TMI Blog2021 (8) TMI 1362X X X X Extracts X X X X X X X X Extracts X X X X ..... rivate Limited v. DCIT (supra) that the transfer pricing adjustment should be restricted to AEs related transaction, we direct the AO/TPO to re-compute the arm's length price of the assessee in respect of the international transaction it had entered with its AEs. Disallowance of interest expenses - allowable business expenditure - AO erred in disallowing the interest paid on account of statutory payments - CIT(A) erred in not deleting the said disallowance - HELD THAT:- The assessee had claimed as deduction in the Profit and Loss Account, interest expenditure on account of delayed payment of statutory dues - Whether the statutory payment are routed through the Profit and Loss account or not is immaterial for deciding the issue whether interest paid for the belated payment of statutory dues is compensatory or not (if the same is compensatory, the interest expenditure is allowable deduction u/s. 37 of the I.T. Act). Mumbai Bench of the Tribunal in the case of Chander K. Raichandani [ 2013 (2) TMI 713 - ITAT MUMBAI] had clearly held that the simple interest paid for belated payment of statutory dues is nothing but compensatory and allowable deduction u/s. 37 - we hold that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain to assessment years 2013-2014 and 2014-2015. Since these appeals were heard together, it is being disposed of by this consolidated order. We shall dispose of the appeals as under: ITA No. 3338/Bang/2018 (Asst. Year 2013-2014) 2. Though 17 grounds are raised in this appeal, the learned AR, during the course of hearing, pressed only ground Nos. 12, 14, 15, 16 and 17. Ground Nos. 12, 14 and 15 are relating to transfer pricing adjustment. Ground Nos. 16 and 17 are regarding corporate tax issue. We shall adjudicate the grounds as under:- Ground No. 12 (Transfer Pricing Adjustment) Ground No. 12 : Computation of margin of the comparable companies adopted by the ld. TPO is erroneous. 3. As regards the above ground, the only contention of the learned AR is that out of the final list of comparables selected by the TPO (refer page 6 of the TPO's order), the margin of one of the comparable companies, namely, Priya International Limited is erroneous. It was submitted by the learned AR that this fact was noticed by the DRP in assessee's own case for assessment year 2012-2013, wherein the DRP directed the A.O. to take the margin of only electronic s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transfer pricing adjustment by directing the AO to re-compute the arm's length price of the assessee at entity level. The learned AR submitted that according to the provisions of Chapter X of the Income-tax Act, the TP adjustment has to be restricted to the Associate Enterprises' transactions alone. In this context, the learned AR relied on the Bangalore Bench of the Tribunal in the case of IKA India Private Limited v. DCIT in IT(TP)A No. 2192/Bang/2017 (order dated 17.09.2018). 4.1. The learned DR did not raise any specific objection to the above contention of the assessee in the written submission filed by him. 4.2. We have heard rival submissions and perused the material on record. The Bangalore Bench of the Tribunal in the case of IKA India Private Limited v. DCIT (supra) had held that as per section 92 of the I.T. Act, the transfer pricing adjustment has to be made with reference to the international transactions the assessee had undertaken with its AEs. The relevant finding of the Co-ordinate Bench of the Tribunal reads as follow:- 55. We have considered the rival submissions. The reasoning of the CIT(A) for considering the entire sales in manufactured ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48 by holding it as not an allowable business expenditure. 5.1. Aggrieved, the assessee preferred an appeal to the first appellate authority. Before the first appellate authority, it was submitted that the interest is compensatory in nature and should be allowed as expenditure u/s. 37 of the I.T. Act. The CIT(A) noticed that the receipt and payment of service tax, excise duty, VAT etc. are not included in the Profit Loss account of the assessee, and it is only forming part of the Balance Sheet. Considering this factor, the CIT(A) held that the interest expenditure on account of delayed payment of statutory dues cannot be allowed as a business expenditure. The CIT(A) also relied on the judgment of the Hon'ble Bombay High Court in the case of Aruna Mills Ltd. v. CIT [1957] 31 ITR 155 (Bom.)]and the Calcutta High Court in the case of Orient General Industries Ltd. v. CIT [1994] 209 ITR 409 (Cal.)]. 5.2. Aggrieved, the assessee has filed this appeal before the Tribunal. The learned AR reiterated the submissions made before the Income Tax Authorities. The learned AR has also relied on the order of the Mumbai Bench of the Tribunal in the case of Chander K. Raichandani v. ACIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the sum of ₹ 15,16,748 paid as interest for belated payment of statutory dues is an allowable deduction. It is ordered accordingly. 5.4.2. In the result, ground Nos. 16 and 17 are allowed. ITA No. 3339/Bang/2018 : Asst. Year 2014-2015 6. Thirteen grounds are raised in this appeal. The learned AR had only pressed ground Nos. 10 to 13. Ground No. 10 is regarding working capital adjustment and Ground No. 11 to 13 are regarding corporate guarantee commission. We shall adjudicate the issues, ground-wise as under: Ground No. 10 Ground No. 10 : The Ld. TPO erred in not providing working capital adjustment to the margins of the comparable companies adopted by him. Hon'ble DRP erred in rejecting the plea of the appellant. 7. The TPO did not grant working capital adjustment claimed by the assessee while determining the arm's length price. The observations of the TPO in not granting working capital adjustment reads as follow:- The taxpayer's Net margin on sales in the AE segment as shown on page 3 is at a margin of 1.31%. Further, no adjustments like working capital and other adjustments can be given unless reasonably accurate adjustment c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , namely:- (a) to (d)...... (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Administrations (hereafter the TPG ) contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: None of the differences (if any) between the situations being compared 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. 17. In Paragraphs 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has been explained as follows:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 or average of these figures. (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. 19. In the present case the TPO held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons:- (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and tested party on same footing. Therefore there is little merit in TPO/DRP's objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the TPO/DRP regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the details required for working capital adjustment and the revenue authorities were not justified in denying the claim of assessee for deduction. The TPO/AO is directed to allow working capital adjustment in the light of the material already available on record, after affording opportunity of being heard to the assessee. 24. The TPO/AO is directed to compute the ALP in the light of directions as given above, after affording opportunity of being heard to the assessee. 7.4.1. In the instant case, we find that the assessee has provided the detailed working capital adjustment working before AO/TPO and the DRP. The working capital adjustment worked out by the assessee are enclosed at page 105 of the paper book filed by the assessee. No defect with regard to the assessee's working capital adjustment was pointed out by the AO/TPO nor by the DRP. In terms of Rule 10B(1)(e)(iii) of the I.T. Rules, the net margin arising in comparable uncontrolled transactions should be taken into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration for the same since these activities were in the nature of shareholders/stewardship activities, and was only incidental to the main activities of the assessee. It was further submitted that it had not costed anything to the assessee in making such an arrangement. It was also contended that the above corporate guarantee did not have any bearing on the profit, loss, income, assets of the assessee so as to call it as an international transaction as contemplated u/s. 92B(1) of the I.T. Act. The assessee also submitted that it was having advances of ₹ 7,67,65,463 from its AE and advances from AE was well over the corporate guarantee of ₹ 3,79,37,300 extended by the assessee in favour of its subsidiary. The AO/TPO rejected the submissions of the assessee and computed tax at 2% on the quantum of corporate guarantee given by the assessee to its AE. 8.1. The DRP held that the corporate guarantee given by the assessee to its AEs was an international transaction and would fall within the definition of international transaction u/s. 92B of the I.T. Act brought in by Finance Act, 2012. The DRP after relying on various judicial pronouncements computed the rate at 1.6% inste ..... X X X X Extracts X X X X X X X X Extracts X X X X
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