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TMI Blog2022 (3) TMI 1604X X X X Extracts X X X X X X X X Extracts X X X X ..... ng officer erred on facts and in law in making an adjustment of Rs. 18,16,82,680 to the arm's length price of the 'international transactions' of provision of software development services undertaken with the associated enterprise on the basis of order passed by the Transfer Pricing Officer ('TPO')/ Dispute Resolution Panel ('DRP'). 2.1 That while giving effect to the direction of DRP, the AO/ TPO erred on facts and in law in computing the operating profit to cost ratio of the appellant at 9.61% as against 15.20% (13.17% in AE segment) computed by the appellant, by erroneously considering foreign exchange fluctuation income of Rs. 10,51,15,282 as non-operating item of income. 2.2 That the AO/ TPO erred on facts and in law in passing order under section 143(3) read with section 144C of the Act in gross violation of section 144C(10) of the Act, by not considering the specific direction of the DRP to consider foreign exchange fluctuation income as operating item of income. 2.3 That the DRP/ TPO erred on facts and in law in considering following companies in the final set of comparable companies allegedly holding them to be functionally comparable to the assessee: (i) E-Zest So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w in not appreciating that delay in receipt of receivable is not an 'international transactions, per se, under section 92B of the Act but is a consequence of an 'international transaction' undertaken in the form of services rendered to the associated enterprise. 3.3 That the DRP erred on facts and in law in holding that the non-realization of invoice value beyond the stipulated period (as per contract) is a separate international transaction, whose arm's length price is required to be determined separately. 3.4 Without prejudice, that the DRP/ TPO erred on facts and in law in not accepting that in any case the transaction of delay in respect of receivables was closely linked to the 'international transaction' of export and since the profit earned by the assessee as a percentage of cost is higher than the profit earned by comparable companies, no transfer pricing adjustment was even otherwise required to be made in this regard. 3.5 That the DRP erred on facts and in law in holding that working capital adjustment does not address the mispricing in the case of taxpayer where interest free receivables were outstanding beyond the average period. 3.6 That the DRP/TPO erred on fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder dated 12.12.2017. The Tribunal has relied on the decision of Hon'ble Delhi High Court in Pr. CIT-V vs. Kusum Health Care Pvt. Ltd. in ITA No. 765/2016, judgment dated 25.04.2017 and held that no adjustment is to be made on account of notional interest on receivables by relying upon Explanation (i), (a) & (c) of section 92B by treating the continued debt balance as an international transaction. Moreover when the taxpayer is debt free company, there is no question of charging any interest on receivables. This issue has also been decided by Hon'ble Delhi high Court in case of Pr.CIT-1 vs. M/s. Bechtel India Pvt. ltd. in ITA 379/2016 order dated 21.07.2016. The relevant findings of the order of the Tribunal in assessee's own case (supra) in paras 14 to 18 which are being reference but not being reproduced for the sake of brevity. 33. The assessee during the year under consideration had not avail any loan from AEs or unrelated third party and was not incurring any interest cost. Further, there was similar delay in receipt of receivables from others and the assessee was not charging any interest on delay in receipt of receivables against services rendered to unrelated third party. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave dealings with foreign AEs would automatically be characterized 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 inquiry by the TPO by analyzing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way. 11. The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables 180 days constitutes an international transaction by itself. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-à-vis that of its comparables, any further adjustment only on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y 2010-11 and up to 417 days qua AY 2012-13 as per detail of invoices raised on unrelated parties qua AY 2012-13, available at page 236 of the paper book." 52. Moreover, the interest can be charged only on loan and borrowing of money and not in case of sale, particularly when there is no penal provision in the agreement entered into between the taxpayer and its AE/non-AE to charge the interest on delayed receivables. Even otherwise, a transaction cannot be re-characterized merely on ground of delay in payment of receivables. 53. Following the order passed by the coordinate Bench of the Tribunal in taxpayer's own case (supra), we are of the considered view that since the taxpayer has not incurred any interest cost nor has availed of any loan from AE or unrelated third parties, as is evident from audited financials at pages 57 & 66 of the paper book, proposed adjustment on account of delay in receipt of receivables by the TPO/DRP is not sustainable, hence ordered to be deleted. Consequently, grounds no.2 to 2.8 are determined in favour of the taxpayer." 4. Decided cases must be put to rest, unless otherwise. In the absence of any material change in the factual matrix and the leg ..... X X X X Extracts X X X X X X X X Extracts X X X X
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