TARGET SOURCING SERVICES INDIA PVT. LTD.,NEW DELHI vs. ACIT, CIRCLE- 25(1) , NEW DELHI

(PAN : AACCT7694Q) (APPELLANT) (RESPONDENT) ASSESSEE BY : Ms. Rajnandini Shukla, Advocate REVENUE BY : Shri Rakesh Kumar, Senior DR Date of Hearing : 18.12.2019 Date of Order : 31.12.2019

O R D E R PER KULDIP SINGH, JUDICIAL MEMBER Appellant, M/s. Target Sourcing Services India Pvt. Limited (hereinafter referred to as ‘the taxpayer’) by filing the present appeal sought to set aside the impugned order dated 20.04.2017 passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Act qua the assessment year 2013-14 on the grounds inter alia that :-

“1. That the Hon'ble DRP erred in fact and law by upholding an adjustment of Rs. 19,79,520/- proposed by the Ld. AO/ Ld. TPO with respect to the outstanding receivables being re-characterised as loan deemed to be extended by the Appellant to its Associated Enterprise CAE") and accordingly proceeded to impute an interest on such outstanding receivables from AE and in doing so have grossly erred by:

1.1. Ignoring the fact that working capital adjustment takes into account the impact of outstanding receivables on profitability and therefore, no further imputation of interest is warranted;

1.2. Disregarding the intercompany pricing arrangement and not appreciating the fact that unlike a loan or borrowing, outstanding receivable is not an independent transaction which can be viewed on standalone basis and needs to be examined/aggregated with the commercial transaction as a result of which the debit balance has come into existence;

1.3. Ignoring the fact that Appellant is a debt free company and therefore, imputation of interest on account of blocked funds is unwarranted;

1.4. Ignoring the fact that Appellant has earned higher operating profit to operating cost (OP/OC) margin as compared to the comparable companies and further the additions proposed falls within +/-3% range allowed under the Indian Transfer Pricing regulations; and 1.5. Ignoring the fact that even if the notional interest on the outstanding receivables is being charged, the same should be net-off against the outstanding payables.

2. The Hon'ble DRP has erred in law by upholding the reference made by the Ld. AO to the Ld. TPO by not appreciating that such a reference suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was 'necessary or expedient' to refer the matter to the Ld. TPO for computation of the arm's length price ("ALP"), as is required under Section 92CA(1) of the Act.

3. The Hon'ble DRP has erred in law by upholding the adjustment made by the Ld. TPO/ Ld. AO thereby by not appreciating that while making the said adjustment the Ld. TPO/Ld. AO have not satisfied the conditions set out in section 92C(3) of the Act.

4. That the Ld. AO has erred both in facts and in law, in charging interest under Section 234A, 234B, 234C and 234D of the Act and withdrawing interest u/s 244A of the Act as applicable.”

S.No. International Transactions Method Amount (in Used Rs.) 1 Provision of Sourcing Support TNMM 25,80,37,141 Services 2 Reimbursement of expense- TNMM 1,96,26,305 paid/payable 3 Reimbursement of expense- NA 1,79,57,901 receive/receivable

GROUND NUMBER 1

10. Undisputedly working capital adjustment in this case absorbs impact of outstanding receivables on profitability. All these arguments have been addressed by the taxpayer before the ld. DRP by way of submissions available at pages 29 to 53, operative part of order at pages 33 & 34 is extracted as under:-

“2.1.7 Accordingly, a working capital adjustment was undertaken by the Assessee for the comparable companies selected in the TP report and a snapshot of the result is provided below for your Honour kind perusal (please refer to page 277 to page 281 for detailed working):

S. Name of company Working Capital No. Adjusted Margins 1 25.83% Asian Exhibition and Conference Limited 2 8.82% Concept Communication Limited 3 (207.01%) Gradiente Infotainment Limited 4 Quadrant Communications 11.14% Limited 5 Times Innovative Media Limited 13.19% Average (29.61%)

PLI TSS India’s Margin Working capital adjusted margins of comparables OP/OC 19.48% (29.61%)

2.1.8 The above analysis empirically demonstrates that the differential impact of working capital of the tested party vis-a-vis its comparables has already been factored in the profitability of the Assessee which is less than working capital adjusted margin of the comparables. Hence, the Assessee humbly submits that keeping in view the above factual position any further adjustment on the pretext of outstanding receivables is uneconomical, unwarranted and wholly unjustified.

2.1.8.1 Further, the Assessee would like to place reliance on the case of Kusum Healthcare Private Limited Vs. ACIT (ITA No. 6814/Del/2014)], wherein the Hon'ble ITAT has evaluated the need to undertake working capital adjustment and concurred with the contentions of the Assessee that working capital adjustment takes into account the impact of outstanding receivables on the profitability. The relevant extract has been reproduced below for your Honour reference:

Quote Para 7 ...... The appropriate adjustments need to be considered to bring parity in the working capital investment of the assessee and the comparables rather than looking at the receivable independently. Such working capital adjustment takes into account the impact of outstanding receivables on the profitability ....

Para 8

..... Accordingly, while calculating the working capital adjusted, operating margin on costs of the comparable companies, the impact of outstanding receivables on the profitability has been taken into account. If the pricing/ profitability of the assessee are more than the working capital adjusted margin of the comparables, then additional imputation of interest on the outstanding receivables is not warranted. Para 10 10. The above analysis demonstrates that the differential impact of working capital of the vis-a-vis its comparables has already been factored in the pricing/profitability of the assessee which is more than that working capital adjusted margin of the comparables. Hence, any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified. Unquote [Emphasis supplied] From the above, your Honour would appreciate that the Hon'ble ITAT has clearly acknowledged the need to undertake working capital adjustment to bring parity in the working capital investment of the tested party and the comparables rather than looking at the receivable independently.”

“9. Mr. Raghvendra Singh, learned counsel appearing for the Revenue submitted that the ITAT overlooked the fact that the expression “international transaction” as defined in Explanation (i)(c) to Section 92B of the Act included “payments or deferred payment or receivable or any other debt arising during the course of business”, and therefore, the outstanding receivables could by themselves constitute an international transaction. He further referred to the OCED Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Paras 3.48 & 3.49 under Chapter III para A.6.1 of the said Guidelines titled “Different types of comparability adjustments” spoke of the need to eliminate differences that may arise from different accounting practices between controlled and uncontrolled transactions. In particular, it was noted under para 3.49 that “a significantly different level of relative working capital between the controlled and uncontrolled parties may result in further investigation of the comparability characteristics of the potential comparable.”Mr. Singh submitted that the ITAT erred in disagreeing with the TPO, who had characterised the outstanding receivables as an international transaction by itself which required benchmarking.

inquiry by the TPO by analysing 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.” 14. In view of what has been discussed above and following the aforesaid decision rendered by the Hon’ble Delhi High Court, we are of the considered view that when the taxpayer has already taken into account the impact of outstanding receivables on profitability while making working capital adjustments of the taxpayer vis-a-vis its comparables which is less than the working capital adjusted margin of the comparables any further adjustment on account of delayed payment of outstanding receivables from AE would distort the entire picture of re-characterization the transactions. In other words, transactions as to outstanding receivables cannot be re-characterized as loan deemed to be advanced by the taxpayer to its AE. We are of the considered view that AO/DRP have erred in making addition of Rs.19,79,520/- on account of interest on outstanding receivables from AE, hence ordered to be deleted.

Ground No.1 is determined in favour of the taxpayer.

GROUND NO.2

GROUND NO.3 16. Ground No.3 being consequential in nature needs no specific findings.

GROUND NO.4 17. Ground No.8 being premature needs no specific findings.

Order pronounced in open court on this 31st day of December, 2019.