TMI Blog2022 (5) TMI 322X X X X Extracts X X X X X X X X Extracts X X X X ..... hen the percentage of RPT would be less than 15%. In our view when Transaction Net Margin method is adopted as MAM, it is only the similar transaction that has to be compared and therefore the ratio of total sales to sales to related party alone has to be seen. Therefore the plea of the Assessee that RPT is in excess of 15% is devoid of any merit and the same is rejected. Therefore we find no ground to exclude this company from the list of comparable companies. Inteq Software Private Limited - Mere absence of response from this company to the notice u/s. 133(6) of the Act cannot be the basis to hold that this company is not comparable. - Regarding the argument that there are some unusual features observed from the financial statements of this company, these features do not affect the comparability. By merely pointing out that there is a substantial increase in value of intangible assets, the Assessee cannot seek to exclude this company from the list of comparable companies, unless the Assessee is able to show that the presence of intangibles is owing to factors which can affect the functional comparability of this company with the Assessee. With regard to exclusion of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... layed receivables - non-charging or under- charging of interest on the excess period of credit allowed to the AE, for the realization of invoices amounts to an international transaction and the ALP of such an international transaction - HELD THAT:- Non-charging or under- charging of interest on the excess period of credit allowed to the AE, for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined. In view of the above observations. the reliance placed by the ld. counsel for the assessee on earlier decisions cannot be accepted. Similarly, Considering the above discussion, it is held that deferred trade receivable constitutes international transaction.Having concluded that deferred trade receivables constitute international transaction, 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. On this aspect we can take useful guidance from the decision of the ITAT Delhi Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. In terms of Sec. 92(1) of the Act, the any income arising from an international transaction shall be computed having regard to the arm's length price. In this appeal by the Assessee, the dispute is with regard to determination of Arms' Length Price (ALP) in respect of the international transaction of rendering SWD services to the AE. 3. As far as the provision of Software Development services are concerned, the Assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The Assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) for the purpose of comparison of the Assessee's profit margin with that of the comparable companies. The OP/OC of the Assessee was arrived at 15% by the Assessee in its TP study. The operating income was ₹ 17,77,11,711/- and the Operating Cost was ₹ 15,45,31,923/-. The Operating profit (O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26.36% 7. Inteq Software Pvt. Ltd. 7.53% 32.14% 45.00% - 28.20% 8. Persistent Systems Ltd. 26.92% 31.34% 35.64% 30.89% 9. Infobeans Technologies Ltd. 34.98% 20.78% 41.95% 32.42% 10. Thirdware Solution Ltd. 23.89% 44.39% 44.68% 36.90% 11. Infosys Ltd. 38.22% 41.30% 36.28% 38.61% 12. Aspire Systems (India) Pvt. Ltd. 34.26% 47.56% 38.04% 39.28% 13. Cybage Software Pvt. Ltd. 62.90% 68.68% 68.82% 66.45% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as adjustment consequent to determination of ALP was added to the total income of the Assessee by the AO. The DRP gave certain directions. Based on the directions of the DRP, the AO passed the final order of assessment. To the extent the Assessee did not get relief from the DRP, the Assessee has preferred appeal before the Tribunal. 7. The main grievance of the Assessee projected in the concise grounds of appeal filed before the Tribunal which was argued before us was (i) choice of comparable companies by the TPO which was affirmed by the DRP (Ground No. 4 5); and Grd. No. 7 regarding exclusion of R.S. Software (India) Ltd., on the ground that the related party transaction is more than 15%; (ii) non acceptance of Assessee's claim regarding non inclusion of certain companies comparable company. (Ground No. 6) (iii) Non grant of working capital adjustment (Grd. No. 9). These grounds (except grd. No. 7) read as follows: 4. The lower authorities erred in including the following companies, even though they fail the higher threshold limit of INR 200 crores for turnover filter: (a) Infosys Ltd. (b) Larsen Toubro Infotech Ltd. (c) Persistent Systems Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; (f)...... (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ared could materially affect the condition being examined in the methodology (e.g. price or margin), or Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called comparability adjustments. 11. As far as comparability of companies listed as (a) to (g) in Grd. No. 4 raised by the Assessee is concerned, the admitted factual position is that the turnover of these companies is more than ₹ 200 Crores and the Assessee's turnover is only ₹ 17,77,11,711/-. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than ₹ 1 Crore. The contention of the Assessee before the DRP was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the Assessee was that there would be effect on profitability wherever there is high or low turnover and therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice:- 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt. Ltd. Tax Appeal No. 18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Banga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the list of comparable companies. 15. As far as company listed at Sl. No. (h) of Grd. No. 4 and Grd. No. 5 i.e., R.S. Software (India) Ltd., is concerned, the turnover of this company in the current year is less than ₹ 200 Crores but in the earlier two years its turnover was more than ₹ 200 crores and was liable to be excluded in those earlier two years. The question raised in the aforesaid grounds is as to: whether this company should also be excluded on the application of turnover filter by reason of its turnover in the earlier two years being more than ₹ 200 crores in the light of Rule 10CA of the rules which were applicable from AY 2014-15 onwards or whether in computing the weighted average profit margin of this company, the earlier two years profit margins have to be ignored because they fail the test of comparability in those two earlier years by reason of the application of the ₹ 200 Crore turnover filter. 16. To answer the above question, we need to look at the amendment to the rules that allow for introduction of a range concept for determination of ALP and use of multiple year data for undertaking comparability analysis in transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rule. (2) A dataset shall be constructed by placing the prices referred to in sub-rule (1) in an ascending order and the arm's length price shall be determined on the basis of the dataset so constructed: Provided that in a case referred to in clause (i) of sub-rule (5) of rule 10B, where the comparable uncontrolled transaction has been identified on the basis of data relating to the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in either or both of the two financial years immediately preceding the current year undertaken the same or similar comparable uncontrolled transaction then,- (i) the most appropriate method used to determine the price of the comparable uncontrolled transaction or transactions undertaken in the aforesaid period and the price in respect of such uncontrolled transactions shall be determined; and (ii) the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the curren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng manner, namely:- (i) where the prices have been determined using the method referred to in clause (b) of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of sales which has been considered for arriving at the respective prices; (ii) where the prices have been determined using the method referred to in clause (c) of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of costs which has been considered for arriving at the respective prices; (iii) where the prices have been determined using the method referred to in clause (e) of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of costs incurred or sales effected or assets employed or to be employed, or as the case may be, any other base which has been considered for arriving at the respective prices ........... 17. Let us apply the above rules to the comparable company R.S. Software (India) Ltd. As per Rule 10CA(2), the dataset of comparable companies chosen has to be arranged in ascending order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the financial year 2015-16 alone should be taken. If one looks at Rule 10CA(2) in isolation, we have to reject this argument because the 1st and 2nd proviso to Rule 10CA(2) of the Rules refers to only R.S. Software (India) Ltd., (i.e., where the comparable uncontrolled transaction has been identified on the basis of data relating to the current year and the enterprise undertaking the said uncontrolled transaction has in either or both of the two financial years immediately preceding the current year undertaken the same or similar comparable uncontrolled transaction ) undertaking uncontrolled transaction during the relevant previous year and if this condition is satisfied then the profit margin of R.S. Software for the 2 financial years immediately prior to the current financial year has to be taken. A plain reading of the 1st proviso would show that the question of comparability is not to be seen while applying the 1st and 2nd proviso to Rule 10CA(2) of the Rules. The provisions of Rule 10CA(2) have to be read harmoniously with the other provisions of Rule 10B Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction [or a specified domestic transaction] shall be the data relating to the financial year [(hereafter in this rule and in rule 10CA referred to as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2% as evident from page-100 of Form No. 35A being the grounds of objection before the DRP by the Assessee. The DRP in its order proceeded on the basis that the threshold limit for application of the Related Party Transaction filter (RPT filter) would be 25% of the total transaction. The Hon'ble Karnataka High Court in its Judgment 28-06-2018 in I.T.A. No. 684/2017 I.T.A.. No. 685/2017 Pr. Commissioner of Income Tax-7 Anr. Vs. M/s. Yodlee Infotech Pvt. Ltd., had to consider among other questions of law the following questions of law with regard to application of RPT filter, viz., Whether on the facts and in the circumstances of the case, and in law, the Tribunal was justified by not acknowledging its own orders where the Tribunal has held in stretching RPT% from 15-20% in case of Katera Software India Pvt. Ltd. and Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that RPT filters should be 15% and not 25%, taken by the TPO? The Hon'ble Court held as follows: 3. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and the Respondent-assessee, has given the following findings against Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions, it should be kept in mind that the uncontrolled transactions should be least influenced by the controlled and related prices. This Tribunal in the series of decisions has taken a view that when good number of comparables are available, then the threshold limit of RPT shall not be more than 15% of total revenue. In view of the facts and circumstances of the case when good number of comparables available, then we are of the considered opinion that the RPT filter of 15% is proper in the case of the assessee. By applying this filter of 15% RPT, we modify the impugned order of the CIT (Appeals) and therefore only one company namely Four Soft Limited will be excluded from the said comparable having more than 15% RPT. Accordingly, we direct the A.O./TPO to exclude the Four Soft Ltd. having 19.89% of RPT. ........ 4. This Court in ITA No. 536/2015 C/w ITA No. 537/2015 delivered on 25.06.2018 (Prl. Commissioner of Income Tax Anr. Vs. M/s. Softbrands India Pvt. Ltd.,) has held that in these type of cases, unless an ex-facie perversity in the findings of the learned Income Tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsels for the parties, we are therefore of the opinion that no substantial question of law arises in the present cases also. The appeals filed by the Appellants-Revenue are liable to be dismissed and are dismissed accordingly. 22. We are of the view that the facts of the Assessee's case is similar to the case decided by the Hon'ble High Court and in the light of the aforesaid decision of the Tribunal which has been upheld by the Hon'ble Karnataka High Court, the RPT filter has to be applied adopting the threshold limit of 15%. We hold and direct accordingly. 23. The next ground that requires adjudication is Gr. No. 6 with regard to exclusion from the list of comparable companies, (a) Inteq Software Private Limited and (b) Infobeans Technologies Ltd. 24. As far as exclusion of Inteq Software Private Limited is concerned, the first objection of the learned counsel for the Assessee was that this company is functionally not comparable because it is engaged in the business of computer programming, consultancy and related activities. The objections of the Assessee in this regard are based on contents in the website of this company as is evident from page-162 to 165 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to transactions with related parties in compliance with provisions of section 188 of the Companies Act and that 'such details have been disclosed in the financial statements. [Page 3391]. The break-up of managerial remuneration which represents a payment to a related party is available at Page 3407. Therefore, there is a disparity as to the disclosure made by the management and the statutory auditors and in the details reflected in the financial statements. c) At Page 118 of the paperbook (internal page 17 of the TPO's order), it is stated that a notice under section 133(6) was issued on the company to call for-information. However, no response was received for the same. The TPO proceeded to use the information available for FY 2014-15 to hold that Inteq Software Private Ltd. was comparable to the Appellant for FY 2015-16. In the absence of a response to the notice under section 133(6), this company deserves to be excluded as a comparable. Further, the TPO cannot consider the information furnished for an earlier year to decide on functional similarity of a comparable in the present year. d) Unusual features observed from the financial statements As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot comparable. 27. Regarding the argument that there are some unusual features observed from the financial statements of this company, these features do not affect the comparability. By merely pointing out that there is a substantial increase in value of intangible assets, the Assessee cannot seek to exclude this company from the list of comparable companies, unless the Assessee is able to show that the presence of intangibles is owing to factors which can affect the functional comparability of this company with the Assessee. 28. With regard to exclusion of this company on the basis of inconsistencies in the financial statement, we find that this objection was not raised before the TPO as can be seen from the discussion of the TPO at page 17 to 19 of his order. Even in the objections before the DRP at page 167 168 no such objection has been raised. The argument is that there is a disparity as to the disclosure made by the management and the statutory auditors in the details reflected in the financial statements. There is no inference drawn with regard to how these disparities will influence comparability in the light of the functions performed, assets employed, risk assumed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company is not engaged in technology innovation activity: thus this point is not applicable. 2.19.4 With regard to the objections related to information collected under Section 133(6) and the claim of high-end service provider, we note that there is no inherent contradiction as claimed by the assessee. From the information collected u/s. 133(6), it is confirmed by the company that it is engaged in provision of customised software development services and not in any activity relating to technological innovation. The functional aspect of the comparable company cannot be contradicted when the company itself confirmed its business activity. Accordingly, we reject the assessee's pleas. 2.19.5 The intangibles referred in the Asset Schedule represent the computer software, and as such does not refer to any IPR or licence owned by the said company. For any software company, it is essential to have rights of software for coding purposes. Further these intangibles are meagre 6.89% of total fixed assets. Therefore, such intangibles cannot be equated with the intangibles acquired created by the assessee to provide specific enduring benefit. Also, the assessee has failed to establ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Trib.) [Page 3532-3547]. - For the FY 2015-16, the computation of related party transactions is as follows: Expenses FY 2015-16 Rental payment(associate) - Sales 8,70,57,162 Managerial Remunerations 1,27,81,296 Total 9,98,38,458 Sales 61,55,51,646 % on RPT 16.22% Pg No of the annual report Page 3484 From the above, it is evident that the company fails the RPT filter and deserves to be excluded as a comparable. 31. The observations of the TPO in this regard were that the RPT limit has been worked out by the Assessee by aggregating sales and purchase side related party transactions and divided by Total sales only to arrive at the conclusion of more than 25% RPT. The TPO held that RPT percentage has to be worked out on the basis of percentage of total sales to the sales to related parties. 32. Before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share etc., all of which cannot be captured in the year end receivable or payable position. (iii) the year end receivables and payable may not reflect as to whether it arises from transactions relating to revenue account or capital account as there is no uniformity in the accounting or reporting requirements and an intermixing is generally possible. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 35. The learned counsel for the Assessee submitted that the conclusions of the DRP are identical to the conclusions arrived at by the revenue authorities in the case of Huawei Technologies India Pvt. Ltd. v. JCIT [2019] 101 taxmann.com 313 (Bang. Trib.). In the aforesaid decision on an identical issue, the Tribunal held that working capital adjustment has to be given. The tribunal reasoned in the aforesaid decision that a reading of Rule 10B(1)(e)(iii) of the Rules read with Sec. 92CA of the Act, would clearly show that the net profit margin arising in comparable uncontrolled transactions has to be adjusted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orking capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: * A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) * This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts to suppliers. 35A. The tribunal observed that examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment of ₹ 4,21,784/- in respect of delayed receivables on a notional manner. The TPO has observed in this regard in his order that the Assessee was asked to furnish details of trade receivable and details of realization and in the absence of such details, he has no other option but to determine the interest attributable to delayed realization of trade receivables by applying 6 months LIBOR plus 400 basis points with a mark-up of 100 basis points (which works out to 4.485%) on the average of opening and closing receivable. The DRP confirmed the action of the TPO. The computation done by the TPO in this regard was as follows: 24. Computation of interest on delayed receivables 24.1 As discussed in the preceding paragraphs, interest on the delayed trade receivables is proposed to be computed on invoice basis. To calculate the delay, the Assessee (vide the show cause issued on 28-Aug-2019) was asked to furnish invoice wise details of all the trade receivables from AEs during the year. The following details were asked in a particular format: Amount raised in invoice, date of invoice, date of receipt, delay in no. of days. Interest is calculated, using LIBOR- 6 mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 6814/Del/2014) held that if the working capital investment of the assessee and the comparables rather are considered than looking at the receivable independently is not necessary as the working capital adjustment takes into account the impact of outstanding receivables on the profitability. It was pointed out that this decision came to be upheld by the Hon'ble Delhi Court in PCIT v. Kusum Healthcare Pvt. Ltd. (Order dated 25.04.2017 passed in ITA No. 765/2016) (refer paras 10 and 11):- 10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression receivables does not mean that de hors the context every item of receivables appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studied. In other words, there has to be a proper i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 of receivable or any other debt arising during the course of business: ............ The amendment is to the effect that international transaction would specifically include within its ambit. 'deferred payment or receivable or any other debt arising during the course of business' and hence non-charging or under-charging of interest on the excess period of credit allowed to the AE for the realization of invoices would amount to an international transaction. It was so held by the ITAT Delhi Bench in the case of Bechtel India Pvt. Ltd. (in ITA No. 6530/Del/2016 dated 16 May 2017). It is important to note that the Bench while arriving at the said conclusion distinguished its earlier order in the case of Kusum Healthcare Pvt. Ltd. (supra) and rejected the contention that interest gets subsumed in the working capital adjustment. The Hon'ble Bombay High court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 215 Taxman 108 (Bom) dealt, inter al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be accepted. Similarly, Considering the above discussion, it is held that deferred trade receivable constitutes international transaction. 43. Having concluded that deferred trade receivables constitute international transaction, 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. On this aspect we can take useful guidance from the decision of the ITAT Delhi Bench in the case of Techbooks International (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle-3, Noida [2015] 63 taxmann.com 114 (Delhi - Trib.), wherein the Tribunal laid down guidelines on the manner of determination of ALP, as follows: 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lustrate, if the comparables have allowed credit period of, say, 60 days and the assessee has realized its invoices in 180 days, then interest for 90 days (150 days minus 60 days) should be added to the price charged by the comparables and the amount of their resultant adjusted operating profit be computed. Rule 10B permits making such an adjustment. Sub-rule (2) to rule 10B stipulates 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 allo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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