BTR PACKAGING PVT. LTD.,NEW DELHI vs. ITO, NEW DELHI

Brief facts of the case are that the assessee was incorporated on 18/07/2005 as 100% export oriented unit

During the year, the assessee entered into following international transactions:-

The assessee had adopted Transactional Net Margin Method (“TNMM”) for determining the Arm’s Length Price (“ALP”) for principal amount of exports to Associated Enterprise (“AE”) and the same was accepted by the Ld. TPO. Ld. TPO, however, passed an order dated 22/01/2015 by suggesting adjustment under section 92 CA of the Income Tax Act, 1961 (“the Act”) to the tune of Rs. 5,27,706/-in respect of the interest on receivables outstanding.

The assessee filed objections before the Ld. Dispute Resolution Panel (“DRP”). Ld. DRP directed that the interest

The assessee is, therefore, before us in this appeal challenging the directions of the Ld. DRP and consequential assessment order, stating that the credit period on sale of goods is not a separate and distinct international transaction and when credit period allowed to AE is already embedded in the TNMM, there was no need for any separate benchmarking. He placed reliance on the decision of the Hon’ble Jurisdictional High Court in the case of Ld. CIT Vs. Kusum Health Care Pvt.Ltd, (2017) 398 ITR 66 Delhi.

Ld. DR placed reliance on the orders of the authorities below.

We have gone through the record in the light of the submissions made on either side. It remains an undisputed fact that the assessee had adopted TNMM method for determining the arm’s length price for principal amount of exports to AE and it was duly accepted by the Ld. TPO. No adjustment under section 92 CA of the Act was suggested in respect of the price for their exports to AE. Ld. TPO had taken the notional interest on the outstanding receivables as ITA.No-1516/Del/2016 Assessment Year: 2011-12 a separate international transaction and suggested for the adjustment, which the assessee has been assisting basing on the decision of the Hon’ble jurisdictional High Court in the case of Kusum HealthcarePvt.Ltd. (supra).

It is the settled principle of law, after the decision of the Hon’ble Jurisdictional High Court in the Case of Kusum Healthcare Pvt.Ltd. (supra), that in TNMM, the net margin earned was exposed with appropriate working capital adjustment to comparable companies; that the receivable mentioned in the Explanation to Sec.92B can be taken up for transfer pricing scrutiny only when it is a standalone activity or a demonstrated approach is adopted by the assessee to use Accounts Receivable to have free working capital funding; and that if the impact of extended credit period on working capital was factored in the pricing / profitability, then there is no tax leakage or evasive tactics adopted by the taxpayer while transacting with the AE. With this view of the matter, we find it difficult to countenance the argument that, had the funds been received in time and deployed would have earned interest income, which would have been relevant only when the original transaction of sale or services provided to the AE was benchmarked under CUP method.

In view of this settled position of law, we are of the considered opinion that, if the impact of extended credit period on working capital was factored in the pricing / profitability, then any credit period allowed to AE gets subsumed in TNMM and there is no tax leakage or evasive tactics adopted by the taxpayer while transacting

In the result, appeal of the assessee is allowed