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Income Tax Appellate Tribunal, IN THE INCOME TAX APPELLATE TRIBUNAL
Before: SHRI PRAMOD KUMAR & BEFORE SHRI PRAMOD KUMAR & BEFORE SHRI PRAMOD KUMAR & SHRI K. NARASIMHA CHARY SHRI K. NARASIMHA CHARYSHRI K. NARASIMHA CHARY SHRI K. NARASIMHA CHARY
PER PRAMOD KUMAR PER PRAMOD KUMAR, , , , VP PER PRAMOD KUMAR PER PRAMOD KUMAR VP VP : VP This appeal, filed by the assessee, is directed against the order dated 14th May, 2018 passed by the Assessing Officer under Section 143(3) read with Section 144C(5) for the assessment year 2014-15.
Grievances raised in the appeal are as follows :-
“1. That on the facts and circumstances of the case and in law, the Ld.AO has erred in assessing the total income of the appellant for the relevant AY at Rs.5,13,54,020/- as against the returned income of Rs.4,92,68,360/-.
2 ITA-5042/Del/2018
2. That on the facts and circumstances of the case and in law, the Hon’ble Dispute Resolution Panel (“DRP”)/Ld.AO/Ld. Transfer Pricing Officer (“TPO”) erred in making a transfer pricing adjustment of Rs.20,85,662/- in respect of the international transactions alleging the same to be not at arm’s length.
3. That on the facts and circumstances of the case and in law, the Hon’ble DRP/Ld.AO/Ld.TPO have erred in holding inter-company receivables arising from the international transactions undertaken by the appellant to constitute a separate international transaction and proceeding to benchmark the notional interest on the same by application of Comparable Uncontrolled Price (“CUP”) method to make an adjustment of INR 20,85,662 to the total income of the appellant.
4. That on the facts and circumstances of the case and in law, the Hon’ble DRP/Ld.AO/Ld.TPO have erred in not appreciating that the appellant has already undertaken working capital adjustment in respect of international transaction pertaining to provision of investment advisory services to account for difference in working capital intensities of comparable companies vis-a-vis the appellant in the TP documentation itself which inevitably considers the impact of receivables and payables arising from international transactions.
5. That on the facts and circumstances of the case and in law, the Hon’ble DRP/Ld.AO/Ld.TPO have erred, in making inappropriate assumption of a specific period for realisation of payment from AEs.
That on the facts and circumstances of the case and in law, the Hon’ble DRP/Ld.AO/Ld.TPO have erred in making adjustment on account of interest on gross receivables instead of net receivables.
That on the facts and circumstances of the case and in law, the Hon’ble DRP/Ld.AO/Ld.TPO have erred in imposing interest on ad hoc basis by considering six months LIBOR + 400bps.
That the Hon’ble DRP/Ld.AO/Ld.TPO have erred in not following the decision of jurisdictional High Court in the case of Kusum Health Care Private Limited (ITA 765/2016)
3 ITA-5042/Del/2018 as well as Hon’ble ITAT’s decision in Appellant’s own case for AY 2010-11 to AY 2012-13.”
Learned representatives fairly agree that the issues in appeal are covered, in favour of the assessee, by coordinate bench decisions, in assessee’s own cases for the assessment years 2010-11, 2011-12, 2012-13 and 2013-14. In the order dated 18th January, 2018, the coordinate bench has, inter alia, observed as follows :-
“9. We have heard the rival submission and perused the relevant material on record. The Ld. counsel has submitted that adjustment on account of receivables is subsumed in the working capital adjustment made by the Ld. TPO and, therefore, no separate adjustment is required on account of receivables following the decision of the Tribunal dated 04/09/2017 in preceding years in 1018/Del/2016 and 75/Del/2017. The Tribunal (supra) decided the issue as under:
“10.9 The next issue before is the issue of adjustment on account of interest on outstanding receivables. This issue is also common in all the three assessment years. It has been the submission of the assessee that the outstanding revenue is not a separate international transaction and that the outstanding receivables cannot be re- characterised as a loan. It has also been submitted that TP adjustment cannot be made on a hypothetical and notional basis unless and until there is some material on record that there has been undercharging of real income. It is undisputed that the assessee has been following a consistent policy with respect to the receivables and payables from/to the AEs. It is also seen that while making the adjustment, TPO has not calculated the notional interest by considering the average time taken by the AE for making the payment to the assessee. Hon’ble Delhi High Court in the case of Principal Commissioner of Income Tax vs Kusum Health Care Pvt. Ltd. in vide judgment dated 25th April, 2017 has laid down in Paras 10, 11 and 12 as under:-
“10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 4 ITA-5042/Del/2018 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 characterized 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 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 time to discern a pattern which would indicate that vis-a-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-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re- characterized the 1018/D/2016, 75/D/2017 Assessment year: 2010-11, 11-12, 12-13 70 transaction. This was clearly impermissible in law as explained by this Court in CIT v. EKL Appliances Ltd. (2012) 345ITR 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.”
10.10 It is seen that the TPO has considered a period of 30 days to be normal for the realization of receivables and has calculated notional interest on period/number of days exceeding 30 days while making the upward adjustment, however, as the Hon'ble Delhi High Court has held in Kusum Health Care Pvt. Ltd. (supra) that there might be a delay in calculation of money even beyond the agreed limit due to a variety of factors which have to be investigated on a case to case basis. The Hon'ble High Court has also 5 ITA-5042/Del/2018 observed that the impact on the working capital of assessee will also have to be studied. Hon'ble High Court went on to conclude that there has to be a proper inquiry by the TPO by analyzing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis receivables for the supplies made to AE, the arrangement reflected international transaction intended to benefit the AE in some way. Hon'ble High Court has also observed that if the entire focus of the 1018/D/2016, 75/D/2017 Assessment year: 2010-11, 11-12, 12-13 71 Assessing Officer is only of one Assessment Year, the figure of receivables in relation to that AY could hardly reflect a pattern that would justify the TPO to reach a conclusion that the figure of receivables beyond prescribed number of days constituted an international transaction by itself. In the present appeals before us, no such in-depth analysis of the receivables has been made by the TPO. Accordingly, we deem it appropriate to restore the issue of interest on receivables in all the three years to the file of Assessing Officer/TPO for recalculating the interest on receivables in conformity with the ratio of judgment of the Hon'ble Delhi High Court in the case of Kusum Health Care Pvt. Ltd. (supra). The assessee will be given due opportunity by the Assessing Officer/TPO before such an adjustment is recalculated. This ground stands allowed for statistical purposes in all three Assessment Years.”
We note that in the preceding years decided by the Tribunal (supra) normal credit period of 30 days was allowed by the Ld. TPO for realization of the receivables and calculated the interest on period exceeding 30 days while making the adjustment for interest. In the instant case the Ld. TPO has allowed credit period of 60 days for computing interest on outstanding receivables (debtors). In the instant case, the Ld. TPO has also allowed working capital adjustment and did not propose any adjustment in the international transactions carried out by the assessee.
The Hon’ble High Court in the case of Kusum Healthcare Private Limited (supra) has observed that the impact of working capital of the assessee would also have to be studied. We find that the Tribunal (supra) has further noted the finding of the Hon’ble High Court that there has to be a proper Inquiry by the learned TPO by analyzing the statistics over a period of time to discern a pattern which would indicate that viz-a-viz receivables further supplies made to the AE, the arrangement reflected international
6 ITA-5042/Del/2018 transaction intended to benefit the AE in some way. The Tribunal (supra) has restored the matter to the file of the Ld. Assessing Officer/TPO for a calculating the interest on receivables in conformity with the ratio of the judgment of the Hon’ble Delhi High Court in the case of Kusum Healthcare Private Limited (supra). Though in the instant assessment year, the working capital adjustment has already been allowed to the assessee, but in the order of the Ld. TPO, it is not clear at what point of time the receivables, inventory and payables are compared for computing working capital adjustment. Their level should be compared on average throughout the year. Further, it is also not evident from the order of the Ld. TPO what appropriate interest rate has been used for computing working capital adjustment.
In view of above facts, we feel it appropriate to restore the issue to the matter of the Ld. Assessing Officer/TPO for analysing the working capital adjustment given by the Ld. TPO and decide the issue in the light of the direction given by the Tribunal in order dated 04/09/2017 in 1018/Del/2016 and 70/Del/2017. The assessee shall be afforded adequate opportunity of being heard.”
Respectfully following the esteemed views of the coordinate bench, we remit the matter to the file of the Assessing Officer for fresh adjudication in the light of above observations which will apply mutatis mutandis this year in the present year as well. Ordered, accordingly.
In the result, appeal is allowed for statistical purposes in the terms indicated above. Decision pronounced in the open Court on 31st July, 2019.