DCIT, BANGALORE vs. M/S RANDOX LABORATORIES INDIA PVT. LTD.,, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER

IT(TP)A No.433/Bang/2016 Assessment year : 2011-12

The Deputy Commissioner of Vs. M/s. Randox Laboratories India Income Tax, Private Limited, Circle 5(1)(1), Plot No.191-195 & 246-250, Bangalore. KIADB Industrial Area, Bommasandra Jigani Link Road Bengaluru – 560 105. PAN: AADCR 0074K APPELLANT RESPONDENT

IT(TP)A No.800/Bang/2016 Assessment year : 2011-12

M/s. Randox Laboratories India Vs. The Deputy Commissioner of Private Limited, Income Tax, Bengaluru – 560 105. Circle 5(1)(1), PAN: AADCR 0074K Bangalore. APPELLANT RESPONDENT

Revenue by : Shri C.H. Sundar Rao, CIT(DR-I), ITAT, Bangalore. Respondent by : Shri Tata Krishna, Advocate

Date of hearing : 09.07.2019 Date of Pronouncement : 17.07.2019

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O R D E R Per N V Vasudevan, Vice President

IT(TP)A No.433/Bang/2016 is an appeal by the Revenue while IT(TP)A.No.800/Bang/2016 is an appeal by the Assessee. Both these appeals are directed against the order dated 28.1.2016 of the Dy.CIT, Circle 5(1)(1), Bangalore passed u/s.143(3) read with Sec.144C of the Income Tax Act, 1961 (the Act) in relation to assessment year 2011-12.

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method (MAM) for determination of ALP, whether it is Transaction Net Margin Method (TNMM) as contended by the revenue or the Resale Price Method (RPM) as contended by the Assessee. It is undisputed before us that identical issue had come up for consideration before the ITAT Mumbai Bench in Assessee’s own case in AY 2010-11 in IT(TP)A No.507/Mum/2015 and the Tribunal by its order dated 7.6.2019 held that RPM was the MAM and directed the TPO to determine ALP applying RPM as the MAM. The following were the relevant observations of the Tribunal on this issue:-

“7. We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. The core issue arising for consideration is, whether the international transaction relating to purchase of reagents, spares, consumables from the AE is a simple trading activity, hence, can be benchmarked under RPM. Before we advert to the core issue, it is necessary to understand the activities of the assessee with its AE. As stated earlier in the order, assessee's AE is manufacturing medical diagnostic reagents, analyzers and consumables. Assessee imports these reagents form the AE and sells them to diagnostic units / laboratories in India for use in various chemical analysis. These reagents are analyzed in machines / equipments known as analyzers. For the purpose of sale of reagents, the assessee enters into specific agreements with third party customers. As per the terms of the agreement, a sample copy of which is placed in the paper book, the customer in India is required to purchase reagents from the assessee and in the event of such purchase, the assessee provides them the analyzer for carrying out the chemical analysis with the reagents. As per the terms of the agreement, the analyzer is made available to the customer for a period of five years without any extra cost. Further, as per the terms of agreement, the assessee is required to provide spares for the analyzer and also provide services including repairs. The analyzers were kept with the third party customers since the assessee was undertaking a research regarding its products as per Indian norms for clinical tests and to provide feedback to the Head Office. Thus, as could be seen from

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the facts on record, the analyzers were never sold to the third party customers who buy the reagents from the assessee, but, were only installed in their premises for chemical analysis and research work for a period of five years. After expiry of five year period, the WDV of the analyzers get reduced to zero and accounting entries to that effect are passed in the books. These facts are evident from the materials available on record. Thus, it is clear, the assessee is merely purchasing reagents from its AE and reselling them to third party customers in India without making any value addition. In fact, the analyzer / spares of the machines are never sold to the third party customers but always remain the property of the assessee. 8. Having examined the nature of transaction carried on by the assessee, it is necessary now to advert to the core issue. Undisputedly, in the transfer pricing analysis, the assessee has selected RPM as the most appropriate method. However, the Transfer Pricing Officer has rejected the RPM primarily on the following reasoning:- i) In the year under consideration, the assessee has made additions to the plant and machinery to the tune of ` 2.18 crore; ii) It has capitalized cost of product development to the tune of 1.07 crore; and iii) The notes to the fixed asset schedule shows that the company is setting up of a manufacturing unit. 9. On the aforesaid reasoning, the Transfer Pricing Officer has concluded that the assessee is not merely a trader but is also engaged in manufacturing and research activity. Learned DRP has simply endorsed the aforesaid view of the Transfer Pricing Officer without discussing much on the issue. However, while doing so, learned DRP has observed that in the transfer pricing analysis, the assessee has applied TNMM. Further, learned DRP while rejecting the contention of the assessee for adopting segmental results of the assessee and comparables, has observed that since the segmental accounting of the assessee is unaudited, it cannot be accepted.

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on record clearly reveal that the assessee had purchased reagents and chemicals from its AE and sold to the third party customers without any value addition. Further, the analyzers, spares and consumables, though, were imported, however, they were not sold but were provided in the laboratories / diagnostics units of the third party customers for testing and research activity. Keeping in perspective the aforesaid factual position, it has to be examined which is the appropriate method to benchmark the arm's length price of the transaction. On going through the provisions of rule 10B and more particularly sub-rule-1(b) of the aforesaid rule, it is evident that RPM is applicable to a case where the price at which property purchased or service obtained by a enterprise from the AE is resold or provided to an unrelated enterprise. The gross profit margin of such a transaction is thereafter compared to the gross profit margin of similar comparable uncontrolled transactions after making necessary adjustment with regard to the expenditure incurred, functional and other differences, the arm's length price is determined. Thus, in the facts of the present case, since the assessee has resold the goods imported from the AE without any value addition, the most appropriate method which can be applied for determining the arm's length price is RPM and TNMM cannot be the most appropriate method in such type of transaction. 12. Having held so, it is necessary to deal with the decisions relied upon by the learned Counsel for the assessee. The Co- ordinate Bench in L'oreal India Ltd. (supra) while deciding the dispute of similar nature held that in such type of transaction RPM is the most appropriate method. While deciding Revenue's appeal against the aforesaid order of the Tribunal, the Hon'ble Jurisdictional High Court, in the decision referred to above, held that in case of distribution or marketing activities when the goods are purchased from associate entities and sales of those goods are effected to unrelated parties without any further processing, RPM has to be adopted. The Co-ordinate Bench in case of Airport Retail Pvt. Ltd. (supra) has held as under:- "10. We have considered the submissions of the parties and perused the material available on record in the light

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of the decisions relied upon. As could be seen from the transfer pricing order as well as the facts materials on record, there is no dispute to the fact that the assessee is a reseller of finished goods, in the duty free shops set up at the Delhi Airport. It is also accepted that the products sold by the assessee such as liquor, perfumes, confectionary, tobacco, etc., are purchased from A.Es and sold to customers without any value addition or material change to such products. It is a fact that the assessee had bench marked the international transaction relating to purchase of finished goods from A.Es by adopting RPM. However, the Transfer Pricing Officer has rejected RPM primarily on the ground that gross profit computation of comparables was not produced by the assessee. He had also stated that the gross profit margin of the products sold by the assessee cannot be compared with gross profit margin of the products sold by the comparables as they are different in nature. In this context, it is to be noted that at the outset, the Transfer Pricing Officer had opined that the transaction of purchase of finished goods for resale was to be bench marked as per CUP method. We are unable to understand why the Transfer Pricing Officer abandoned bench marking under CUP if he considered it as the most appropriate method to bench mark the international transaction between the assessee and the A.Es. 11. At this stage, it would be appropriate to refer to certain provisions in the statue relating to transfer pricing adjustment. Section 92C of the Act, provides for computation of arm's length price of an international transaction between the assessee and its A.E. by following one of the methods prescribed therein. Rule 10C, defines most appropriate method to be one which is best suited to the facts and circumstances of each particular transaction and which provides the most reliable measure of arm's length price in relation to the international transaction. Sub-rule (2) of rule 10C, specifies the factors to be considered for selecting most appropriate method. Rule 10B provides the mode and manner of determination of arm's length price under different methods. As per rule 10B(1)(b), determination of arm's length price under RPM is applicable to a case where the price at which property purchased or service obtained by the enterprise from the A.E. is resold or is provided to an unrelated enterprise.

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The gross profit margin in respect of such a transaction is thereafter compared to the gross profit margin of similar comparable uncontrolled transactions and after making necessary adjustment with regard to expenditure incurred, functionally and other differences the arm's length price is determined. Thus, when there is no dispute to the fact that the assessee is purchasing finished products from the A.Es for the purpose of reselling to unrelated parties without any value addition, under normal circumstances, the most appropriate method to bench mark the arm's length price of such transaction in terms of 10B is RPM. The Tribunal, Mumbai Bench, in Mattel Toys India Pvt. Ltd. (supra), after analyzing the applicability of most appropriate method in respect of such kind of international transactions has observed, under RPM product similarity is not a vital aspect for carrying out comparability analysis but operational comparability is to be seen. The Bench observed, gross profit margin earned by the independent enterprise in comparable uncontrolled transaction will serve as a guiding factor which is also the case in case of a distributor wherein property and service purchased from the A.E. are resold to other independent entities without any value addition. Thus, it was concluded by the Bench that in such case of purchase and resale of finished products without any value addition RPM, is the best method to evaluate the arm's length price of the transactions. In case of Luxottica India Eyeware Pvt. Ltd. (supra), the Tribunal, Delhi Bench, following a number of other decisions held as under:- "10.2. Coming to the argument that the assessee himself has adopted TNMM as the MAM for its transfer pricing study and hence it cannot turn around and argue for adoption of RSPM as the MAM, we find that the Mumbai Bench of the Tribunal in the case of Mattel Toys(I) Pvt.Ltd. in ITA no.2476/Mum/2008 held as follows. "41. Now coming to the argument of the Ld.DR that once the assessee itself has chosen TNMM as the MAM in TPR, then it cannot resort to change its method at an assessment or appellate stage. In our opinion, such a contention cannot be upheld because if it is found on the facts of the case that a particular method will not

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result into proper determination of the ALP, the TPO or the appellate authorities can very well hold that why a particular method can be applied for getting proper determination of ALP or the assessee can demonstrate a particular method to justify its ALP. Thus, even if the assessee had adopted TNMM as the MAM in the TP report, then also it is not precluded from raising the contentions/objections before the TPO or the appellate Courts that such a method was not an appropriate method and is not resulting into proper determination of ALP and some other method should be resorted. The ultimate aim of the TP is to examine whether the price or the margin raising from an international transaction with the related party is at ALP or not. The determination of approximate ALP is the key factor for which the MAM is to be followed. Therefore, if at any stage of the proceedings, it is found that by adopting one of the prescribed methods other than chosen earlier, the most appropriate ALP can be determined, the assessment authorities as well as the appellate Courts should take into consideration such a plea before them provided, it is demonstrated as to how a change in the method will produce better or more appropriate ALP on the facts of the case. Accordingly, we reject the contentions of the Ld.DR and also the observations of the AO and the Ld.CIT(A) that the assessee cannot resort to adoption of RPM method instead of TNMM." 10.3 The case of the assessee is much better than the case of M/s Mattel Toys (I) Pvt.Ltd. (supra) for the reason that the assessee in its transfer pricing report has also used RSPM as the MAM. Hence this argument of the Revenue is rejected. 10.4. As the undisputed fact is that the functional profile of the assessee is that of a trader and as the characterisation of the transaction is purchase and sale of goods, we hold that RSPM is the MAM by applying the following decisions of the Co-Ordinate Bench of the Tribunal.

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“13. This finding in our humble opinion is wrong for the reason that the CIT(A) has adopted these very comparables, along with three others while arriving at the operating margins at Para 7.16 of his order. As the assessee is a trader, without value addition to the goods, we find force in the submissions of the assessee that resale price method is the most appropriate method for determining the ALV with respect to AE transaction. In fact, the Revenue has accepted this method in earlier two years. The TPO in his order dt. 7.3.2005 for the AY 2002- 03 and order dt. 20.3.2006 for the AY 2003-04, has agreed with the computation of arm's length price made by the assessee under the resale price method." (ii) In the case of L'Oreal India P. Ltd. vs. ITO (ITA no.5423/Mum/2009) it is held as follows: "19. During the course of hearing, ld.DR also supported the method considered by TPO and referred to Para 2.29 of OECD price guidelines 2010 as stated hereinabove. On the other hand, ld.AR justified the RPM method adopted by it and also referred to order of TPO in the preceding AY as well as succeeding AY to the AY under consideration to substantiate that RPM is the most appropriate method to determine ALP. He submitted that the assessee made adjustment for marketing and selling expenses to the profits to make it comparable to the comparable companies' profits. We agree with the Ld.CIT(A) that there is no order of priority of methods to determine ALP. RPM is one of the standard method and OECD guidelines also states that in case of distribution and marketing activities when the goods are purchased from AEs which are sold to unrelated parties, RPM is the most appropriate method. In the case before us, there is no dispute to the fact that the assessee buys products from its AEs and sells to unrelated parties without any further processing."

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(iii) In the case of Danisco (India) Pvt.Ltd. vs. ACIT, Circle 10(1), New Delhi (ITA no.5291/Del/2010), it is held as follows: "22. Considering the above submissions we find that the assessee established in 1998 as a 100% subsidiary of Danisco A/S Denmark. Danisco India is engaged in the business of manufacturing and trading of food additives. The manufacturing business in respect of food flavours and the trading business is for products for falling under the category of food ingredients. The main grievances of the assessee against the order of the Ld. TPO upheld by the Ld.DRP are regarding their approach in the manner in which transfer pricing adjustment has been made, the approach adopted by the Ld.TPO in granting 17 comparable companies denying the economic adjustment claim made by the assessee, regarding computation of margins of the assessee, non consideration of supplementary transaction and denial of adequate opportunity of being heard to the assessee by the authorities below as well as their failure to examine the contentions and arguments of the assessee in this regard. Considering these grievances as discussed herein above by us in the arguments advanced by the parties/their submissions and having gone through the decision relied upon, we find substance in the submission of the assesse3e and thus we are of the view that it is a fit case to set aside the matter to the file of the Ld.TPO for his fresh consideration and decide the issue afresh after affording opportunity of being heard to the assessee and discussing their submissions in the order and reasons, if any, for not agreeing or agreeing with them. It is ordered accordingly with direction to the Ld.TPO to: a) first examine as to whether, was there any value addition on imported goods, and if answer is in negative then apply RPM as a most appropriate method for trading transactions of imported goods and in consequence examine the application of appropriate method as commission payment;

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(iv) Frigoglass India P.Ltd. (ITA no.463/Del/2013), it is held as follows: "We have heard the rival contentions and perused the material available on record. In our considered view, once assessee has given a methodology for working of ALP on selection of a particular method supported by appropriate comparables, the working can be dislodged by TPO on the basis of cogent reasons and objective findings. In this case except theoretical assertions and generalized observations, no objective findings have been given to come to a reasoned conclusion that assessee's adoption of CPM for manufacturing segment and RPM for trading segment was Factually and objectively not correct. Thus the rejection of methods by TPO as adopted by assessee is bereft of any cogency and objectivity. The same is a work of guessing and conjectured. Similarly the TNMM method applied by the TPO suffers from the same inherent aberrations as mentioned above. In these circumstances we are of the view that Assessee's methods of CPM and RPM respectively worked by applying appropriate comparables is to be upheld. Thus the ALP working returned by the assessee is upheld. The Assessee's TP grounds are allowed." (v) Textronic India Pvt.Ltd. vs. DCIT (ITA no. 1334/Bang/ 2010), it is held as follows: "We have considered the rival submissions. The dispute is with regard to the ALP in respect of international transactions whereby the assessee imports equipment from its AE and resells them without any value addition to the Indian customers. In similar circumstances, Mumbai Bench of the Tribunal in the case of L'Oreal India Pvt.Ltd. (supra) has taken the view that the RPM would be the most appropriate method for determining the ALP. The Mumbai Bench of Tribunal in this regard, has referred to the OECD guidelines wherein a view has been expressed that RPM would be the best method

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when a resale takes place without any value addition to a product. In the present case, the assessee buys products from the AE and sells it without any value addition to the Indian customers. In such circumstances, we are of the view that the ratio laid down by the Mumbai Bench of the Tribunal in the case of L'Oreal India Pvt. Ltd. (supra) would be squarely applicable to the facts of the assessee's case. In that event, the GP as a percentage of sales arrived at by the TPO in Annexure to the TPO's order insofar as trading activity of comparables identified by the TPO at 12.90%. The GP as a percentage of sales of the assessee is at 35.6% which is much above the percentage of comparables identified by the TPO. In such circumstances, we are of the view that no adjustment could be made by way of ALP. We, therefore, accept the alternative plea of the assessee and delete the addition made by the AO. In view of the above conclusion, we are not going into the other issues on merits raised by the assessee on the approach adopted by the TPO in arriving at the ALP. Thus, ground Nos. 2 to 7 are allowed. 10.5 In view of the above discussion, we direct the TPO to adopt RPM as the MAM in this case." 12. The aforesaid decision of the Tribunal, Delhi Bench, was challenged before the Hon'ble Delhi High Court by the Department. However, the High Court dismissed the appeal of the Revenue on the issue of acceptance of RPM selected by the assessee over TNMM applied by the Department. It is further necessary to observed, in case of OSI Systems Pvt. Ltd. (supra), the Tribunal, Hyderabad Bench, following the decision in case of Luxottica India Eyeware Pvt. Ltd. (supra) held as under:- "44. On a perusal of the extracted portion from the order of the Coordinate Bench, it is very much clear that after considering a number of decisions on the very same issue from different Benches of the ITAT, it was held that in case of transactions related to purchase and sale of goods, RPM is the most appropriate method. The principles laid down by the Delhi Bench clearly applies to the facts of the

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present case not only because the assessee is involved purely in trading activity, but also in the TP study assessee has adopted RPM as the most appropriate method. Only because in the preceding assessment year for some reason assessee has not challenged the decision of DRP in upholding application of TNMM, assessee cannot be prevented from objecting to adoption of TNMM in the impugned assessment year. In view of the aforesaid, we remit the matter back to the file of the AO/TPO to examine assessee's analysis under the RPM and decide the issue accordingly afterdue opportunity of being heard to the assessee." 13. The facts on record reveal that the Transfer Pricing Officer under a misconception that the assessee has undertaken manufacturing activity has rejected RPM. Learned DRP has also not examined the facts in proper perspective. Rather, learned DRP has recorded an erroneous finding by stating that in the transfer pricing analysis the assessee has chosen TNMM as the most appropriate method. The aforesaid finding of learned DRP is factually incorrect, as, on a perusal of the transfer pricing analysis of the assessee, a copy of which is placed in paper book, it is revealed that the assessee has selected RPM as the most appropriate method and has also explained why TNMM is not applicable to the subject transaction. In view of the aforesaid, we hold that RPM is the most appropriate method to benchmark the subject international taxation relating to purchase of reagents analyzers, etc. Since, neither the Transfer Pricing Officer nor learned DRP has pointed out any other defect in the transfer pricing analysis of the assessee except that the assessee is involved in manufacturing activity, we are of the view that the benchmarking done by the assessee under RPM has to be accepted. More so, when the Transfer Pricing Officer has accepted the comparables selected by the assessee. That being the case, only thing which requires verification is the gross margin of the assessee with that of the comparables. We direct the Assessing Officer / Transfer Pricing Officer to examine this aspect and decide the issue accordingly after due opportunity of being heard to the assessee. With the aforesaid observations, grounds are allowed. Since, we have allowed assessee's claim that RPM is the most appropriate method, the other issue relating to computation of margin of comparables under TNMM does not

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require adjudication. Further, we direct the Assessing Officer / Transfer Pricing Officer to adopt the correct purchase figure as debited to the Profit & Loss account after due verification.”

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from AE but to use re agents the customer has to possess analysers, which is given free of cost by the Assessee. Therefore, the Assessee is not merely indulging in simple trading in reagents. Perusal of the order of the Tribunal for AY 2010-11 (Paragraph-8) would show that the same reasons were given by the TPO in AY 2010-11 for coming to the conclusion that the Assessee is not a reseller simpliciter and therefore RPM cannot be the MAM. The findings recorded by the Tribunal in paragraph-11 of its order for AY 2010-11 would show that manufacturing activity had not commenced in that year and this fact remains the same for AY 2011-12 also. The finding in the same paragraph by the Tribunal is that the Assessee purchases and sells re agents and chemicals without any value addition. The tribunal has also recorded a finding that analyzer, spares and consumables, though were imported, however, they were not sold but were provided in the laboratories/diagnostics units of the third party customers for testing and research activity. In the light of similarity of facts in AY 2011-12 & 2010-11, we are of the view that the decision rendered by the Tribunal in AY 2010-11 would equally apply to AY 2011-12 also. Following the aforesaid decision of the tribunal we hold that RPM is the MAM for determining ALP and the AO is directed to compute the ALP as directed by the Tribunal in Paragraph-13 of its order for AY 2010-11. We hold and direct accordingly and allow the relevant grounds No. E & F to the extent indicated in this order.

“G. As regards computing arm's length interest in respect of receivable outstanding from the AEs beyond six months as on 31.03.2011: 1. The Honourable DRP is not justified in upholding the action of the Learned TPO in applying transfer pricing

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provision to book debt, when there, is no income arising out of such transaction. 2. The Honourable DRP and Learned TPO have failed to appreciate that Explanation (i) to Section 92B of the IT Act though inserted by Finance Act 2012, with effect from 01.04.2002, is not retrospective in nature as it creates additional liability and hence. no transfer pricing addition could have been made accordingly. 3. Without prejudice to the above, the Honourable DRP and Learned TPO have failed to appreciate that book debt cannot regarded as an international transaction even within the meaning of newly inserted Explanation (i)(c) to section 92B of IT Act. 4. The Honourable DRP and Learned TPO have failed to appreciate that newly inserted Explanation (i)(c) to section 92B of IT Act would apply only to a receivable with Associated Enterprise as a consequence of a non- international transaction like takeover of business by Associated Enterprise and would not include a receivable as a consequence of an international transaction. He has failed to appreciate that the latter is the effect of an existing international transaction and hence not a transaction at all in its very natural meaning thereby failing the test of international transaction. 5. The Honourable DRP and Learned TPO have failed to appreciate that an unilateral delay in payment of debt by the Associated Enterprise cannot be regarded as an arrangement, understanding or action in concert within the meaning of section 92F (v) of IT Act. 6. The Honourable DRP and Learned TPO have failed to appreciate that whether any interest is to be charged or not or what strategy needs to be adopted for carrying out a business activity is the sole prerogative of the assessee, and neither the TPO nor the Assessing Officer has any role in this regard. The legitimate business needs of the assessee cannot be dictated by the revenue authorities as held in the cases of S.A. Builders Ltd. vs. CIT [2006] 288

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ITR 1 (SC), Festo Controls (P.) Ltd. vs. DCIT [2013] 30 taxmann.com 16 (Bang.-ITAT), CIT vs. EKL Appliances Ltd. [2012] 345 ITR 241 (Delhi), Dresser-Rand India (P.) Ltd. vs. Addl. CIT [2011] 13 taxmann.com 82 (Mum.) & Abhishek Auto Industries Ltd. vs. DCIT [2012] 15 ITR (Trib) 168 (Delhi). 7. Without prejudice to the above, the Honourable DRP and Learned TPO have failed to appreciate that Appellant has both trade receivable of Rs. 4,48,35,896/- and trade payable of Rs.23,16,01,984/- with M/s. Randox Laboratories Ltd., UK and trade payable is more than trade receivable necessitating no adjustment. 8. The Honourable DRP and Learned TPO have failed to aggregate the trade receivable and trade payable as both are inextricably connected with each other. 9. The Honourable DRP and Learned TPO have failed to take cognizance of the fact that the Appellant did not charge any interest even to its non-AEs on the outstanding receivables and therefore, he is not justified in determining the Arm's Length Price interest in respect of book debt with the Associated Enterprise. 10. Without prejudice to the above, the Learned TPO is not justified in failing to appreciate that the nil interest charged by the Appellant in respect of book debts with Non- Associate Enterprise constitutes an internal Comparable Uncontrolled Transaction for benchmarking interest to be charged on book debts with Associated Enterprise and viewed thus, no adjustment is required. 11. The Honourable DRP is not justified in upholding the action of the Learned TPO in applying premium of 3% on LIBOR rate without substantiating the need and extent of the said premium.” 7. The above grounds can be conveniently decided together with Grounds raised by the revenue in its appeal, which reads thus:-

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“1. The direction of the Dispute Resolution Panel are opposed to the law and not on the facts and circumstances of the case. 2. The Id. has erred in granting to apply LIBOR rate plus 3% as ALP for interest on loan without appreciating the facts of the case and its comparables. 3. For these and other grounds that may be urged upon, direction of the Dispute Resolution Panel may be reversed and that assessment order be restored. 4. The appellant craves leave to add, alter, amend or delete any other grounds on or before hearing of the appeal.” 8. The facts as far as the aforesaid grounds of appeal are concerned, are that the AO noticed that a sum of Rs.4,48,35,896/- was receivable by the Assessee from M/s. Randox Laboratories Ltd., U.K.(AE) as on 31.3.2011. The Assessee was also due and payable to M/s. Randox Laboratories Ltd., UK, a sum of Rs.23,16,01,984/-. The TPO called upon the Assessee to explain the nature of amount receivable by the Assessee from its AE. The Assessee explained that amount were receivable from AE for services rendered by the Assessee to the AE like Life Science Support services, Engineering product services, Market Support services and accounting support services rendered by the Assessee to AE during financial year 2007-08 & 2008-09. The outstanding balance also includes a balance which is on account of sale of certain unusable fixed assets.

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account of determination of ALP. The TPO also observed that the Assessee was availing loans from HDFC Bank Ltd., and paying interest at 9% p.a. on such borrowings. On the above reasoning the AO made an addition of Rs.52,33,657/- to the total income of the Assessee as adjustment on account of notional interest income as follows:- “6.2.5 During the course of hearing the representatives of the assessee company also could not satisfactorily explain anything. Hence the arm's length price of the benefit extended to the AE shall determine by the cost of borrowing of fund plus a suitable mark-up. It is also seen that the assessee availed secured loans from HDFC Bank at the rate of 9% p.a., which is used to benchmark for determination of ALP plus a mark up of 3% towards overhead expenses, credit risk etc. The arm's length price of the facility extended to the AE is calculated as follows;

Opening value of debit balance with the AE Rs. 4,23,91,715/ -

Closing value of debit balance with the AE Rs. 4,48,35,896/ -

Average value of debit balance with the AE Rs. 4,36,13,806/-

Rate of interest at which HDFC Bank advanced loan 9%

Rate of applicable interest: 9% + 3% = 12%

Value of ALP (Notional interest) Rs. 4,36,13,806*12/100 = Rs. 52,33,657/-

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(a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; (c) capital financing, including any type of long-term or short- term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; (d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; (e) a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date; (The aforesaid Explanation (i) to Sec.92B was inserted by the finance Act, 2012 w.r.e.f. 1-4-2002.) 11. According to the DRP, Clause (c) of the aforesaid Explanation (i) applies to a case of deferring receipt of payment on account of receivables and by deferring payment on account of receivables beyond the normal credit period, the AE gets a benefit and such type of arrangement should also be regarded as international transaction to which provisions of Sec.92 applies.

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the retrospective amendment to the law referred to in earlier paragraph was also considered by the Court. The facts in the aforesaid case was that the TPO noted that the credit period for the debtors as mentioned in the sale contract with unrelated entities was 180 days. However, in the case of the AEs they were “allowed to linger for long”. The said receivables qua the AE was treated as a separate international transaction. An addition of Rs. 1,57,54,943/- to the income of the Assessee was proposed by the TPO as the ALP interest that the Assessee ought to have charged for the extended period of credit allowed to the AE. On appeal by the Assessee, the ITAT set aside the assessment order. The ITAT noted that the Assessee had undertaken working capital adjustment for the comparable companies selected in its transfer pricing report. It was further noted that “the differential impact of working capital of the Assessee vis-à-vis its comparables had already been factored in the pricing/profitability” which was more than the working capital adjusted margin of the comparables and, therefore, “any further adjustment to the margins of the Assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified.” Against the order of the ITAT, the revenue preferred appeal before the Hon’ble Delhi High court. The revenue sought to rely on the statutory retrospective amendment by insertion of Explanation (i) to Sec.92B of the Act. The Hon’ble Delhi High Court upheld the order of the Tribunal by observing as follows:- “10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression „receivables‟ does not mean that de hors the context every item of „receivables‟ appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised 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

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will have to be studied. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of www.taxguru.in ITA 765/2016 Page 5 of 5 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 beyond 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 basis of the outstanding receivables would have distorted the picture and re- characterised the transaction. This was clearly impermissible in law as explained by this Court in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi). 12. Consequently, the Court is unable to find any error in the impugned order of the ITAT giving rise to any substantial question of law for determination. The appeal is, accordingly, dismissed.” 15. In the present case, admittedly the receivables relate to transactions in FY 2007-08 & 2008-09. The TPO has not spelt out as to what is the nature of the receivables and whether it had any relation with any international transaction of those years and what is the position with regard to the ALP of those transactions, whether working capital adjustment were made while determining ALP of connected international transaction, what is the effect of payables by the Assessee to the very same AE and on what account these payables were due to the Assessee, whether in the circumstance where there is receivables as well as payables from the very same AE, can you say that there is any real benefit of longer credit period allowed to the AE in respect of receivables from AE. Without an analysis of all these facts, it is not possible to come to a conclusion that allowing

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longer credit period to the AE was an international transaction and income from such transaction has to be determined having regard to ALP. We are therefore the view that the issue requires to be set aside to the TPO for examination afresh of the question whether allowing longer credit period was in the nature of an international transaction in the facts and circumstances of the case. The TPO will decide the issue afresh after affording opportunity of being heard to the Assessee.

Pronounced in the open court on this 17th day of July, 2019.

Sd/- Sd/- ( JASON P. BOAZ ) ( N.V. VASUDEVAN) Accountant Member VICE PRESIDENT

Bangalore, Dated, the 17th July, 2019.

/ Desai Smurthy /

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Copy to:

By order

Assistant Registrar, ITAT, Bangalore.