TMI Blog2016 (6) TMI 1275X X X X Extracts X X X X X X X X Extracts X X X X ..... period on the receivable from AE - the normal credit period allowed for the receivable from the AE shall be the credit period prevailing in the industry and therefore we are of the view that two months credit period should be taken as a normal business practice in the industry. Also consider the benchmark interest rate as LIBOR/PLR in the light of various precedents on this issue. - I.T.(T.P.) A. No.308/Bang/2015 - - - Dated:- 17-6-2016 - Shri Abraham P George And Shri Vijay Pal Rao, JJ. Appellant By : Shri Sampath Raghunathan, Advocate. Respondent By : Shri P. Chandrashekar, CIT (D.R). ORDER Shri Vijay Pal Rao, This appeal by the assessee is directed against the assessment order dt.19.1.2015 passed under Section 143(3) r.w.s. 144C of the Income Tax Act, IT(T.P)A No.308/Bang/2015 1961 (in short 'the Act') in pursuant to the directions of the Dispute Resolution Panel (in short 'DRP') dt.21.11.2014 for the Assessment Year 2010-11. 2. The assessee has raised the following grounds :- 1. The learned Assessing Officer and the learned Transfer Pricing Officer grossly erred in determining a transfer pricing adjustment on account of the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the assessee had undertaken following international transactions with its associated enterprises : S.No. International transactions Value in transctions. 1. Software development services Rs.8,38,56,154/- 4. The TPO accepted the software development services provided to its AE at Arm's Length. However, the TPO proposed to make an adjustment regarding interest on outstanding receivable by adopting Comparable Uncontrolled Price method ('CUP') as against NIL shown by the assessee. The TPO adopted bank Prime Lending Rate (PLR) at Arm's Length Price ('ALP') in respect of the interest on outstanding receivable from AE and accordingly made an addition of IT(T.P)A No.308/Bang/2015 ₹ 60,20,331. The assessee challenged the action of the Assessing Officer/TPO before the DRP but could not succeed. 5. Before us, the learned Authorised Representative of the assessee has submitted that the credit period allowed to the AE regarding receivable on account of service provided to the AE is not an independent international transaction, therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /Bang/2015 AR has submitted that the TPO has applied one month credit period as bench- mark and also applied the bank PLR as bench-mark interest rate which is not justified as the proper credit period on normal case should be six months. Thus the ld. AR has submitted that the bench mark interest should be LIBOR rate. 6. On the other hand, the ld. DR has relied upon the orders of the authorities below and submitted that extending the credit period on receivable from AE is clearly an international transaction as per the provisions of Section 92B and Explanation 2 to the said section. 7. We have considered the rival submissions and relevant material on record. At the outset, we note that allowing a credit period on receivable from AE is not an independent international transaction however, it is part of the main international transaction of providing software development services by the assessee to its AEs. There are series of decisions wherein the Tribunal has considered this transaction as part of the main international transaction between the assessee and its AE and therefore the treatment of the same at the time of determining the arm's length of the international transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39/-. The DRP though concurred with the view of the Assessing Officer/TPO on the issue of international transaction, however, the adjustment was reduced by applying the interest rate of 7% instead of 18.816% applied by the TPO. The first issue raised by the assessee is whether the aggregate period extended by the assessee to the AE which is more than the average credit period extended to the non-AE would constitute international transaction. We are of the view that after the insertion of explanation to section 92B(1), the payment or deferred payment or receivable or any debt arising during the course of business fall under the expression international transaction as per explanation. Therefore, in view of the expanded meaning of the international transaction as contemplated under clause (i) (e) of explanation to section 92B(1), the delay in realization of dues from the AE in comparison to non-AE would certainly falls in the ambit of international transaction. However, this transaction of allowing the credit period to AE on realization of sale proceeds is not an independent international transaction but it is a closely linked or continuous transaction along with sale transaction to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndividual and separate transaction. The approach of the TPO and DRP in analyzing the credit period allowed by the assessee to the AE without considering the main international transaction being sale to the AE will give distorted result by disregarding the price charged by the assessee from AE. Though extra period allowed for realization of sale proceeds from the AE is an international transaction, however, for the purpose of determining the ALP, the same has to be clubbed or aggregated with the sale transactions with the AE. Even by considering it as an independent transaction the same has to be compared with the internal CUP available in the shape of the credit allowed by the assessee to non AE. When the IT(T.P)A No.308/Bang/2015 assessee is not making any difference for not charging the interest from AE as well as nonAE then the only difference between the two can be considered is the average period allowed along with outstanding amount. If the average period multiplied by the outstanding amount of the AE is at arm's length in comparison to the average period of realization and multiplied by the outstanding from non AEs then no adjustment can be made being the transaction is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of outstanding receivables on the profitability. In this regard, the reliance is placed on the following rulings wherein the need to undertake working capital adjustment has been appreciated by the Hon'ble Tribunals : Mercer Consulting India Pvt. Ltd. [TS-170-ITAT-2014(DEL)] Mentor Graphics (Noida) Private Limited [109 ITD 101] Egain communication (P) Ltd. [ITA No. 1685/PN/2007] Sony India (Pvt.) ltd. [2011-TII-43-ITAT-DEL-TP] Capgemini India Private Limited [TS-45-ITAT-2013(Mum)-TP] 8. In view of the above, a working adjustment appropriately takes into account the outstanding receivable. Therefore, the assessee has undertaken a working capital adjustment to reflect these differences by adjusting for differences in working capital and thereby, profitability of each comparable company. Accordingly, while calculating the working capital adjusted, operating margin on costs of the comparable companies, the impact of outstanding receivables on the profitability has been taken into account. If the pricing/ profitability of the assessee are more than the working capital adjusted margin of the comparables, then additional imputation of interest on the outstan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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