TMI Blog2018 (9) TMI 1938X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee to its Associate Enterprise (AE) - HELD THAT:- If the funds are repatriated to India as observed by the Ld.DRP there would be substantive reduction in the interest cost and potential increase in the profit of the company. Therefore, having observed that the advance is not a trade advance, we hold that the interest is chargeable on the advances given to the AE. The assessee has incurred huge financial cost including the interest on working capital. As rightly observed by the Ld.DRP, had the assessee did not divert the funds, the tax payer would have saved the interest to the extent of diversion of funds. Therefore, the arguments of the Ld.AR not to charge the interest on interest free funds given or advance to the AE is not acceptable and we hold that the AO has rightly made the adjustment. As relying on ACIT, Circle 1(1), Guntur Vs. CCL Products (India) Ltd. [ 2017 (9) TMI 1737 - ITAT VISAKHAPATNAM] we direct the AO to charge the interest @2% more than the LIBOR which is reasonable and at arms length. Accordingly, the assessee s appeal on this ground is partly allowed. This issue is involved for the assessment year 2011-12 and 2012-13 and the appeal of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 016 & 68/Viz/2017 - - - Dated:- 7-9-2018 - SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER For the Appellant : Shri G.V.N.Hari, AR For the Respondent : Shri Deba Kumar Sonowal, DR ORDER PER D.S. SUNDER SINGH, Accountant Member: These appeals are filed by the assessee against the order passed by the Deputy Commissioner of Income Tax / [(Transfer Pricing Officer (TPO)]-1, Hyderabad dated27.01.2015and 30.01.2016 for the assessment year 2011-12 and 2012-13 respectively u/s 143(3) r.w.s.144C(13) of the Act. Since the issues involved in both the appeal are common, both the appeal are clubbed and heard together and disposed off in a common order for the sake of convenience. 2. The assessee filed 7 grounds appeal No.67/Viz/2016 for the A.Y.2011-12and subsequently filed the two additional grounds with a petition for admission of additional grounds which reads as under : (a) Additional ground filed vide petition dated 17.07.2018 Whether on the facts and in the circumstances of the case, the assessing officer erred in enhancing the income by way of adjustments towards Arm Length price when the income of the appellant is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd to remit to Government of India account u/s 194J of the Act. Therefore, we do not see any reason to interfere with the order of the Ld.AO and uphold the disallowance. The assessee s appeal on this ground is dismissed. 7. Ground No.3 for the A.Y.2011-12 is related to the addition of ₹ 2,04,215/- towards adhoc disallowance @10% of the foreign travel expenses. In the draft assessment order passed u/s 144(C)(1) of the Act, the AO found that the assessee had incurred the foreign travel expenses of ₹ 20,42,150/-. The assessee had produced the books of accounts and on verification, the AO found that the director made several visits to the foreign countries, but the nature and purpose of such visits as well as the business conducted by the Director was not explained to the AO satisfactorily. The assessee also failed to explain the genuineness and relevance of the foreign travel expenses to the satisfaction of the AO. Therefore, the AO proposed to disallow 10% of the foreign travel expenses which worked out to 2,04,215/- towards unverifiable expenses in the draft assessment order. The assessee has not filed any objection before the DRP against the draft assessment order. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther invest in equity and to that effect the shares are allotted within a specified period or if a loan or advance has been given, it would expect a suitable interest on it. It is immaterial, whether the source of the loan is interest free or interest bearing. Further the Ld.TPO observed that under arms length situation, it is only to be seen that how much interest that could be earned from the application of the funds. Though RBI does not regulate the interest rate chargeable on outbound loans, but the loans received from non-resident direct investor as well as loan extended to the subsidiaries or associates abroad has to be reported in a prescribed form. The advances from India and Indian currency has been subsequently converted into currency of the geographic location of the AE, hence the PLR of the Indian Banks have to be applied as external CUP. Thus, the TPO was of the view that outbound loans are effectively rupee loans and the returns have to be bench marked with a domestic interest rate rather than LIBOR. The ideal interest rate on outbound and intra group loans would be that the interest rate which would have been charged independently by independent parties in similar ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvance given to the AE was out of interest free funds available to the company, hence, there is no case for making the adjustment towards ALP. The Ld.AR also invited our attention to the order of the TPO, wherein, the TPO observed that the PLR margin of the assessee on independent search for comparables is found to be 37.26%, which is higher than the average margin of the comparable companies. Hence, argued that no adjustment is required since the PLI is higher than the comparable cases. The Ld.AR also submitted that the advances given were for business purposes and to fortify his contention, the Ld.AR invited out attention to page No.116 of the paper book, wherein the opening balance of ₹ 27,29,01,494/- was adjusted out of the software services rendered by the AE. Hence, argued that the advance was purely business purpose and no adjustment is required. The Ld.AR also relied on the decision of Hon ble ITAT A Bench of Hyderabad in the case of Cura Technologies Ltd. Vs. DCIT, Circle-1(2), Hyderabad in ITA No.301/Hyd/2017, wherein, the Hon ble ITAT remitted the matter back to the file of the AO for considering the purpose of advance with a direction of not to charge the intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee to make the advance to the AE. Therefore, we are unable to accept the contention of the assessee that the payment is for business purpose. We have gone through the Form 3CEB Report which is enclosed in the paper book at page No.105 to 113. The transfer pricing document also does not show any such requirement of payment of advance to the AE. During the appeal hearing also the assessee did not establish with any evidence to show that the assessee is required to make payment to the AE for executing the project or for trade advance etc. Since the advance given to PPK is not established as trade advance, the case law relied upon by the assessee in the case of Cura Technologies of ITAT Hyderbad is not applicable in the assessee s case. The Ld.DRP relied on the decision of the Coordinate Bench, ITAT Bengaluru in the case of Logix Micro System Ltd. (supra), and held that the financial impact of international transaction is applicable in the assessee s case. Parking huge funds for a longer period with AE without interest is not acceptable. If the funds are repatriated to India as observed by the Ld.DRP there would be substantive reduction in the interest cost and potential increase in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess and to build the brand image globally and there is no intention of earning interest. Therefore, we hold that the interest charged by the assessee @ 2% which is more than LIBOR rate is reasonable and at arms length. Accordingly, we uphold the order of Ld. CIT(A) and dismiss the appeal of the revenue. This view is supported by the decision of ITAT Kolkata Bench 'C', in Deputy Commissioner of Income-tax, Circle-4 (1), Kolkata v. M.K. Shah Exports Ltd.*[2017] 81 taxmann.com 477 (Kolkata - Trib.) 13. Respectfully following the view taken by the Coordinate Bench of this Tribunal, we direct the AO to charge the interest @2% more than the LIBOR which is reasonable and at arms length. Accordingly, the assessee s appeal on this ground is partly allowed. This issue is involved for the assessment year 2011-12 and 2012-13 and the appeal of the assessee is partly allowed for both the assessment years. 14, The next issue is interest on receivables. For the assessment year 2011-12, the AO made the adjustment of ₹ 34,17,765/- and for the assessment year 2012-13, ₹ 2,44,65,964/- as ALP adjustment towards interest on receivables. The TPO observed that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases and hence the argued that delay and the consequent interest is taken care in the sale price. The assessee also relied on the decision of ITAT Hyderabad in the case of Bartronics India Ltd., ITA No.259/Hyd/2017 dated27/09/2017, wherein, Hon ble ITAT held that where the whole work contract is considered within the ALP, the advance given during the course of contract does not call for special adjustment. In this case, the Ld.AR argued that the advances were part of business transactions and the PLI margin of the assessee company was higher than the comparable cases as evidenced from the order of the TPO in page No.3. The margin of the assessee company was 37.26% which is higher than the comparables. Since the assessee is neither charging the interest on receivables nor paying interest on trade payables, the decision of ITAT Hyderabad in Bartronics India Ltd. is squarely applicable. The Ld.AR invited our attention to page No.22 in para No.23.1, wherein the Coordinate Bench has taken the support of Lanco Infratech Ltd. Vs.DCIT and cancelled the interest levied on receivables. For ready reference, we extract relevant part f the order of the ITAT in para No.23.1 in page Nos.22 and 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on the amounts received by it from the main contractor, this adjustment is not warranted. Respectfully following the principles laid down in various case law relied upon by assessee above, we have no hesitation in deleting the above adjustment. As seen from the order of the TPO in the next year AY 2013-14, he has considered the same- issue and has not made -any adjustment by stating as under: 7.5 Receivables: With regard to receivables it is noticed from the information filed that the company is not exporting and supplying any goods or services to AEs. The balances appearing in the Balance Sheet are mobilization advances which are to be adjusted against future supply bills and hence no adverse inference is drawn. Since the TPO order is in tune with the provisions of the Act and the principles laid down on this issue, we are of the opinion that no adjustment is required on the issue of mobilization advances during the impugned year also. Accordingly, grounds raised by assessee including additional grounds are allowed. Respectfully following the decision of the coordinate benches in the above cases, we cancel the interest levied and allow the ground of assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order in GVK Power Infrastructure Ltd which reads as under: 12. Even otherwise as observed from the order of the TPO on three occasions, there was a delay of receivables and pointed out by the Ld. A.R. the assessee is not indulged in any systematic or organized activity of allowing the undue credit to the AEs. The assessee relied on the decision of MothersonSumiInfotech Designs Limited Vs. DC1T reported In (2018) 52 CCH 0122 Delhi, and Hon'ble ITAT Delhi held as under: 5. We have considered the rival submissions and perused the material available on record. The assessee has given several reasons to explain that it being a business transaction, commercial consideration should have been considered by the authorities below. It was explained that the long term business relation with the customer and A.E. predicate waiver of this right. The interest is only associated with the loans and not services. It was explained that payments are received only after satisfaction of the customer and therefore, there was delay in receiving the payments. The assessee also explained before T.P. authorities below that average outstanding days for recovering sales dues was 57 days in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ussion and in the light of various decisions above and facts of the case, we are of the view that the adjustment to the income of the assessee is wholly unjustified on account of interest on receivables. We, accordingly, set aside the orders of the authorities below and delete the entire addition. 6. In the result, appeal of the assessee is allowed. The department has not made out case of systematic planning of allowing the undue credit to the AE. Further Ld.AR relied on the decision of Pr.CITvsB.C.Management Services (P) Ltd, (2018) 164 DTR (Del)299 where in Hon ble Delhi High court held that delayed payment made by AE cannot be treated as part of income. For ready reference we extract the relevant part of the order of the Hon'bleDeIh High court which reads as under: 9. With respect to the treatment of notional interest by the TPO/AO, the Court is of the opinion that no question of law arises. In an identical situation, in Principal Commissioner of Income Tax Vs. Bechtel India Pvt. Ltd. ITA 379/2016, decided on 21.07.2016, the Court had held that such notional income on account of delayed payment made by the AO cannot be treated as part of the income and made the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO on objection filed before the DRP. 19. Aggrieved by the order of the AO, the assessee is in appeal before this Tribunal. During the appeal hearing, the Ld.AR submitted that the issue is squarely covered by the decision of Hon ble Supreme Court in the case of CIT Vs. Alom Extrusions 227 CTR 417(SC). In this case, though the assessee has not remitted the employers contribution before the stipulated date of 15th of succeeding month, the assessee had remitted the entire amount before filing the return of income. Therefore, we hold that the assessee is entitled for deduction if the employer contribution is paid before filing the return of income before the due date. Accordingly, appeal of the assessee on this ground is allowed. 20. The next issue is additional Ground No.2 raised by the assessee with regard to granting exemption u/s 10A on enhanced profits on account of additions made by the AO on domestic front in respect of of ₹ 10,00,000/- towards disallowance u/s 40(a)(ia) and ₹ 2,04,215/- towards foreign travel expenses for the assessment eyar 2011-12. Similarly, for the assessment year 2012-13, the AO made the addition o f₹ 9,77,039/- u/s 36(1)(va) r.w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10A, the assessee is entitled for exemption u/s 10A on 100% profits computed as per the Act. For ready reference, we extract sub section 1 of section 10A of the Act which reads as under : 10A. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : 24. As per proviso to sub section 1 of section 10A, the exemption shall not be allowed in case of not furnishing the return before the due date. In this case the return was filed before the due date and the additions were made due to disallowances discussed above. The similar issue has come before the Hon ble Bombay High Court in the case of Gem Plus Jewellery India Ltd. 330 ITR 0175, wherein, the Hon ble Bombay High Court held the issue in favour of the assessee and against the revenue. We extract relevant part in page ..... X X X X Extracts X X X X X X X X Extracts X X X X
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