereby computed arms length price u/s 92C(3) by making addition of notional interest. 2. The ld. CIT(A) failed to appreciate and ought to have held that the continuing debit balance with Associate .....

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er, still the margin of Appellant are more than comparables and hence, no further addition is called for u/s 92C(3) of the Act. 5. The Appellant humbly prays that the order of the ld. CIT(A) be set aside and the adjustment on account of arm s length price adjustment be deleted. ITA No. 1136/Mum/2014 (Revenue s appeal) 1. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was right in directing the assessing officer to workout interest in respect of Arm s Length .....

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of appeal show, the singular dispute arises from an addition of ₹ 15,82,891/- made by the Assessing Officer on account of notional interest on the outstanding debit balances with associated enterprises by treating the same as an international transaction in terms of Sec. 92B of the Act. In other words, grievance of the assessee is that income-tax authorities have erred in treating the outstanding debtor balances as at the end of year as an international transaction u/s 92B of the Act and .....

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0A of the Act amounting to ₹ 1,63,23,157/- and it offered tax on book profit of ₹ 1,49,18,266/- u/s 115JB of the Act since tax computed u/s 115JB of the Act was more than the tax computed under the normal provisions of the Act. Be that as it may, for the present purpose, we are concerned with an addition of ₹ 15,82,891/- made by the Assessing Officer on account of notional interest on continuing debit balances of the associated enterprises. The facts relevant for the said contr .....

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hod (TNMM) at the entity level. The assessee had determined its entity level margin of 9.19% and after benchmarking it with the average margin of the comparables selected, the margins of assessee were found to be favourable and thus, assessee pointed out that the stated value of its international transaction of Provision of software development services to the associated enterprises was at an arm s length price. Notably, the average margin of the comparable concerns was computed at 3.53%. The af .....

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Assessment Year of 2008-09, Assessing Officer computed an addition of ₹ 15,82,891/- being interest chargeable on the continuing debit balances of the associated enterprises, calculated @ 7%, which was the short term deposit rate of State Bank of India. The aforesaid dispute was carried in appeal by the assessee before CIT(A) by making varied submissions. Firstly, the plea was that continuing debit balances with associated enterprises does not constitute international transaction within the .....

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after reducing the notional interest from the value of sales effected, the basic transaction of providing software development services to the associated enterprises remain at arm s length price and hence no addition was warranted separately on this count. The CIT(A) has disagreed with the assessee in principle, but has scaled down the addition. As per the CIT(A), the quantum of addition worked out by the Assessing Officer by applying 7% rate of interest, being the short term deposit rate of St .....

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the cross-disputes relate to the same issue, they are being taken up together. 5. Insofar as appeal of Revenue is concerned, the grievance is against action of CIT(A) in holding that the arm s length rate of interest on the continuing debtor balances of associated enterprises be calculated by applying LIBOR + 200 basis points. The stand of Revenue on the other hand is that such interest be calculated by applying 7% rate of interest which is the short term deposit rate of State Bank of India. On .....

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6. Pertinently, the substantive dispute is in the appeal of assessee whereby it is canvassed that the impugned transaction reflected by the outstanding debit balances of the associated enterprises cannot be construed as an international transaction within the meaning of Sec. 92B of the Act. It has also been agitated in the appeal of assessee that there was no practice of charging interest on overdue payments from non-associated enterprises and, therefore, no adjustment is liable to be made on ac .....

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for u/s 92C(3) of the Act. 7. The learned representative also brought out that in Assessment Year 2008-09 the Tribunal vide ITA No. 7755/Mum/2012 dated 8.10.2014 has deleted a similar addition on the ground that where there is a uniform policy of not charging interest to both associated enterprises and non-associated enterprises, no adjustment on account of notional interest on outstanding receivables of the associated enterprises is required to be made. 8. At the time of hearing, the learned re .....

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m s length interest on such debit balances be adjusted/reduced from the assessee s margin of 9.19% and the resultant margin would also be favourable in comparison to the average margin of the comparables selected. It has been explained that assessee has given credit period of 45 days to its associated enterprises and with respect to the payments received beyond the credit period, the Assessing Officer had made the adjustment on account of notional interest. The assessee-company has given a worki .....

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and, therefore, the transaction can be said to be at arm s length and no separate adjustment is required to be made on this count. We find that such a plea of assessee was very much before the Assessing Officer also, as is evident from a copy of communication dated 21.12.2011 addressed to the Assessing Officer, a copy whereof is placed at pages 43 to 46 of the Paper Book. At pages 47 to 49 of Paper Book, the working of notional interest on delayed payment from associated enterprises and also the .....

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