CONTITECH INDIA PVT. LTD.,NEW DELHI vs. DCIT, NEW DELHI

This is an appeal by the assessee against the order dated 05.12.2014 of the AO passed u/s 144C r.w.s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act).

Following grounds have been raised in this appeal:

Ground No. 1 in this appeal is general in nature so does not require any comment on our part.

Vide Ground Nos. 2 to 2.9, the grievance of the assessee relates to the transfer pricing adjustment of Rs.2,62,53,680/- made by the AO on account of corporate expenses.

Facts of the case related to this issue in brief are that the assessee e-filed its return of income declaring total income of Rs.7,28,40,766/-. Since the assessee had undertaken international transactions with its associated enterprises (AE), the AO made a reference to the TPO, New Delhi u/s 92CA(1) of the Act vide order dated 23.12.2013. During the year under consideration, the assessee in terms of agreement dated 8 Contitech India Pvt. Ltd. 20.10.2006 for availing the technical, marketing and administrative support services had entered into, inter alia, international transaction for payment of corporate charges amounting to Rs.2,62,53,680/- with its AE. In the transfer pricing document maintained by the assessee, the said transaction for the purpose of benchmarking was aggregated with other international transactions and benchmarked by applying TNMM as the most appropriate method with OP/OC as the Profit Level Indicator (PLI). The assessee submitted that since the operating profit margin to operating cost (OP/OC) percentage of the assessee at 12.10% was higher than the weighted average profit margin of comparable companies at 10.92%, therefore, the international transactions undertaken by the assessee with AE were at arm’s length price. However, the TPO held that the assessee has failed to substantiate that services have actually been rendered to it and benefit has actually been derived by it on the basis of documentary evidence. The TPO observed that the assessee in support of its contention has merely furnished copies of certain mails exchanged between the personnel of the assessee. The TPO was of the view that none of the e-mails exchanged between the employees established the requirement/specific need of the assessee for their services, the benefit which has accrued to the 9 Contitech India Pvt. Ltd. assessee, or that an independent party would have been willing to pay another independent party for the services purported to be received by the assessee. The TPO applied CUP method and concluded that the arm’s length price of this transaction for payment of corporate charges was at Nil as against Rs.2,62,53,680/- paid by the assessee to its AE. Thereafter, the AO passed the draft assessment order by making the addition of aforesaid amount. Against the draft assessment order, the assessee raised the objection before the ld. DRP who upheld the addition made by the TPO. Accordingly, the AO made the impugned addition on account of adjustment to the arm’s length price of payment relating to international transaction of corporate expense (intra group charges).

Now the assessee is in appeal. The ld. Counsel for the assessee at the very outset stated that this issue is covered in assessee’s own case for the assessment year 2008-09 in wherein the ITAT remanded the matter back to the file of the TPO for de-novo consideration vide para 4.5 at pages no. 9 & 10 of the order dated 29.08.2014. It was also submitted that the assessee could not procure evidences from its AE earlier which now had been obtained. Therefore, this matter may go back to the file of the TPO/AO as has been done in the earlier year.

We have considered the submissions of both the parties and perused the material available on the record. In the present case, it is an admitted fact that the assessee could not procure summary of the invoices raised on it by its AE and could not furnish the specific details or complete break-up of how the cost had been allocated, during the proceeding before the TPO or DRP. Therefore, this issue was set aside to the file of the TPO/AO in the appeal relating to the assessment year 2008-09 and the said order has been followed by the ITAT in for the assessment year 2009-10. The relevant findings have been given vide para 4.5 of the order dated 29.08.2014 in ITA No. 5765/Del/2012 for the assessment year 2008-09 which read as under:

In his rival submissions the ld. DR could not controvert the aforesaid contention of the ld. Counsel for the assessee.

After considering the submissions of both the parties and the material on record, it is noticed that an identical issue having similar facts has already been adjudicated by this bench 13 Contitech India Pvt. Ltd. of the Tribunal in for the assessment year 2009-10 in assessee’s own case vide order dated 18.02.2016 wherein relevant findings have been given in paras 8 to 11 of the said order which read as under:

The Hon'ble Delhi High Court in CIT v. Cushman & Wakefield (India) (P.) Ltd. (2014) 367 ITR 730(Del) has held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such services exist or benefits did accrue to 14 Contitech India Pvt. Ltd. the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO. In that case, it was observed that the E-mails considered by tribunal from Mr. Braganza and Mr. Choudhary dealt with specific interaction and related to benefits obtained by assessee, providing a sufficient basis to hold that benefit accrued to assessee. Since the details of specific activities for which cost was incurred by both AEs (for activities of Mr. Braganza and Mr. Choudhary), and attendant benefits to assessee were not considered, the Hon'ble High Court remanded the matter to file of concerned AO for an ALP assessment by TPO, followed by AO's assessment order in accordance with law considering the deductibility or otherwise as per section 37(1) of the Act.

When we advert to the facts of the instant case, it turns out that the TPO proposed the transfer pricing adjustment with Nil ALP of the international transaction of `Payment of royalty’ on the ground that no such payment was warranted and further no cost benefit analysis on this count was brought to his notice and as such the payment of royalty was not required. The AO in his final assessment order dated 26.12.2013 has taken the ALP at Nil on the basis of recommendation of the TPO without carrying out any independent investigation in terms of the deductibility or otherwise of such payment in terms of section 37(1) of the Act. As per the ratio decidendi of Cushman & Wakefield India (P.) Ltd. (supra), the TPO was required to simply determine the ALP of this transaction unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act.

Another issue raised by the assessee vide Ground Nos. 4 to 4.8 relates to the adjustment of interest amounting to Rs.18,70,633/- on account of delay in receipt of receivables from the associated enterprise and considering the same as unsecured loans.

The facts related to this issue in brief are that during the year under consideration the assessee raised invoices for export of automotive power transmission V-belts and industrial power transmission V-belts to the AEs. The receivables were, however, received after some time lag than the period agreed between the parties. Similar delay was also reported in 16 Contitech India Pvt. Ltd. transactions undertaken with unrelated third parties. The TPO re-characterized the delay in receipt of receivables as unsecured loans advanced to the AEs and charged interest @ 13.25% on the period of delay exceeding 45 days and accordingly computed an interest of Rs.18,70,633/-. The ld. DRP sustained the addition recommended by the TPO. Accordingly, the AO in the impugned order made the addition of Rs.18,70,633/- against which assessee is in appeal.

The ld. Counsel for the assessee submitted that the TPO re-characterized the delay in receipt of receivables, as unsecured loans advanced to the AEs and charged interest @ 13.25% on the period of delay exceeding 45 days. It was contended that in the transfer pricing documentation, the assessee had benchmarked its operating profit margin earned from international transactions with AE at 12.10% as against the weighted operating profit (OP/OC%) of the comparable companies at 10.92%. Since the operating profit margin earned by the assessee was higher than the weighted average operating profit margin of the comparables, therefore, the international transaction was to be considered at arm’s length price. It was further contended that the ITAT has deleted the adjustment made by the TPO on account of delay in receipt of receivables, 17 Contitech India Pvt. Ltd. considering the higher profitability earned by the assessee vis- à-vis comparables in the following cases: � Goldstar Jewellery Ltd. Vs JCIT (ITA No. 6570/Mum/2012) � Kusum Healthcare Pvt. Ltd. Vs ACIT (ITA No. 6814/Del/2014) � Bechtel India Pvt. Ltd. Vs DCIT (ITA No. 1478/Del/2015) � Micro Inks Ltd. Vs ACIT (ITA No. 1668/Ahd/2006) � ACIT Vs Information Systems Resource Pvt. Ltd. (ITA No. 7757/Mum/2012) 18. It was further submitted that the assessee had received remittance from unrelated third parties with a time lag of 2-3 months and in some cases the assessee had either not received the remittance or received after a year. Therefore, there was no inordinate delay in receipt of the amount and the time lag was as per industry norms. It was stated that even after applying CUP, the transaction relating to the receipt of proceeds from AE was at arm’s length. Therefore, no interest was to be charged on the receivables of the AE when the assessee was not charging interest on receivable of unrelated parties. The reliance was placed on the decisions of the ITAT rendered in the following cases:

Alternatively, it was submitted that in a number invoices raised on the AE, the assessee had received remittances well in advance and was under liability to pay to its AE for the services rendered by them and did not incur any expense on such payables to its AE. Therefore, when the assessee had not incurred any expenses on payables to its AE and had received payment in advance, there could not be any adverse inference with regard to delay in receipt of receivables against the provision of services. It was emphasized that the DRP vide its order dated 03.11.2014, directed the TPO to deduct the interest forgone on outstanding due to AE from the arm’s length on receivables due from AE. A reference was made to page no. 15 of the DRP’s order. It was stated that the TPO disregarded the direction of the DRP and proceeded to make adjustment considering only the delay in receipt of receivables. It was further stated that the direction of the DRP, to net off the interest expenses while computing the interest on delay in receipt of receivables from the AE. It was submitted that the said view is also supported by the decision of Mumbai Bench of the ITAT in the case of Technimont ICB House Vs DCIT in ITA No. 487/Mum/2014. It was also pointed out that the 19 Contitech India Pvt. Ltd. interest on payable to AE in the present case worked out to Rs.36,70,655/- as against the transfer pricing adjustment of Rs.18,70,633/- made by the TPO, therefore, the adjustment made by the TPO was liable to be deleted. It was further submitted that the interest on receivable was to be restricted at the rate of Libor as receivable due from the AE are primarily in Euros. The reliance was placed on the decisions of the ITAT in the following cases:

In his rival submissions the ld. DR strongly supported the orders of the authorities below.

We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it appears that the TPO considered the delay in receipt of receivables as unsecured loans advanced to the AE and charged the interest on the period of delay exceeding 45 days. However, he had not considered the payables due to the AE and also did not consider the amount received in advance from the AE while working out the interest on the delay in receipt of receivables from the AE. In the 20 Contitech India Pvt. Ltd. instant case, the TPO has not followed the directions of the DRP in right perspective. The DRP at page no. 15 of its order dated 03.11.2014, directed the TPO by observing as under: “Since, in the present case as per the service agreement the payment is not received as per the agreement, therefore, the TPO was justified to charge interest beyond the Arm’s length period. Any delay beyond a period mentioned in the agreement, in an arm’s length situation would have warranted a return based on opportunity cost of the money. Accordingly, this Panel upholds that any delay beyond the arm’s length period should have been subject matter adjustment and TPO has rightly determined the ALP by applying CUP method. But since there are certain instances where payments have been received earlier and the taxpayer has not charged interest thereon, therefore, taxpayer is to provide the necessary data in this regard and TPO is directed to compute the interest forgone on these outstanding also and give benefit of same and bring to tax only the net interest income.”

Since the TPO has not worked out the net interest income on the basis of the direction given by the DRP. We, therefore, deem it appropriate to set aside this issue back to the file of the AO/TPO to be decided afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee.

As regards to this issue it was the common contention of both the parties that it is consequential in nature. We order accordingly.

In the result, the appeal of the assessee is allowed for statistical purposes. (Order Pronounced in the Court on 17/10/2016)