COSMO FILMS LTD.,NEW DELHI vs. DCIT, CIRCLE- 6(2), NEW DELHI
Income Tax Appellate Tribunal, DELHI BENCHES ‘H’: NEW DELHI.
Before: SHRI S.RIFAUR RAHMAN & MS. MADHUMITA ROYCosmo Films Limited, vs.
PER S. RIFAUR RAHMAN, ACCOUNTANT MEMBER :
This appeal preferred by the assessees is directed against the assessment order dated 27.10.2013 passed by the DCIT, Circle 6 (2), Delhi under section 143(3) read with section 144C of the Income-tax Act, 1961 (for short ‘the Act”) for Assessment Year 2013-14 pursuant to the directions of the Dispute Resolution Panel u/s 144C(5) of the Act raising following grounds of appeal :-
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“1. That the Learned Deputy Commissioner of Income tax, Circle 6(2},
(hereinafter referred to as "Ld. AO") has erred on facts and in law in assessing the income of the Appellant at INR 19,20,40,130 under section 143(3) r.w.s
144C of the Act as against the returned income of INR 9,11,89,260. 2. That the Ld. AO/ Dispute Resolution Panel (hereinafter referred to as “Ld. DRP”) erred on facts and in law in confirming an adjustment amounting to INR 6,014,935/- on account of notional interest relating to the alleged delay in recovery of outstanding receivables pertaining to sales made to its associated enterprises ("AEs");
1 Without prejudice to the following grounds, the Ld. AO/ Ld. Deputy Commissioner of Income Tax, Transfer Pricing Officer- 1(2) (1) & 1(2) (2) erred on facts in erroneously computing the adjustment at INR 6,014,935/- based on the interest rate (i.e. at 6 months LIBOR plus 400 basis points) as pronounced by Ld. DRP in its directions issued under section 144C of the Income-tax Act, 1961 (lithe Act").
2 Without prejudice, the Ld. AO/ DRP erred on facts and in law by failing to appreciate that in the facts of the case there was no cause or motive for the Appellant to shift profits out of India by not charging interest on outstanding receivables of its AEs.
3 That the Ld. AO/ DRP erred on facts and in law in not appreciating that notional interest on receivables does not constitute an international transaction so as to invoke provisions of section 92 of the Income-tax Act, 1961 (lithe Act").
4 That the Ld. AO/DRP erred on facts and in law in failing to appreciate that the Appellant did not charge interest on receivables outstanding in relation to sales made to independent unrelated customers and was therefore, not required to charge interest on receivables outstanding in the account of the AEs.
5 That the Ld. AO/DRP erred on facts and in law in confirming the re- characterization of the outstanding receivables pertaining to sales made to AEs as a short term loan.
6 That, without prejudice to the above grounds, the Ld. DRP erred on facts and in law in not appreciating that even considering the excess credit period no adjustment is warranted in as much as the operating margin of the Appellant is higher than the operating margins of the comparable companies adjusted for differences in the level of working capital.
7 Without prejudice to above, the Ld. DRP erred on facts and in law in not appreciating that even if the interest on outstanding receivables is to be considered as part of sale price of goods, it stands bench marked along with such transaction of sale of goods.
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2.8
That the Ld. DRP erred on the facts and in law in arbitrarily adding
400 basis in prevailing months' L1BOR rate on the grounds of non-furnishing the credit rating of the AEs by the Appellant along with the exposure of the Appellant's risk towards foreign exchange fluctuations. While doing so, the Ld. DRP completely failed to furnish the appropriate reasons for arriving onto aforesaid findings and demonstrating the basis of determining the aforesaid mark-up in LIBOR rate.
That the Ld. Assessing Officer/DRP has erred on facts and in law in holding capital subsidy granted to the Appellant by the Government of Maharashtra in the form of Sales Tax Exemption under the Dispersal of Industries Package Scheme of Incentives, 1993 was chargeable tax as a revenue receipt. Furthermore, the subsidy amount added to the income has been computed incorrectly by including reversal of sales tax liability.
1 That the Ld. AO/DRP has erred on facts and in law in not appreciating that the aforesaid exemption, granted to the Appellant to encourage setting up of new industries in the backward areas, represents a 'capital subsidy' not chargeable to tax.
2 That the Ld. AO/DRP has erred in law in not following the decision of the Hon'ble Delhi ITAT for AY 2004-2005 to A.Y 2006-2007 merely on the ground that the same has not been accepted by the Department and an appeal against the said decision has been filed before the Hon'ble Delhi High Court.
3 That the Ld. AO/DRP has erred in law and on facts in mechanically following the assessment order for previous years.
Ground No.1 is general in nature, hence the same is not adjudicated. 3. With regard to Ground Nos.2 to 2.8 regarding addition of Rs.60,14,935/-, ld. AR of the assessee brought to our notice relevant facts, the assessee company filed its return of income on 29.11.2013 declaring income of Rs.9,11,89,260/- in the computation of income. Notices under section 143(2) and 142(1) along with questionnaire of the Income-tax act, 1961 (for short ‘the Act’) was issued and served upon the assessee company selecting the case for scrutiny. Questionnaire was served upon the assessee along with the notices. In response, ld. AR of the assessee
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appeared from time to time and submitted necessary details. He further submitted that the case was selected through CASS for examining the details.
3.1
Ld. AR submitted that the assessee company is engaged in the business of manufacture of BOPP films and Trading of Thermal Lamination machines.
3.2
Further he submitted that as per Form No.3CEB filed along with the return, the assessee company had entered into international transaction with its associated enterprises during the year and accordingly, reference was made to the TPO to determine the Arm's Length Price u/s 92CA(3) of the Act in respect of international transaction entered into by the assessee. Further the Transfer Pricing Officer (TPO) has done an upward adjustment of Rs.4.36,48,717/- while determining the Arm's Length Price of the International transactions. Thereafter, a draft order of was passed on 28.12.2016 and sent to the assessee. The assessee filed objections before the Dispute Resolution Panel (DRP) against the adjustments proposed to be made in the draft order. Ld. DRP issued directions to the TPO vide order dated 22.09.2017. In this regard, the TPO was requested to furnish his findings/comments in the matter and the TPO vide his order dated 25.10.2017 has stated that after giving effect to the directions of the DRP, the earlier adjustment of Rs.4,36,48,717/- is reduced to 5
Rs.60,14,935/-. Assessing Officer, in compliance with the directions of the DRP and the order of the TPO, disallowed an amount of Rs.60,14,935/-. and added back to the total income of the assessee.
4. Ld. AR submitted that on this issue, assessee is in appeal vide ground nos.2 to 2.8 and submitted that this issue is squarely covered in favour of the assessee by the decision of the coordinate Bench in assessee’s own case in AY 2020-21 in ITA No.4176/Del/2024 dated 23.04.2025. He accordingly pleaded that this grounds may be allowed.
5. On the other hand, ld. DR of the Revenue relied on the findings of the lower authorities.
6. Considered the rival submissions and material placed on record. We observed that this issue is covered by the decision of the coordinate
Bench in assessee’s own case vide order dated 23.04.2025 (supra) and the ITAT has held as under :-
“8. Ground No. 10-20: These grounds related to Transfer Pricing of Rs.
20,62,216/- on account of notional interest relating to alleged delay in recovery of outstanding receivable pertaining to sales made to its associate enterprises. In the draft assessment order (Page no. 482-489), Ld. AO proposed an addition of Rs.98,28,820/- in respect of notional interest on receivables in respect of sales 10 made to AEs. Ld. TPO has mentioned that as per Clause (i) (c) of Explanation to Section 92, ‘International Transaction’
includes 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 payments or receivable or any other debt arising during the course of business. In view of this clause, he was of the view that the assessee was obliged to benchmark interest on outstanding receivables. However, the assessee had not provided any benchmarking for this purpose. Therefore, he proceeded to benchmark the same. In this connection, he listed 321 invoices where receipts were delayed beyond a period of 30 days from the date of invoice. He allowed grace period of 30 days and charged interest at the rate of 6.371% per annum for the delayed period on 6
the basis of LIBOR+400bps. Such interest was computed at Rs.98,28,820/- and it was suggested that the income of the assessee may be revised upwards by an identical amount.
1 The case of assessee is that assessee had requested for working capital adjustment in the case of comparable. This was denied on the ground that the assessee has not demonstrated that there is a difference in the levels of Working Capital employment by it vis-a-vis, the comparable. This adjustment is not a matter of right and it must be based upon some data. Adopting this recommendation of the TPO, the Ld. AO made adjustment of Rs.98,28,820/- to the income of the assessee by stating that adjustment suggested by the TPO is binding on him u/s Section 92CA(3). This addition was challenged before Hon’ble DRP. It was contended that in view of the decision of Hon’ble Delhi High Court in the case of Kusum Healthcare Private Limited, ITA 765/2016 if impact of credit period was factored in Working Capital Adjustment while determining the Arm’s Length Price, then no further adjustment was required for interest on receivables. However, the submissions were not accepted. It was mentioned that in the case of CIT vs. Cotton Naturals India Pvt. Ltd. (2015) 55 taxmann.com it has been held that interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principal should apply in respect of delayed receipts arising out of sales. It was held that appropriate CUP keeping in view currency risk borne by the assessee and other factors, LIBOR+400bps is applied for calculating interest on delayed realizations. The Ld. AO had allowed a grace period of 30 days, which however was increased to 60 days by Hon’ble DRP. In view of this, interest on delayed payments beyond 60 days was computed at Rs.20,62,216/- by the Ld. AO in the final order.
2 In this context we appreciate the submission of ld. AR that assessee is giving like over 90 days credit to Indian customers. The decision in Kusum Health care (supra) has been followed in Bechtel India Pvt. Ltd., ITA No. 7234//DEL/2017, dated 18.12.2020, subsequent to CIT vs. Cotton Naturals India Pvt. Ltd. (supra). Thus we are inclined to sustain these grounds to the extent that assessee is entitled to working capital adjustments. The issue is restored to the files of AO for giving working capital adjustment to impugned international transaction.”
Respectfully following the aforesaid order, we allow ground nos.2 to 2.8 with the aforesaid directions given in the above order. Accordingly, the grounds raised by the assessee are allowed for statistical purposes with the direction to give working capital adjustment.
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8. With regard to ground nos.3 to 3.3 regarding addition of Rs.9,48,35,932, ld. AR of the assessee brought to our notice the relevant facts, during the current year, from the computation sheet, it is seen that the assessee has claimed deduction of Rs9,48,35,932/- as Sales Tax Exemption treated as capital receipt. In the preceding assessment year i.e. 2012-13, a similar receipt of Rs.50,75,390/- was treated as revenue receipt and added back to the income of the assessee. The assessee vide notice dated 21.11.2016
was asked to give copy of last five Assessment Orders with respect to assessment completed u/s 143(3)/144/147 of the Act. In response, assessee submitted its reply which is placed at pages 7 & 8 of the appeal set. After going through the reply of the assessee, the Assessing Officer observed that since the issue in previous years has not attained finality, therefore the contention of the assessee cannot be accepted. Therefore, the claim of the assessee with respect to sales tax exemption as capital subsidy amounting to Rs.9,48,35.932/- was disallowed and added back to the total income of the assessee and the same has been upheld by the ld.
DRP.
9. Ld. AR further submitted that against this issue, assessee has raised ground nos.3 to 3.3 and submitted that this issue is squarely covered in favour of the assessee in its own case in ITA No.5038/Del/2013 & ors.
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vide order dated 26.07.2023. Accordingly, he pleaded to allow these grounds.
10. On the other hand, ld. DR of the Revenue relied on the findings of the lower authorities.
11. Considered the rival submissions and material placed on record. We observed that this issue is covered by the aforesaid decisions in assessee’s own case. Further we find that ITAT in ITA No.5038/Del/2013 & ors.
vide order dated 26.07.2023 has dealt this issue as under :-
4. In so far as whether Sales Tax subsidy is of revenue in nature or is capital receipt, this issue travelled up to the Tribunal in the first round of litigation and the Tribunal in ITA No.
2831/DEL/07 and others have given a categorical finding that Sales
Tax subsidy is of capital in nature, following the Special Bench decision in the case of Reliance Industries Ltd 88 ITD 273, which was subsequently affirmed by the Hon’ble High Court of Bombay.
Respectfully following the decision of the Coordinate Bench, Sales Tax subsidy is treated as capital receipt.”
Respectfully following the aforesaid decision of the coordinate Bench in assessee’s own case, we allow ground nos.3 to 3.3. 13. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on this 12th day of December, 2025. (MADHUMITA ROY) ACCOUNTANT MEMBER
Dated: 12.12.2025
TS
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ITA No.7849/Del/2017