TMI Blog2017 (5) TMI 965X X X X Extracts X X X X X X X X Extracts X X X X ..... t, beyond the stipulated period of agreement, then, the same will not come within the working capital adjustment because working capital adjustment is made with reference to the opening and closing balances as on 1st April and 31st March. Therefore, respectfully following the decision of Ameriprise India Pvt. Ltd. (2015 (8) TMI 652 - ITAT DELHI) and, again, in the case of Mckinsey Knwledge Centre Pvt. Ltd. [2017 (5) TMI 830 - ITAT DELHI] we reject the assessee’s contention that the interest on delayed payment of receivables get subsumed in the working capital adjustment allowed to the assessee. Also argument that since it was debt free fund company, which finding is not disputed, therefore, no interest could be attributable on the late realization of receivables is to be rejected at the threshold because, as noted earlier, interest on delayed realization of receivables is a separate international transaction and, therefore, requires separate benchmarking. It has nothing to do with the operations of the assessee company being with the debt free funds only. Selecting of ad hoc interest rate of LIBOR+400 bps while computing the addition - Held that:- We find that the ld. DRP has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reimbursement of expenses (received) CUP 178,315,111 3. Accordingly, the reference was made to ld. TPO for determining the arm s length price (ALP). The ld. TPO issued a show cause notice dated 1st May, 2016 to the assessee as detailed below:- Examination of the balance sheet reveals receivables thereby implying that the payment for the invoices raised by you have not been received within the stipulated time as provided in your service agreement with your AE. In this regard, you are requested to furnish the time period for payment as per your service agreement with your AE. However, to be reasonable and fair to the assessee, instead of charging penal interest, the delayed payments are being treated as unsecured loans advanced to the AEs and it is proposed to charge a normal rate as per the annual average yield of corporate bonds pertaining to credit rating of your AE for the period of delay in receipt of payment beyond the time stipulated in the services agreement. The interest rate has been charged on the basis of prevailing average SBI base rate during the year. You are requested to furnish credit rating of all th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluding 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. 7. From this, he concluded that any type of advance, payments or deferred payments are receivable or any other debt during the course of business advancement is covered under the definition of International transaction. The ld. TPO further pointed out that in this case, admittedly, the tax payer had provided benefit to its AE by way of advancement of interest free loan in the garb of delayed receipt of receivables. He observed that these funds could have been otherwise deployed for at least earning interest income. Therefore, the tax payer had incurred cost in connection with a benefit and services provided to the AE by way of delayed receipt of receivable. He pointed out that no payment terms have been specified as per service agreement or the invoice and, therefore, as per prudent estimate payment period of 30 days shall be allowed for payment of sales/service. Any delay beyond the aforesaid period would be benchmarked accordingly. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee had failed to demonstrate that selected comparables had similar overdue receivables and no separate adjustment was required on interest of overdue receivables. The ld. DRP further observed that the assessee failed to show that the delay in payment of receivables was compensated by the AE through a set off in any other transaction. He further pointed out that any set off requires that both the transactions which set off each other should be benchmarked separately and the ALP must, firstly, be determined separately for these transactions. He referred to OECD guidelines and pointed out that the same recognizes that a set off does not mean that both the transactions should not be at arm s length. The guidelines also say that the onus of demonstrating the existence of a set off built into two transactions was on the assessee. It was for the assessee to establish set off which require supporting evidence. The ld. DRP further pointed out that the assessee s contention that no separate adjustment can be made towards interest on overdue receivables as the entity level results had already been considered by the TPO was not acceptable because consideration of entity level results ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is nil. However, the computation of interest on receivables would take this into account as it considers the outstanding balance throughout the year. 8. The ld. DRP relying on the decision of ITAT in Ameriprise India Pvt. Ltd. vs. ACIT, 2015-TII-347-ITAT-DEL-TP, rejected the assessee s contention that this adjustment is not required as working capital adjustment takes into account the delay. The next objection of the assessee was that the adjustment towards interest on delayed receivables was not warranted as the assessee was a zero debt company. This plea was rejected observing that ALP is the price which could have been paid in an uncontrolled transaction. The ld. DRP demonstrated that even though marginal cost is zero, still the goods will command price. The ld. DRP further observed in para 2 as under:- Further, the assessee s balance sheet shows substantial current liabilities and also loans and advances. The P L A/c shows significant income from interest and the assessee has also debited interest of ₹ 64,79,897/-. It is apparent that if the assessee had received its receivables from its AE within time, it could have reduced its interest payment, or increased ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has provided working capital adjustment in its directions which takes into account the impact of outstanding receivables on the profitability. Therefore, no separate adjustment is warranted on account of outstanding receivables. The ld. counsel referred to the decision of the Tribunal in the assessee s own case for assessment year 2010-11 contained at pages 196 to 218 of the paper book and pointed out that the Tribunal has held that the assessee is a debt free company and, therefore, it was not justifiable to presume that borrowed funds had been utilized to pass on the facility to its AEs. The Tribunal, relied on the decision of Kusum Healthcare Pvt. Ltd., TS/129/ITAT/2015/Del/TP for holding that no separate adjustment was warranted on account of interest on receivables. The ld. counsel further pointed out that Hon'ble Delhi High Court while dismissing the appeal of the Revenue, has held as under:- 4. As far as question (B) concerning the adjustment for interest no receivables, the Court finds that the ITAT has returned a detailed finding of fact that the Assessee is a debt free company and the question of receiving any interest on receivables did not arise. Consequentl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration also before the TPO as reliance placed on Kusum Healthcare Pvt. Ltd. qua the facts in the year under consideration also needs to be established. Accordingly the issue is restored back with the above direction. 13. The ld. counsel further relied on the decision of ITAT in the case of Kusum Healthcare Pvt. Ltd. (supra), wherein it was held that if the impact of the credit period was duly factored as in a working capital adjustment while determining the ALP, then, no separate adjustment for interest on receivables was warranted in the hands of the tested party. The ld. counsel pointed out that the decision in Kusum Healthcare Pvt. Ltd. has been followed in the following cases:- i) Information Systems Resource Centre Pvt. Ltd. (TS-252-ITAT- 2015-MUM; and ii) Gold Star Jewellery Ltd. vs. JCIT (ITA No.6520/Mum/2012). 14. The assessee further placed reliance on the ITAT Delhi in the case of Indo German Jewellery Ltd. (ITA No.587/Mum/2009), wherein it has been held that the transaction of sale and lending are distinctly set out as per section 92 of the Act and it was held that interest income is associated more with lending or borrowing of money and not with sale. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational transaction of interest receivable from its AEs for late realization of invoices beyond such stipulated period is a separate international transaction. Allowing working capital adjustment in the international transaction of rendering services has been held to have no impact on the determination of ALP of the international transaction of interest on receivables from AEs beyond the stipulated period allowed as per the Agreement. In our considered opinion, whereas, the international transaction of purchase/sale of goods from/to AE contemplates comparison of the price charged/paid for such goods by impliedly including the interest for the period allowed for realization of invoices as per the terms of the agreement, the international transaction of charging interest on late recovery of trade receivable covers the period which starts with the termination of the period of credit allowed under the agreement, which is subject matter of the international transaction of purchase/sale of goods. There is one more fallacy in the argument about the subsuming of interest income in the working capital adjustment. It is simple that working capital adjustment is ordinarily computed by cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has debt free funds, he submitted that the same is of little consideration in transfer pricing because benchmarking is to be done in respect of separate international transaction involving non-charging and under charging of interest on delayed receivables. This plea is relevant only when the issue regarding disallowance of interest u/s 37(1) is under consideration. 17. We have considered the submissions of both the parties and perused the record of the case. The assessee s grievance is two-fold. Firstly, when working capital adjustment has been made, then, no separate adjustment is required to be made in respect of accounts receivables because the same gets subsumed in the working capital adjustment. The second plea of the assessee is that since its funds are entirely debt free, therefore, no adjustment is warranted in regard to late realisation of proceedings from receivables. The assessee s reliance as noted earlier, is on the decisions in its own cases for assessment year 2010-11 and 2011-12. The issue has been elaborately considered in the case of Ameriprise India Pvt. Ltd. (supra) and, again, in the case of Mckinsey Knwledge Centre Pvt. Ltd. (supra). In the case of Techbo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (i) of this Explanation, which is relevant for our purpose, provides as under:- `Explanation.-For the removal of doubts, 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; . 22. On going through the relevant part of the Explanation inserted with retrospective effect from 1.4.2002, thereby also covering the assessment year under consideration, there remains no doubt that apart from any long-term or short-term lending or borrowing, etc., or any type of advance payments or deferred payments, any other debt arising during the course of business has also been expressly recognized as an international transaction. That being so, the payment/non-payment of interest or receipt/non-receipt of interest on the loans accepted or allowed in the circumstances as mentioned in this clause of the Explanation, also become internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19. In the case of Ameriprise (supra), it has been observed that the working capital adjustment is in respect of international transaction of rendering services to the AE. Interest for credit period allowed as per the agreement is given in the price charged for rendering of services. Whereas the non-realisation of invoice value beyond the stipulated period is a separate international transaction whose ALP is required to be determined. Granting of working capital adjustment is confined to the international transaction of rendering of services, whose ALP is separately determinable. On the other hand, the international transaction of interest receivable from its AEs for late realization of invoices beyond such stipulated period is a separate international transaction. Allowing working capital adjustment in the international transaction of rendering of services can have no impact on the determination of ALP of the international transaction of interest on receivables from AEs beyond the stipulated period allowed as per agreement. In the case of Mckinsey Knwledge Centre Pvt. Ltd. (supra), again, the Tribunal reiterated this reasoning and, inter alia, observed that: . In our consid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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