TMI Blog2020 (7) TMI 620X X X X Extracts X X X X X X X X Extracts X X X X ..... g receivable from its associated enterprise is devoid of any merit for the peculiar facts in this case wherein total shareholders funds are enjoyed by the associated enterprise as outstanding receivable. No document whereby the assessee has made any request before the learned transfer pricing officer or before the learned dispute resolution panel with respect to granting of working capital adjustment. Even in the transfer pricing study report submitted by the assessee which is placed the learned authorised representative could not show us that assessee himself has claimed any working capital adjustment while preparing its comparability analysis. In transfer pricing study report the assessee has stated what kind of assets it has employed and it has not stated that any working capital has been employed by the assessee. Even otherwise the assessee could not show us what is the difference in working capital of the assessee compared with comparable companies. Thus the adjustment of working capital was not at all there in case of assessee for this year. In view of this, we reject this argument. - Decided against assessee. - ITA No. 6102/Del/2016 - - - Dated:- 6-7-2020 - Ms. Suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of customized electronic data. It converts that are from hard copy or files into XML/SGML/HTML, creating electronic style files and modifying the user interface for CD-ROM delivery. Assessee receives raw data from its customers in hard copy or in electronic form, which is then converted. Thereafter data is arranged and formatted. Thus, assessee is claimed to have been primarily engaged in the provision of IT enabled data conversion service to its associated enterprise. 4. Assessee filed its return of income on 9/10/2012 declaring income of ₹ 251,841,830/ . As assessee has entered into certain international transactions, the learned assessing officer referred the matter to The Deputy Commissioner Of Income Tax, Transfer Pricing Office - 3 (2) (2), New Delhi [ The ld TPO] to determine the arms Length price of the International Transactions[IT]. With respect to the international transactions, as per the transfer pricing document submitted by the assessee, it has entered into the international transaction of provision of IT enabled data conversion services with its associated enterprise Aptara inc. USA amounting to ₹ 1,680,845,212/ which has been benchmarked by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer pricing officer to include and to exclude certain comparables. Thereafter, pursuant to the direction of the learned dispute resolution panel, the learned transfer-pricing officer passed an order wherein no addition on this account was made. Therefore, this issue is not at all agitated before us in original grounds of appeal. 6. However, the learned transfer-pricing officer found that as per the financials of the assessee it was observed that the assessee is having total trade receivable of ₹ 1,324,807,379/- from its Associated Enterprise[AE] . The assessee was asked to provide the details with respect to the loan taken by the associated enterprises. Assessee was also asked to provide the details with regard to the credit spread given to the associated enterprise. On receipt of the information, it was found that there are inordinate delays in the recovery of outstanding dues from its associated enterprise. The assessee was asked to submit the details of receivable and 60 days credit period was allowed to the assessee for receiving the payment from associated enterprise. The learned transfer pricing officer held that the actual delay in receipt of payments by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier years. It further stated that interest rate chargeable should be LIBOR + 300 points in view of the decision of the honourable Delhi High Court in case of cotton naturals. Based on this the learned transfer pricing officer passed order pursuant to the direction of the learned dispute resolution panel and calculated the interest on outstanding receivable at ₹ 1,64,05,578/- . Consequently, the final assessment order was passed by the learned assessing officer wherein total income declared by the assessee of ₹ 258,041,830 was assessed at ₹ 268,247,408. The only addition in dispute was addition on account of arm s-length price as referred to in the order of the learned transfer pricing officer amounting to ₹ 164,05,578 on account of interest chargeable on outstanding receivable beyond a specified period of 150 days from associated enterprise. 7. Therefore from the above facts it is clear that the only dispute is with respect to the interest on outstanding receivable considered by the learned transfer pricing officer as a separate international transaction and thereafter determining its arm s-length price of ₹ 1 6405578/ . 8. At the time of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd is purely a legal ground which can be raised by the assessee and therefore same is admitted. 12. With respect to the ground number seven raised as an additional ground by the assessee, it definitely requires the investigation of the fresh facts of the functional analysis of the comparables which are now being challenged by the assessee. Even otherwise the learned assessing officer has not made any adjustment with respect to the ITeS segment of the assessee. These international transaction is held to be at arm s-length by the learned assessing officer/transfer pricing officer pursuant to direction of the learned dispute resolution panel. Thus there is no addition/adjustment on account of same. As there is no adjustment made by the learned assessing officer, even otherwise, testing of the comparability of those two comparables mentioned in the ground number seven by the learned authorised representative/assessee is merely an academic exercise. Therefore same is not a legal ground but a ground requiring investigation of facts and therefore it cannot be admitted. 13. In view of the above facts, the two additional grounds raised by the assessee, ground related to the adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Delhi High Court. He further submitted a chart of working capital adjustment of comparable companies and submitted that if the margins of the comparable companies are adjusted the AM of margins of comparable comes to 19.30%. He submitted that +5% -5% range with respect margin of the assessee. He submitted that the margin of the assessee is determined at 15.54% and +5% range is 21.32% and -5% range is 9.76% whereas the AM of the comparable companies is 19.30% and therefore no adjustment can be made. He therefore submitted that the adjustment made by the learned assessing officer/TPO is not sustainable with respect to the outstanding of associated enterprise. To support his contention the assessee submitted a convenience paper book also. In the convenience paper book he submitted the financial statements of the associated enterprise dated 31st of December 2008, 2009, 2010 and 2011. It further submitted the Ledger account of the associated enterprise in the books of the appellant for the financial year 2011 12. Referring to the financial statement of the associated enterprise, it was submitted that it has been incurring losses over the period for four years between 2008 and 2011. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the assessee company and its AE, it was observed by the TPO that the AE was allowed much longer period for payment than was allowed normally in an uncontrolled situation. The TPO considered the prescription of clause 8.4 of the Agreement which provides that all amounts under this Agreement should be paid within 150 days from the date of invoice. In his opinion, 60 days credit facility is ordinarily given without any interest payment and any delay in payment thereafter was liable to be compensated with interest @ 1.5% to 2% per month on the outstanding amount. The assessee was required to give working of interest on late realization or non-realization of export proceeds during the financial year 2009-10. Such working given by the assessee has been made Annexure-1 to the order of the TPO. On a perusal of the statement of non/late realization of export invoices furnished by the assessee, the TPO held that the assessee ought to have charged @ 15% p.a. on receivables as on 1.4.2009 which were outstanding for more than 60 days; and export proceeds not realized within 60 days from the date of invoice during the year. These two amounts were calculated at ₹ 3.16 crore and ₹ 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excess share premium short received, that the amount of interest was also charged. The Hon'ble Bombay High Court overturned the opinion of the TPO by holding that the amount of less share premium received over and above the actual premium received cannot be added as TP adjustment because the receipt of premium itself, being a capital receipt, is not chargeable to tax. When the amount of premium is a capital receipt, the Hon'ble High Court held that the so called short premium charged also cannot assume the character of revenue. Apart from the deletion of addition on account of share premium, the Hon'ble Bombay High Court in Vodafone India Services (P.) Ltd. v. Union of India [2014] 369 ITR 511/[2015] 53 taxmann.com 286 and Shell India Markets (P.) Ltd. v. Asstt. CIT [2014] 369 ITR 516/[2015] 228 Taxman 94/[2014] 51 taxmann.com 519 (Bom) has held that interest on such short realized premium also cannot be construed as an item of transfer pricing adjustment. It is obvious that the facts of the instant case are absolutely different from those considered in the case of Vodafone India Services (P.) Ltd. (supra). The base amount on which interest was calculated by the TPO in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of business has been ordained by the legislature as an international transaction, it is, but, natural that if there is any delay in the realization of such debt arising during the course of business, it is liable to be visited with the TP adjustment on account of interest income short charged or uncharged. 13.7 The Hon'ble Bombay High Court in the case of CIT v. Patni Computer Systems Ltd. [2013] 215 Taxman 108/33 taxmann.com 3 dealt, inter alia, with the following question of law:- (c) Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises? 13.8 While answering the above question, the Hon'ble High Court noticed that an amendment to section 92B has been carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside the view taken b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... retrospective effect from 1.4.2002 sets the controversy to rest inasmuch as it provides in unambiguous terms that any other debt arising during the course of business is an international transaction. Ex consequenti, transfer pricing adjustment on account of interest income is mandated in case of late/non realization of invoice value from AE. The view canvassed by the ld. AR on this issue is, therefore, found to be devoid of merit and hence jettisoned. 13.11 Now, we come to the computation of the ALP of the international transaction of 'debt arising during the course of business.' This has two ingredients, viz., the amount on which interest should be charged and the arm's length rate at which the interest should be charged. 13.12 In so far as the first aspect is concerned, we find that the TPO has taken normal credit period of 60 days and accordingly made addition on account of transfer pricing adjustment for the period in excess of 60 days. In our considered opinion, transfer pricing adjustment on account of interest for the entire period of delay beyond 60 days cannot be treated as a separate international transaction of trading debt arising during the course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that for the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged, inter alia, with reference to the : '(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions ' . Then sub-rule (3) mandates that an uncontrolled transaction shall be comparable to an international transaction if 'reasonably accurate adjustments can be made to eliminate the material effects of such differences'. Applying the prescription of rule 10, it becomes vivid that difference on account of the 'contractual terms of the transactions', which also include the credit period allowed, needs to be adjusted in the profit of comparables. As the TPO has taken the entire delay beyond that normally allowed as a separate international transaction, which position is not correct, we hold that the effect of delay on interest up to 150 days over and above the normal period of realization in an uncontrolled situation, should be considered in the determination of the ALP of the international transaction of 'Provision of IT Enabled data conversion services' and the period of delay a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nced as a trade receivable to its associated enterprise is ₹ 1 02,73,60,940/ . For the year ended on 31st of March 2012 the shareholders fund available in the books of the appellant was ₹ 1 235355303/ whereas outstanding receivable from its associated enterprise is ₹ 1324807379/ . Therefore in the current year the outstanding receivable from its associated enterprise is more than the shareholders funds available with the assessee. Thus it implies that the total profit earned by the assessee is enjoyed by is associated enterprise out of india fully. Further, opening outstanding receivable from the associated enterprise was ₹ 102.73 crores, assessee billed ₹ 168.08 crores during the year and at the end of the year ₹ 138.33 crores were outstanding from AE. On looking at the profit and loss account the assessee has incurred the expenditure of ₹ 148.01 crores. Therefore, it is apparent that associated enterprise is only paying assessee the amount which is enough for defraying expenditure to keep it afloat and keeping all other sums in the form of outstanding trade receivable. In view of above peculiar facts, where total shareholders funds ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own case for earlier year has set aside the whole issue back to the file of the learned assessing officer with a direction to grant credit for 150 days, which has already been granted by the learned dispute resolution panel and the learned transfer pricing officer has also rectified its addition from ₹ 10,45,76,291/- to ₹ 1,64,05,578/ , Therefore there is no need that this issue should go back to TPO /AO. Therefore, we confirm the finding of the learned dispute resolution panel and the learned TPO incorporated in the order of the learned assessing officer. Accordingly, ground number [1]- [5] of the appeal, along with the additional ground number 5.1 are dismissed. 23. Ground number six is against the initiation of penalty proceedings and charging of interest u/s 234B and 234C for which no arguments were advanced and even otherwise the initiation of penalty proceedings is premature and charging of interest is consequential in nature, same is dismissed. 24. Before parting, we are aware that this order is pronounced beyond 90 das form the date of hearing due to lockdown which extends the period of limitation. Thus relying on the decision of the coordinate bench in [ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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