TMI Blog2017 (11) TMI 959X X X X Extracts X X X X X X X X Extracts X X X X ..... t-bearing borrowed funds were utilised for extending any kind of loan to its AE and it cannot be reckoned that assessee has given any benefit to the AE by blocking its interest-bearing funds to the AE by extending the credit period. Accordingly, the transfer pricing adjustment, as made by the TPO, by imputing the interest on delay in receipt of payment is uncalled for on the facts of the present case and we direct that the same to be deleted. - ITA No. 404/Del/2017 - - - Dated:- 13-11-2017 - SHRI B.P. JAIN, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER For The Appellant : Shri Kamal Sawhney, Adv. Shri Shikhar Garg For The Respondent : Shri Devendra Gulati, CA Shri H.S. Choudhary, CIT-DR ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER This appeal has been preferred by the assessee against the final assessment order passed u/s 143(3) r/w section 144C of the Income Tax Act, 1961 (hereinafter referred to as the Act ) passed subsequent to the directions of the Hon ble Dispute Resolution Panel - 1, New Delhi for assessment year 2012-13. 2.0 Brief facts of the case are that the assessee is a 99.99% subsidiary of Bain USA. The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On account of ITES ₹ 1,86,38,499/- 2. On account of Receivables ₹ 15,48,913/- 2.4 The final assessment was completed at a total income of ₹ 9,77,17,210/-. 2.5 Now, the assessee has approached the ITAT and has raised the following grounds appeal:- That on the facts and circumstances of the case, and in law: That the Learned Assessing Officer ( Ld. AO ) erred in proposing to assess the income of the Assessee at ₹ 9,77,17,210/- as against the returned income declared by the Assessee at ₹ 1,15,29,195 by making an addition of ₹ 2,01,87,414(Rs. 1,86,38,499 for the transaction pertaining to provision of Information Technologies Enabled Services ( ITES ) and ₹ 15,48,913 on account of interest on receivable outstanding) by holding that the Assessee s international transaction does not satisfy the arm s length principle envisaged under the Act. 1. The Ld. AO/ Hon ble DRP erred on facts and in law in enhancing the income of the Assessee by ₹ 1,86,38,499 by holding that the Assessee s international transaction pertaining to provision of IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.1 recharacterising the overdue receivables amount as deemed loan and that it constitutes as an international transaction separate from the main transaction; 3.2 Treatment of outstanding receivables from AEs as separate international transaction i.e. Unsecured loan; 3.3 not appreciating that in relation to the overdue receivables, the conduct of the Appellant with its AEs and non AEs was exactly the same; 3.4 not appreciating that the arm s length price determination for outstanding receivables is subsumed within the arm s length price determination of the principal international transaction itself; 3.5 not appreciating the fact that working capital adjustment adjusts the mark-up of comparable companies on account of variation in the working capital of the Assessee; and 3.6 determining an interest rate of LIBOR plus 400 basis points without giving regard to various factors responsible for determination of interest rate. 4. The Ld. AO/ Hon ble DRP erred in routing the recovery of expenses from group companies through the profit loss account by not appreciating that only value added functions warrant mark-up and thereby recomputing the op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /Del/2015 3.1 It was further submitted that if TCS E-Serve is excluded from the list of comparables, the assessee would be at arm s length and, as a consequence, the issue relating to inclusion/exclusion of R Systems International Ltd. and Eclerx Services Limited will become academic. It was further submitted that upper margin of arm s length mark up after the exclusion of TCS E-Serve will work out at 24.85%. 2. Eclerx Services Limited: The Ld. AR submitted that TCS E-Serve Ltd. was not a comparable as it followed an outsourcing model of business while the assessee was a captive service provider performing back office support functions. It was submitted that the two models are entirely different and have a significant impact on the FAR of the companies and, therefore, companies following the outsourcing model cannot be compared with the assessee who performs its own functions. The Ld. AR further submitted that the issue of comparability of Eclerx Services Limited to captive back office service providers is covered in favour of the assessee for the relevant assessment year by the order of the ITAT Delhi Bench in the case of B.C. Management Services Pvt. Ltd. vs DCIT (su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the benefit of 5% band and as a consequence the issue relating to inclusion/exclusion of TCS EServe Ltd. and Eclerx Services Limited will become academic. It was submitted that then the upper margin of the assessee would be 24.85%. 3.2 On the second issue being challenged by the assessee pertaining to interest of ₹ 15,48,913/- for receivables outstanding beyond 30 days, the Ld. AR submitted that the interest component is embedded in the sale price and commercial considerations need to be appreciated and such compensation or charging of interest are commonly ignored by businesses. It was submitted that working capital adjustment takes into account the impact of outstanding receivables on the profitability and accordingly no separate adjustment is warranted on account of outstanding receivables. The Ld. AR submitted that the Assessing Officer/Hon ble DRP were patently wrong in recharacterizing the overdue amounts as deemed loan. It was further submitted that the Delhi Bench of ITAT in the case of Kusum Healthcare Pvt. Ltd. in ITA No. 6814/Del/2014 had held that if the impact of the credit period was duly factored in as working capital adjustment while determining the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of the assessee in this regard and has given its directions thereafter. It was submitted that that working capital adjustment takes into account only trade creditors and not credits received towards capital items, loans etc. The Ld. CIT DR also read out from the relevant paragraphs as contained in the directions of the Hon ble DRP and also submitted that ITAT Delhi Bench in the case of Ameriprise India P. Ltd. vs. ACIT reported in 2015-TII-347-ITATDEL- TP had held receivables do not have any impact on working capital adjustment in any manner. It was also submitted that the Hon ble Delhi High Court in the case of CIT vs. Cotton Naturals India Pvt. Ltd. reported in 2015-TII-09-HC-DEL-TP had held that interest on receivables was a separate international transaction in terms of Explanation (i)(c) to Section 92B. 5.0 We have heard the rival submissions and have also perused the material on record. As far as the assessee s plea for inclusion of R Systems International Limited is concerned, it is seen that the TPO/Hon ble DRP had rejected this company on account of different financial year ending. However, the assessee has re-cast the profit and loss account of the company as per th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l placed on record, we find that first of all, the assessee is a debt free company as it has neither received any interest from any creditors nor paid interest to any debtor. A perusal of profit and loss account shows that interest and finance charges are only ₹ 73; and interest on corporate tax is ₹ 1,27,798/-. Apart from that there is no debt or loan with the assessee on which it has to pay any interest. Once it is an accepted fact that assessee does not have any interest bearing borrowed funds for extending any kind of loan to its AE, then it cannot be reckoned that assessee has given any benefit to the AE by blocking its interest-bearing funds to the AE by extending the credit period. This has been so held by this Tribunal in the case of Bechtel India Private Limited (supra). Moreover as pointed out by the Ld. Counsel, the assessee has also given similar credit period to the third parties which are extending up to 181 days. If a similar credit period is given to the AE as is given to third parties, then under the arms length scenario in looking into the similar conditions prevailing between controlled transaction and comparable uncontrolled transaction, then there c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was specifically asked by the Bench to point out to us if there was any distinguishable fact in the case of the assessee as compared to the facts in the cases of BC Management Services (P) Ltd (supra) and Kusum Health Care Pvt. Ltd (supra) 19 with respect to the issue of interest on receivables. However, the Ld. CIT DR only placed reliance on the general principles of International Taxation and could not demonstrate with evidence that the case of the assessee was on a different footing as compared to the facts in the cases of BC Management Services (P) Ltd (supra) and Kusum Health Care Pvt. Ltd (supra). Therefore, after considering the rival submissions and also the relevant material, we find force in the contention of the assessee that since the assessee is a debt free company and since it has neither received any interest from its creditors nor paid any interest to any of its debtors, it cannot be inferred that interest-bearing borrowed funds were utilised for extending any kind of loan to its AE and it cannot be reckoned that assessee has given any benefit to the AE by blocking its interest-bearing funds to the AE by extending the credit period. Accordingly, the transfer pricin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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