M/S. GREAT WALL INDIA RESEARCH & DEVELOPMENT PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(1), BANGALORE

From the above grounds it is clear that the assessee has raised sole and substantive ground in regard to adjustment made towards interest on receivables and in ground No.2, the assessee has challenged initiation of penalty proceedings which is consequential in nature and ground No.3 is general in nature.

Aggrieved from the Draft Assessment Order, the assessee filed objection before the DRP. The learned DRP passed direction under section 144C(5) of the Act on 18.07.2024 where TPO was directed to recompute the interest on outstanding receivables. Accordingly, the TPO complied with the direction of the DRP on 29.07.2024 and the TPO revised the rate on outstanding receivables @ 5.19% and made addition of Rs.74,69,614/- to the total income of the assessee. Accordingly, the OGE was passed and added back an amount of Rs.74,67,614/- to the total income of the assessee.

Aggrieved from the above Order, assessee filed appeal before the Tribunal. The learned Counsel for the assessee reiterated the submissions made before the lower authorities and submitted that assessee has used TNMM as the most appropriate method with a profit level indicator of OP/OC. The learned AR further submitted that the working capital adjustment has not been given to the assessee. The working capital adjustment subsumes outstanding receivables from the AEs. In such situation, further adjustments to the margins of the assessee by computing interest on outstanding receivables is not justifiable. The TPO has wrongly treated the delayed receivables from AEs as advancement of loan and computed the arms length interest adopting SBI PLR rate @ 12.27% resulting in TP adjustment of Rs.1,76,54,649/- and the DRP has directed to recomputed the adjustment in the light of facts observed as per para No. 2.1.26 to 2.1.34 of their order. The assessee company is a debt free company. It is wholly owned subsidiary of Great Wall Motor Company Ltd., China. The assessee is fully funded by the AEs for its operation in India. The assessee has no borrowed funds and no other interest has been paid to any other parties. Therefore, the assessee does not bear any working capital risk since it has been fully funded by its AEs and has no working capital contingencies. However, DRP has held that the working capital risk cannot be avoided. He further submitted that the assessee has generally received trade receivables from AEs within due dates as specified in the intercompany agreement. However, in 2021, there were few delayed receipt due to covid 19 pandemic and the AE’s company i.e., China was the most affected company during the pandemic. The trade receivables have been received within due dates from the subsequent Financial Years post the impact of covid 19. This shows that the delay was not intentional but consequential to the unprecedent pandemic. In this regard, the RBI provided relaxation for collection of export invoices raised during the period April 2020 to July 2020. The period allowed by RBI for collection of receivables was extended from 9 months to 15 months. The said

On the other hand, the ld. DR relied on the order of the lower authorities and submitted that the assessee is unable to prove the extended credit period to its AEs. The agreements were not produced before the ld. TPO, therefore the TPO has considered the credit period of 30 days. The ld. DRP has considered the issue in detail.

Considering the rival submissions here the dispute regarding only on the addition made by the AO after direction of ld. DRP for Rs. 74,67,614/- after applying LIBOR rate whereas the invoices were raised to the AEs in CNY. The ld. DRP noted that the assessee was unable to demonstrate how the nature of its business or specific conditions warranted a deviation from the standard 30 days credit period typically considered reasonable. This lack of justification leaves the panel without a basis to consider a longer credit period reasonable. The panel emphasises that any deviation from the standard credit period must be supported by robust evidence that justifies such a departure based on the specific business context and industry practices. Considering the arguments of the ld. AR regarding not considering the RBI announces measures for dealing with the COVID-19 pandemic dated 01.04.2020 which is placed at paper book page No. 390 to 391 has not been considered while calculating the credit period. We noted that the assessee is also unable to prove on the finding of the ld. DRP regarding in case of loss arising due to fluctuation of foreign currency of CNY. During the course of hearing both the parties were agreed for the applying 6 months LIBOR plus 300 basis points for calculating the interest on delayed receivables considering the credit period of 30 days. The AO/TPO/DRP is directed to consider the applicability of the above noted RBI announcement as relied by the ld. AR to the extent of applicability in the case of the assessee.

In the result the appeal of the assessee is allowed for statistical purpose.

Appellant 2. Respondent 3. Pr.CIT 4.CIT(A) 5. DR, ITAT, Bangalore.