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Facts
The assessee, D S Trading Co., a partnership firm dealing in Raw Cashew Nuts, reported a business loss for AY 2021-22. The Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) made upward adjustments of INR 2,80,66,728/- for export transactions to Associated Enterprises (AE) and INR 1,15,16,873/- for outstanding receivables, leading to a total upward adjustment of INR 3,95,83,601/-. The assessee contested these adjustments, arguing that significant demurrage charges were extraordinary costs due to COVID-19 and that no notional interest should be charged on outstanding receivables.
Held
The Tribunal held that the exponential increase in demurrage and detention charges should be treated as extraordinary costs and non-operating in nature, thus allowing the appeal on this ground. It further ruled that no interest could be charged on a notional basis for outstanding receivables, thereby allowing the appeal on this ground as well, relying on previous judgments.
Key Issues
1. Whether exponential demurrage and detention charges should be considered extraordinary non-operating costs for transfer pricing. 2. Whether notional interest can be charged on outstanding receivables from an Associated Enterprise. 3. Validity of penalty proceedings initiated under Sections 271AA and 270A.
Sections Cited
143(3), 144C(13), 144B, 92D, 10D, 92C, 10C, 92CA(1), 144C(2), 271AA, 92B, 270A, 92CA(3)
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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: DR. B.R.R. KUMAR, VICE-MS. SUCHITRA KAMBLE
O R D E R PER DR. B.R.R. KUMAR, VICE-PRESIDENT:-
By way of this appeal, the assessee-appellant has challenged correctness of the order dated 05.09.2024 passed by the Assessing Officer under section 143(3) r.w.s. 144C (13) r.w.s. 144B of the Income Tax Act, 1961 [hereinafter referred to as "the Act" for short], for the Assessment Year 2021-22.
The grounds of appeal raised by the Assessee are as follows:-
“1. Ground No 1 - Upward transfer pricing adjustment of INR 2,80,66,728/- on account of benchmarking of export transaction to Associated Enterprises 1.1. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in re-computation of the arm's length price ('ALP') of the international transactions of exports entered by the Appellant, by proposing an upward adjustment of INR 2,80,66,728/-.
1.2. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in not considering the exponential increase in Demurrage & Detention charges of INR 2,57,46,964/- as extra-ordinary cost and hence, non-operating in nature.
1.3. Without prejudice to the above, the learned AO/Hon'ble DRP has erred in not considering the subject transaction at arm's length by applying Internal CUP i.e. average sales price to AE is higher than the average sales price to third party during the relevant assessment year. 1.4. Without prejudice to the above, the learned AO / Hon'ble DRP has erred in not considering the subject transaction at arm's length by applying Internal CUP i.e., average sales price to AE is higher than the average purchase price from the same AE during the relevant assessment year. 1.5. Without prejudice to the above, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in not making the TP adjustment proportionate to the quantum of international transactions with respect to export undertaken by the Applicant.
2. Ground No 2 - Adjustment amounting to INR 1,15,16,873 on account of outstanding receivable 2.1. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in considering receivables as a separate international transaction and thereby proposing an adjustment of INR 1,15,16,837 in respect of outstanding receivables. 2.2. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in not considering the net outstanding trade receivables of the same AE. 2.3. The learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in not considering the set off of domestic trade payables (purely entered to facilitate AE in COVID situation) against trade receivables pertaining to AE. 2.4. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in not considering the fact that no interest is being paid on trade payables to the same AE / third party. 2.5. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in not considering the fact that the Appellant operates with a negative net working capital and no funds are actually parked with AEs ie total outstanding payables are more than total outstanding receivables.
2.6. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in not considering the fact that working capital adjustment appropriately takes into account the outstanding receivable and hence, separate TP adjustment is unwarranted. 2.7. Without prejudice, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in calculating interest on the outstanding receivables for the entire year (instead of calculating based on actual credit period allowed).
3. Ground No 3 - Initiation of penalty under section 271AA @ 2% on non- reporting of outstanding receivables. 3.1. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in proposing penalty under section 271AA of the Act for non-reporting of outstanding receivables considering it as a separate international transaction. 3.2. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in considering the outstanding receivables falling within section 92(B) of the Act as a capital financing transaction.
4. Ground No 4 - Initiation of penalty under section 270A of the Act 4.1. On the facts and in the circumstances of the case and in law, the learned AO/Hon'ble DRP has erred in initiating the penalty proceedings under section 270A of the Act.”
The assessee-company is a partnership firm engaged in the business of trading of Raw Cashew Nuts. The assessee filed the return of income on 15.02.2022 declaring a business loss of Rs. 1,77,96,363/-. The return was processed under Section 143(1) of the Income Tax Act, 1961 ('the Act'). During FY 2020-21, the assessee had entered into an international transaction of purchase of raw cashew nuts and sale of raw cashew nuts. The assessee has maintained information/ documents for the aforesaid transactions as prescribed under Section 92D of the Act read with Rule 10D of the Rules. The assessee had undertaken a detailed transfer pricing ('TP') analysis in respect of its aforesaid international transactions based on which it was concluded that its international transactions were at arm's length in accordance with the provisions of Section 92C of the Act read with Rule 10C of the Income tax Rules, 1962 ('the Rules').
During the assessment proceedings, a reference under Section 92CA(1) of the Act had been made by the Assessing Officer to the Deputy Commissioner of Income Tax, Transfer Pricing Officer -1, Ahmedabad. The Transfer Pricing Officer ('TPO') proposed following adjustment in his order dated 28.10.2023.
a) Upward transfer pricing adjustment of INR 2,80,66,728/- on account of benchmarking of transaction made related to export. b) Upward adjustment of INR 1,15,16,873/- (as per the rectified order u/s 154 issued by TPO dated 21.11.2023) on account of outstanding receivable.
Aggrieved by the order of the Assessing Officer, the assessee filed objection before the Dispute Resolution Panel (DRP) as per provision of Section 144C(2) of the Act. The Ld. DRP rejected the objections filed by the assessee. Subsequently, the Assessing Officer vide impugned order dated 05.09.2024, after giving effect to the directions of the Ld. DRP, computed total income of the assessee-firm at INR 2,17,87,238/- by proposing an upward adjustment of INR 3,95,83,601/-.
Aggrieved by the aforesaid order of the Assessing Officer, the assessee is now in appeal before the Tribunal.
I. Non-consideration of the exponential increase in Demurrage & Detention charges of INR 2,57,46,964/- as extra-ordinary cost.
7 At the outset, the Ld. AR submitted that the TPO has not considered exponential increase in demurrage and detention charges of Rs.2.57 crores as extra-ordinary cost and hence non-operating in nature. It was argued that due to Covid, owing to the lockdown, the goods which have been imported could not be cleared on timely basis which led to payment of almost 4.73% of sales as demurrage charges. The demurrage charges paid in earlier years for a turnover of Rs.19 to 36 crores was Rs.1.5 lakhs to Rs.4.05 lakhs only. During the year under consideration the demurrage charges paid were to the tune of Rs.2.57 Crores. Considering the demurrage charges OP/OC would be 1.35% which would be within the tolerance limit of ALP of 1.78%. These facts are not in dispute.
7.1 On this issue, we are guided by order of Co-ordinate Bench of Delhi in the case of Transwitch India (P.) Ltd. Vs. DCIT, 21 taxmann.com 257, wherein it was held as under:-
I. Section 92C, read with section 92CA, of the Income-tax Act, 1961 - Transfer pricing - Computation of arm’s length price - Assessment year 2006-07 - Assessee-company was a wholly owned subsidiary of an American company and operated a design centre for its parent company for design and development of software and related services - During financial year under consideration, it had undertaken international transactions of provision of software development services with its associated enterprise - As operating profit margin (OP/OC) earned by it at 8.39 per cent was higher than weighted average of operating profit margin of comparable companies at 7.93 per cent, international transactions of provision of software design and development services was claimed to be at arm's length price - However, TPO, while determining ALP in case of assessee, rejected adjustments made by assessee on account of extraordinary expense comprising of relocation expenses for new premise; additional rent paid for two months; and salary paid for unproductive hours during shifting to new office - Assessee claimed that during financial year 2005-06, it shifted its office from Safdarjung Enclave to Mohan Co-operative Industrial Estate due to sealing drive of Municipal Corporation of Delhi (MCD) and had to pay two months' extra rent for year and brokerage to engage new office - Further, because of shift in office, employees of assessee were idle and unproductive from 1-3-2006 to 25-3-2006 as normal operations commenced from new office with effect from 25-3-2006 - TPO rejected assessee's submission inter alia on grounds that assessee had not given a copy of MCD notice whereby its office premise was ordered to be shut down; that nature of assessee's business was such that shifting of business from one premise to other could be effected over a weekend without causing any disruption; and that no such claim for adjustment of abnormal cost had been made by assessee in its transfer pricing report and assessee's argument appeared to be a desperate measure to somehow increase its NCPM - Whether if in order to avoid any sealing assessee decided to shift its office premise to a commercial area and in that process incurred aforesaid abnormal expenses, rejection of assessee's claim towards comparability adjustment on ground that its premises was not actually sealed was unjustified - Held, yes - Whether section 92CA(3) specifically requires TPO to take into consideration all evidence which assessee may produce during course of hearing and, therefore, it would be inappropriate to reject claim of assessee towards comparability adjustment merely on ground that same was not included in TP study - Held, yes - Whether since assessee had quite convincingly rebutted TPO's reservations regarding its claim and adjusted operating margin of assessee at 17.80 per cent was higher than operating margin of 17.09 per cent earned by comparable companies selected by TPO, international transactions undertaken by assessee satisfied arm's length criteria and TPO had wrongly rejected aforesaid claim of comparability adjustment on account of abnormal expenses incurred by assessee - Held, yes [In favour of assessee]”
Following the guidelines given by the above order, we hold that the demurrage charges being an extra ordinary cost shall be treated as non-operating in nature. Appeal of the assessee on this ground is allowed.
II. Interest on outstanding receivables INR 1,15,16,837
The TPO held that the assessee has made sale to AE and has shown outstanding receivable of Rs.32,53,34,324/- in its financial statements. The TPO held that the same has not been reported in Form 3CEB. The TPO held that the assessee has also not submitted the details of outstanding receivables viz. invoice date, credit period, due date, date of receipt and interest rate etc. even after repeated reminders. The assessee submitted that against the gross outstanding receivables of Rs.32.53 crores from the AE, the gross outstanding payable were to the tune of Rs.21.61 crores and the net receivables from the AE could be considered as Rs.10.91 Cr. considering the normal business trading cycle. The Ld. DRP held that there is a pattern in trading behaviour of the assessee where the payment for supplies to AEs are not collected nor received in due time. Thus, the interest on these trading debts have been uncharged. It was held that interest on deferment of collection and receivable is a separate international transaction. The Ld. DRP held that there is no relevance of non-charging to Associated Enterprise/Non-Associated Enterprise or, on payables. The Ld. DRP held that an international transaction is required to be benchmarked as a trading debt arising during business and relied on the ratio of McKinsey Knowledge Centre India (P.) Ltd. v. Pr. CIT [2018] 96 taxmann.com 237/407 ITR 450 (Delhi). The Ld. DRP further relied on the judgment of Perot System TSI (India) Ltd Vs. DCIT 37 SOT 358 and BT e-Serv (India) (P.) Ltd vs. ITO, 87 taxmann.com 251. In conclusion, the Ld. DRP held that the interest on deferment of collection and receivable is a separate international transaction. There is no relevance of non-charging to Associated Enterprise/Non-Associated Enterprise or, on payables, even to set off the receivables against the payables.
8.1 Before us, the Ld. AR repeated the arguments taken up before the Revenue Authorities and Ld. DR relied upon the order of the Ld. DRP.
8.2 Heard the arguments of both the parties and perused the material available on record.
It is a fact on record that the assessee had receivables to the tune of Rs.32.53 Crores. The Ld. AR submitted that assessee is a debt-free company and hence notional interest can be chargeable from the AE. The facts indicate that, during the year, the assessee has sold RCN to its AE as well as third parties in India.
Details of the same are tabulated below: Particulars Export sales to AE Local sales to third parties
Total Quantity in Kgs 41,68,528 11,19,069 Sales value (Re-export) 40,50,87,499 9,83,40,330 Sales price per Kg 97.18 87.88 8.3 In this regard, the assessee has sold to AE at a higher rate i.e. 97.18 per kg as compared to 87.88 per kg sold to third parties in India. The outstanding receivables of 32,53,34,324 consists of the re-export of the goods which were imported by it from its AE and has re-exported the goods which were imported by third parties from its AE, acting as a Facilitator. The said re-export of goods may not be classified as an export of goods but rather as a purchase return. This process of returning the goods to the original exporter is only due to financial difficulties faced by Applicant and 3 Parties due to COVID-19. The nature of these transactions as purchase returns implies that the goods meant for final sale in the local market but could not be sold and subsequently returned to the AE.
8.4 A brief summary of outstanding receivables along with corresponding payables in tabulated below: All amount in INR Particulars AE Vithal Kanchur Others Total Impex Cashews Total receivables 32,53,34,324 6,20,17,463 2,38,29,049 41,11,80,836 as per Balance sheet Total payables as 21,61,76,410 20,64,44,990 6,66,14,826 3,40,75,948 52,33,12,174 per Balance sheet Total receivables 32,53,34,324 32,53,34,324 against export sales of INR 40,50,87,499 Total payables 19,01,52,316 14,80,53,828 5,47,77,263 39,29,83,407 (purchase specifically identified against export sales to AE)
8.5 On going through the entire facts specific to the instant case, we find that the transactions have been entered with the local parties for and on behalf of the AE, and also keeping in view the facts that the local parties have not been paid till date, there has been a net receivable of Rs.10.91 Crores, and the assessee being a debt-free company, placing reliance on the judgement of Hon’ble High Court of Delhi in the case of Pr. CIT Vs. M/s Inductis India Pvt. Ltd. in (Para 6.5 & 6.6), we hold that no interest can be charged on notional basis.
Appeal of the assessee on this ground is allowed.
In the result, appeal of the assessee is allowed.
The order is pronounced in the open Court on 20.06.2025