TMI Blog2022 (9) TMI 587X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be justified and no separate upward adjustment on outstanding export receivables is required and therefore we direct the Ld.AO to delete the upward adjustment made towards overdue receivables from AE. We therefore allow this ground raised by the assessee. Adjustment towards corporate guarantee commission on the gross guarantee given to AE - AR pleaded that it is not an international transaction as the assessee has not charged the AE - HELD THAT:- TPO made the adjustment by instances referring to the commercial banks providing financial guarantees but did not contemplate the issue of corporate guarantee. The concept of bank guarantees and corporate guarantees was explained in the case of Prolifics Corporation Ltd[ 2015 (1) TMI 551 - ITAT HYDERABAD] by the Hyderabad Tribunal wherein it has observed that the provisions of corporate guarantee always involves risk and there is a service provided to the AEs in increasing its creditworthiness in obtaining loans in the market. We find that there must be a minimum charge on the P L Account but there is an enhanced risk which cannot be ruled out in providing guarantees. Ultimately, the Hon ble Tribunal upheld the adjustment m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national transactions with its Associated Enterprises (AE) and bench marked its international transactions under Transaction Net Margin Method (TNMM). The assessee filed its revised return of income for the assessment year 2017-18 on 21.11.2018 admitting a total income of Rs 132,15,54,810/-. The case was referred to the Transfer Pricing Officer [TPO] for determining Arms LengthPrice (ALP) u/s 92CA(3) in respect of its international transaction entered into with AE, after approval from the Principal Commissioner of Income Tax-1, Visakhapatnam on 1/4/2019. In response to the notices of the Ld. TPO, the assessee filed various submissions and requested for personal hearing which was allowed on 20/1/2021. Considering the submissions made by the assessee s representative, the Ld. TPO determined the ALP of the international transactions of the assessee with its AE, at Rs. 50,57,43,750/- and directed the AO to enhance the total income of Rs. 50,57,43,750/- u/s. 92CA(3) of the Act. The TPO gave the below summary of the adjustments u/s. 92CA(3) of the Act: Sl No. Description Adjustment u/s. 92CA(3) (Rs.) 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P/TPO/AO erred in not appreciating the fact that the Act provides for taxing only real income whether received or accrued under the normal provisions. 2.4. The DRP/TPO/AO erred in not appreciating the fact that transfer pricing adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. 2.5. Without prejudice to the above, the DRP/TPO/AO erred in imputing notional interest on delayed receivables despite the fact that the primary transaction has already been tested and considered to be at arms length under Transaction Net Margin Method at the entry level. 2.6. The DRP/TPO/AO ought to have appreciated that the appellant has earned a very high arms length net margin than that of the comparable companies (ie., 12.15% as against 8.07% with export incentive considered as operating income and 4.17% and 1.28% without export incentive). It impliedly demonstrates that the appellant is compensated for cost of delayed receivables through higher operating margin embedded in sales to AE. 2.7. Without prejudice to the above, the DRP/TPO/AO erred in not appreciating that the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d arbitrary. 5. The main issue is with respect to upward adjustment in imputing notional interest on the outstanding overdue receivables from Associated Enterprises (AEs). The Learned Authorized Representative (Ld. AR) submitted that the assessee has adopted Transaction Net Margin Method (TNMM) and therefore the interest on outstanding receivables is subsumed in the Arm s Length Price (ALP) charged to the AEs. The AR further submitted that the assessee s operating margin is 4.17% as compared to the comparable selected by the Ld. TPO where the operating margin is at 3.69%. The Ld. AR further submitted that the assessee has made 72% of the total sales to AEs and 28% to non-AEs. The Ld. AR confirmed that no interest is charged on the outstanding receivables either to AE or Non-AE parties. The Ld. AR relied on the following case laws: (i) PCIT vs. Kusum Health Care (P) Ltd [2018] 99 taxmann.com 431 (Delhi HC) (ii) PCIT vs. Amadeus India (P) Ltd [2020] 113 taxmann.com 393 (Delhi HC). (iii) Pegasystems Worldwide India Pvt Ltd vs. ACIT [2015] 64 taxmann.com 470 (Hyd. Trib.) (iv) DCIT vs. CCL Products (India) (P) Ltd [2019] 106 taxmann.com 11 (Visakhapatnam Trib.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the argument of Ld AR that receivables is not an international transaction. Whether separate adjustment is required to be made in respect of receivables is the subject matter. The assessee also submitted the working capital adjustment made to the operating margin of the comparable companies and the assessee. From the submissions made by Ld AR, we find that if the export incentives are considered as non-operating income, the operating profit ratio of the comparable companies is 1.28% as against the operating margin of 4.17% of the assessee. Alternatively, if the export incentives are considered as operating income, the operating margin of the comparable companies is 8.08% vis- -vis the assessee at 12.15%. We find from the above working the assessee s margin is significantly higher than the operating margin of the comparable companies. There may be a delay in the collection of receivables even beyond the agreed time limits due to a variety of factors which has to be decided on a case to case basis. When TNM method is considered as the most appropriate method, which was also not disputed by Revenue, the net margin thereunder would take care of such notional interest cost. It was furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f USD 3,39,09,479 approximately 1.84 times the credit availed by the AE. This shows that there was no chance of the assessee being called upon by the bank to satisfy the obligation of the AE (and factually the same has nto occurred till date as well). 3.8. The DRP/TPO/AO erred in not appreciating the fact that due to the skewed debit-equity ratio of the AE, the banks would not be willing to grant loan unless it is guaranteed by the parent (ie., assessee) and providing such guarantee is an onerous responsibility of a shareholder. 3.9. The DRP/TPO/AO ought to have appreciated that the provision of corporate guarantee has not resulted in reduction of rate of interest and the AE has not derived any benefit which has an impact on its profits or loss or assets. 3.10. The DRP/TPO/AO erred in not adopting any of the prescribed methods for benchmarcking the corporate guarantee transaction. 3.11. Without prejudice to the above, the DRP/TPO/AO erred in considering the rate prescribed under Safe Harbour Rules as arms length price without appreciating that such rate is applicable only to parties who have resorted to safe harbor provisions. 3.12. The DRP/TPO/AO erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal transaction and it is only a shareholder s obligation. The Ld. AR further submitted that merely relying on the information obtained U/s. 133(6) of the Act which was not shared with the assessee, the Ld. TPO has erred in determining the rate @ 1.9% of the corporate guarantee given to AEs. Per contra, the Ld. DR referred to the Notification of the Central Board of Direct Taxes (CBDT) issued on 7/6/2017 wherein it is notified that the rate should not be less than 1% on the corporate guarantee given to AEs. The Ld. DR further submitted that the Ld. DRP has rightly considered the Notification (supra) and thereby upheld the ALP rate of 1.9% adopted by the Ld. TPO in respect of adjustment made to the corporate guarantee given to AE. The Ld. DR therefore pleaded that the order of the Ld.DRP / Ld.AO be upheld. 11. We have heard both the parties and perused the material available on record and the orders of the Authorities below. It is observed from the order of the Ld. TPO that the Ld. TPO has obtained from various banks the rate of fees charged by them on the issuance of financial guarantees for the computation of ALP. The Ld. TPO has thus concluded that the median of the ALP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect to disallowance U/s. 14A of the Act. 4.1. The AO erred in making disallowance under section 14A of the Act and the DRP erred in sustaining the said disallowance. 4.2. The AO/DRP failed to appreciate that in the absence of dividend income, the provisions of section 14A of the Act will not be applicable. 4.3. Without prejudice to the above, while computing the average value of investments under Rule 8D(ii), the AO ought to have excluded the investments which did not yield dividend income. 13. The issue raised by the assessee in the Grounds of Appeal is with respect to disallowance U/s. 14A of the Act r.w.r 8D. The Ld. AR argued that the assessee has not earned any exempt income warranting the disallowance u/s. 14A of the Act. The Ld. AR pleaded that the assessee s holding shares is merely to retain the controlling interest and no income has been received by the assessee during the impugned assessment year. The Ld. AR relied on the following decisions: (i) CIT vs. Chettinad Logistics P. Ltd 95 taxmann.com 250 (Supreme Court). (ii) CIT vs. Chettinad Logistics P. Ltd [2017] 80 taxmann.com 221 (Madras) (iii) Marg Ltd vs. CIT 120 taxmann.com 84 (Madr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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