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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SMT. ASHA VIJAYARAGHAVAN & SHRI JASON P. BOAZ
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE
BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER
IT(TP)A No. 228/Bang/2015 Assessment year : 2010-11
Ingersoll Rand (India) Ltd., Vs. The Deputy Commissioner of Plot No.35, KIADB Industrial Income Tax, Area, Bidadi, Circle 11(4), Bangalore – 562 109. Bangalore. PAN: AAACI 3099Q APPELLANT RESPONDENT
Appellant by : Shri K.R. Vasudevan, Advocate Respondent by : Shri Sanjay Kumar, CIT-III(DR)
Date of hearing : 06.10.2015 Date of Pronouncement : 05.11.2015
O R D E R Per Asha Vijayaraghavan, Judicial Member
This appeal by the assessee is directed against the order dated 24.12.2014 of the Assessing Officer passed u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [hereinafter referred to as "the Act"].
The assessee company is in the business of manufacturing and/or trading of Air Compressors, Feeder Crushers, Loaders, Vibratory
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Compactors, Light Towers, Utility Vehicles and Pavers. Return of income for the A.Y. 2010-11 was filed by the assessee on 8.10.2010 declaring an income of Rs.27,81,885 which was processed u/s. 143(1) of the Act. The case was selected for scrutiny under CASS and notice u/s. 143(2) issued on 9.9.2011 and notice u/s. 142(1) issued on 12.12.2013.
The information called for was furnished on 23.12.2013 and examined by the Assessing Officer. The case was referred to the TPO for determination of the arm’s length price (ALP) u/s. 92CA of the Act. As per the order of the TPO dated 30.01.2014, draft assessment order was passed on 24.2.2014 against which objections were filed by the assessee before the DRP. The ld. DRP upheld the draft assessment order and final assessment order was passed by the AO on 24.12.2014.
The TPO made a TP adjustment of Rs.1,64,44,290 to the returned income of the assessee in view of determination of ALP as follows:- Summary of TP adjustments (Rs.) Payment of Management Fees 1,53,40,000 Interest charged on AE debts outstanding exceeding six 11,04,290 months Total 1,64,44,290
Computation of Total Income Returned income (as per revised return): Rs.78,77,81,515 Add: Difference of ALP determined by the TPO u/s. 92CA(4) of the Act : Rs. 1,64,44,290 --------------------- Total Taxable Income Rs.80,42,25,805 ---------------------
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Aggrieved by the final order passed by the AO adopting the TP adjustment made by the TPO, the assessee is in appeal before us on the following grounds:-
“1) The learned Assessing Officer (“AO”), the learned Joint Commissioner of Income Tax (Transfer Pricing Officer — II), Bangalore (“Transfer Pricing officer” or “TPO”) and the Honorable Dispute Resolution Panel (“DRP”) have erred in law and facts of the case in proposing a transfer pricing adjustment under section 92CA of the Income-tax Act, 1961 (“the Act”) amounting to Rs. 1,53,40,000 on account of payment of cost contribution charges by the Appellant and while doing so: 1.1. The learned TPO, AO and the Hon’ble DRP erred in considering the arm’s length price to be with respect to the payments made by the assessee towards cost contribution charges to its Associated Enterprise (AE). 1.2. The learned TPO, AO and the Hon’ble DRP erred in holding that the international transactions cannot be aggregated in the application of Transactional Net Margin Method (‘TNMM’) for the transfer pricing analysis without appreciating the fact that the principle of aggregation of closely linked transactions is a well-established rule prescribed by the Organisation for Economic Co-Operation and Development guidelines (‘OECD Guidelines’) and referred to for guidance in various rulings of Income Tax Appellate Tribunals (‘ITAT’). 1.3. The learned TPO, AO and the Hon’ble DRP erred in selecting Comparable Uncontrolled Price Method (“CUP”) as the most appropriate method in determining the arm’s length price of payment towards management fees to AE despite the learned TPO not following the provisions prescribed in clause (a) of the sub-rule (1) of Rule l0B of the Rules for determination of ALP in relation to an international transaction under CUP. 1.4. The learned TPO, AO and the Hon’ble DRP erred in ignoring the evidences submitted by the assessee to prove that it was in need of services, services were actually rendered and the benefit was derived from the services obtained from the AE.
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2) The learned TPO, AO and the Hon’ble DRP have erred in imputing notional interest on the outstanding receivables amounting to Rs.. 11,04,290/- from the AEs and while doing so: 2.1. The learned TPO, AO and the Hon’ble DRP erred in imputing interest on the outstanding receivables from the AEs ignoring the fact that the assessee followed the same policy of not charging any interest on trade receivables from both AEs as well as Non-AEs. 2.2. Without prejudice, the learned TPO and AO ought to have been netted off the outstanding payables pertaining to the dues owed by the assessee from the outstanding receivables from AEs before proposing transfer pricing adjustment in connection with notional interest on outstanding receivables from AEs. 2.3. Without prejudice, the learned TPO, AO and the Hon’ble DRP has erred in not providing the reasonable period as interest free period for which no interest has to be determined by calculating the notional interest for the entire year (for 12 months) on outstanding receivables from AEs amounting to Rs. 74,91,793. 2.4. The learned TPO, AO and the Hon’ble DRP having accepted the Transactional Net Margin Method (‘TNMM’) as the most appropriate method had failed to appreciate that the operating margin of the assessee is higher than the arithmetic mean operating margin of comparable companies even after working capital adjustment which provides ample evidence that the additional compensation if any, required towards the credit period is already factored in the pricing of the goods sold/services rendered to its AEs. 2.5. The learned TPO, AO and the Hon’ble DRP erred in determining the credit rating of the AEs as ‘BB’ on adhoc basis and thereby imputing interest on the outstanding receivables from the AEs at a rate of 14.74% which was derived based on the annual average yield for ‘BB’ rated bond for 5 year or more term at 12.28% plus adhoc 20% premium which was obtained from CRISIL under section 133 (6) of the Act.
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Corporate Tax 3) Short Credit of Taxes deducted at source (TDS) - The learned AO has erred in granting a credit for TDS to the extent of Rs. 5,92,70,316 as against Rs. 6,05,12,937 claimed by the assessee in the revised return of income, thus resulting in a short credit of Rs. 12,42,621. 4) Interest under Section 234B - The learned AO has erred in levying interest under section 234B of the Act amounting to Rs. 2,31,864. The appellant craves to leave/to add to/to alter/to amend/to rescind/to modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing this appeal.”
The ld. counsel for the assessee submitted that the during the F.Y. 2009-10, the assessee has entered into international transactions with its Associates Enterprises (AEs) and based on the FAR analysis and availability data, Transactional Net Margin Method (TNMM) was selected as the most appropriate method. The assessee earned operating profits to total costs (OP/TC) of 13.30% as against the OP/TC of 13.08% earned by the comparable companies. Accordingly, with the application of TNMM, the international transactions have been concluded by the assessee to be at arm’s length.
It is now submitted before us that the TPO and the DRP erred in making a TP adjustment of Rs.1,53,40,000 on account of payment of cost contribution charges by the assessee. The brief facts with regard to this issue are that the assessee received services from its AE in the area of
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Administration, Finance, Treasury, Tax and Strategy etc. These services are utilized by the assessee to undertake its business operations in India. In order to leverage the expertise of Ingersoll-Rand Company, assessee entered into a cost contribution agreement with Ingersoll-Rand Company. In this connection, the assessee has made the payment of Rs.2,57,42,489 towards the cost contribution charges during FY 2009-10 relating to following periods:
- Pertaining to FY 2009-10 - Rs. 1,53,40,000 - Pertaining to FY 2008-09 - Rs. 1,04,02,489 (This payment is reflected as prior period item in the audited financial statements of FY 2009-10).
Accordingly, the learned TPO has proposed the TP adjustment in connection with the cost contribution charges made pertaining to both the periods mentioned above.
Cost contribution towards intra-group services (Ground No.1.1)
The ld. counsel for the assessee further submitted that lower authorities erred in treating the arm’s length price (ALP) of the cost towards management fees to be “Nil” holding that there is no justification for the above mentioned payments and doubting whether the services were actually rendered in connection with the business of the assessee.
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It was submitted that during the year assessee has paid its AE a total sum of Rs. 2,57,42,489 as cost contribution charges in connection
with intra-group services. The nature of service/ benefits derived by assessee has been provided below:-
It was submitted that the payments amounting to Rs.2,57,42,489 towards cost contribution charges is reflective of an arm’s length charge.
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It was further submitted that the assessee received services from its AE in the area of Administration, Finance, Treasury, Tax and Strategy etc. and
these services are utilized by assessee to undertake its business operations in India. It was stated that the lntra-group charges are incurred
centrally by the AE and allocated to the various group affiliates including
assessee on the basis of headcount and the annualized sales and the costs represent the actual costs incurred by the AE in the capacity of a
centralized service provider and are allocated amongst the concerned affiliates on a rational, logical and systematic basis.
The ld. counsel for the assessee highlighted the guidelines
postulated by the Organisation for Economic Cooperation and Development (“OECD”) with respect to the allocation of costs in respect of
intra-group services. It was submitted that the OECD Guidelines recognize that whilst the direct charge method may be the most practically convenient
method, such a method might be difficult to apply in practice in many cases
for MNE groups. The Guidelines recognize that under such circumstances MNE groups may find they have few alternatives but to use cost allocation
and apportionment methods which often necessitate some degree of estimation or approximation, as a basis for calculating an arm’s length
charge. The OECD Guidelines also provide illustrative basis for the allocation methodology [Para 7.22 & 7.23 of OECD Guidelines]. In this
regard the relevant paragraph 7.25 of the OECD Guidelines was pointed
out which is reproduced below:-
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“The allocation might be based on turnover, or staff employed, or some other basis. Whether the allocation method is appropriate may depend on the nature and usage of the service. For example, the usage or provision of payroll services may be more related to the number of staff than to turnover, while the allocation of the stand-by costs of priority computer back-up could be allocated in proportion to relative expenditure on computer equipment by the group members.”
It was submitted that the assessee has, in accordance with the stipulations as mentioned in the OECD Guidelines, adopted a rational, systematic and logical methodology for the payment of cost contribution charges. It was pointed out that the methodology of allocation followed is standard, uniform, harmonized and consistent across the entities of the Ingersoll Group of companies. Further it was stated the detailed workings providing the allocations of cost among various Ingersoll Group companies was submitted to the learned TPO during the assessment proceedings.
It was submitted that the basis of allocation followed across group companies is identical to the one adopted for allocating intra group charges to India. The AE in the capacity of a Centralized service provider enters into agreements with all the concerned affiliates in respect of the allocation of costs. It was further submitted that an analysis of the facts as set out in the aforementioned paragraph would provide ample evidence to the fact that the allocation of intra group charges by the AE to the assessee adheres to the tenets of the indirect allocation mechanism provisions as stipulated under Paragraph 7.25 of the OECD Guidelines. It was pointed out that the
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AE has charged only the actual costs incurred and there is no mark-up charged on the same.
Reliance was placed on Circular no. 87-2R dated 27 September, 1999 of the Canada Customs and Revenue Agency wherein the above has been explained by means of an example:-
“For example, in many cases, the services provided through intra- group arrangements are administrative or ancillary in nature, and the participants would only have been prepared to centralize the activity if they could share in the cost savings. Cost may represent an arm’s length charge in such situations’.
It was therefore emphasized that the AE in the capacity of a centralized service provider provides an element of cost saving to the Group as a whole, of which the assessee is also an integral part. This being the case, the costs cross charged by the AE would in itself be demonstrative of an arm’s length charge.
Aggregation approach with the application of TNMM and selection of most appropriate method (Ground Nos. 1.2 and 1.3)
It was submitted on behalf of the assessee that the learned TPO in the transfer pricing order has rejected the aggregation of international transaction made by the assessee by using the TNMM as most appropriate method and proposed to apply Comparable Uncontrolled Price (“CUP”) Method for determining the ALP of the international transaction pertaining
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to payment of intra-group services. It was submitted that though the learned TPO has provided that CUP should be considered as the most
appropriate method, he has failed to substantiate how CUP method can be applied in instance case, as he has not identified any uncontrolled
comparable transactions to enable the application of CUP Method. It was
submitted that considering the maturity of the databases, nature and type of information available as well as the nature of the international
transactions, it would be extremely cumbersome, if not impossible to obtain comparable data on an independent basis. Hence conducting a
benchmarking analysis to determine the ALP of the international transactions separately would be a difficult task.
In light of the above, it was reiterated that to determine the ALP of
the international transaction pertaining to payment of intra-group services, TNMM has to be applied following the aggregation approach as the
transactions are closely linked and integral to the manufacturing operations
of the assessee and therefore the determination of ALP on an aggregate basis would be more appropriate.
Benefits derived by assessee from intra-group services (Ground No.
1.4)
It was submitted by the assessee that the lower authorities have
erred in ignoring the evidences submitted by the assessee to prove that it was in need of services and services were actually rendered and benefit
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was derived from the services obtained from the AE. Further, the guidance, advice and support obtained from the experienced and knowledgeable team of the AE helped in management of the operational and corporate activities reducing significantly the level of senior personnel required locally, and provided for a higher degree of co-ordination of the activities among assessee and its foreign affiliates. It was submitted that the key benefits to the assessee by availing the Intra-Group services include, but are not limited to:-
• Access to high quality services on “as and when such a need arises” basis; • The staff providing the services have unequalled knowledge of the business and the issues, compared to third party providers; • Some of the services provided by the AE would not likely be obtainable from third party service providers, and it may not be prudent from a business as well as commercial perspective to avail some of the services provided by the AE’s, directly from third party service providers; • It is practically and financially not possible for the assessee to employ such experienced personnel on a stand-alone basis. Further, procuring such assistance from third party consultants would have proven to be extremely costly for the assessee: • Further, due to the direct involvement of administrative and executive management teams, the level of staff and management required at the recipient entity levels get reduced. This further provides for a higher degree of coordination of the activities among the foreign affiliates. This greater degree of coordination in turn facilitates increased sales and more efficient use of the resources; • Provide operational efficiencies (e.g. better training, staff recruitment and retention and IT platforms) and to promote opportunities of cross selling to maximise revenues;
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• Reduced costs - Many functions can be carried out centrally for the benefit of the entire Group, by reducing duplication, providing dedicated resources and the benefits of economies of scale. • Ingersoll Group has a brand name and reputation in the market because of the level and quality of the services provided to the clients. Therefore, lack of support from Ingersoll group may adversely impact the ability of IRIL to provide quality services to the client. Further, failure to have correct/appropriate policies could lead to control risks further arising leading to loss of revenue or unexpected rise in the cost of the business.
Evidence to demonstrate that the services are indeed rendered by the AE
It was submitted by the assessee that with a view to substantiate that it has indeed obtained the services of AE, the following information/documents were provided to the learned TPO during the assessment proceedings:-
• Detailed description of the intra-group services rendered by the AE (Page 99 of the paper book) • Cost Contribution Agreement entered between IRIL and Ingersoll Rand Company dated January 1, 2009 (Page 349 of the paper book) • Ledger extracts along with sample copy of invoice in connection with the Intra-group services (Page 355 of the paper book) • The detailed working providing the allocation of costs by Ingersoll Rand Company to various group affiliates of Ingersoll Group including IRIL (Page 358 of the paper book) • Evidence of communication in the form of electronic mails I meetings I presentations made to demonstrate services provided (Page 362 and 431 of the paper book).
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customer management etc. paperbook)
Based on the above, it was submitted on behalf of the assessee that it is reasonable to view that the payment made towards cost contribution amounting to Rs. 2,57,42,489 is as per the internationally accepted transfer pricing principles and accordingly reflective of an arm’s length charge. Reliance was placed on the following decisions:-
Festo Controls (P) Ltd. [IT(TP)A 969/Bang/2011]. 2. McCann Erikson (P) Ltd. [ITA No.5871/De;/2011].
We find that the Mumbai Bench of the Tribunal in the case of Dresser Rand India Pvt. Ltd. [ITA No.8753/Mum/2010] upheld the payment of cost contribution charges and deleted the additions made by the AO observing as follows:-
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• It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an assessee and what s not. • An assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question assessee’s wisdom in doing so. • Whether a particular expense on services received actually benefits an assessee in monetary terms or not is not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm’s length price of that service. • The real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. • Similarly, whether the AE gave the same services to the assessee in the preceding years without any consideration or not is also not relevant. • The Assessee has filed a huge compilation of papers, including copies of reports, emails and other documents evidencing the rendering of services. • There is no infirmity in this contribution being taken as an arm’s length contribution to the costs. • There is no objective way in which use of services can be measured and as is the commercial practice even in market factors driven situation, the costs are shared in accordance with some objective criterion, including sales revenues and number of employees. • In any case, the assessee has adopted TNMM as most appropriate method, and the revenue authorities have neither made an effort to show as to how this method is not appropriate to the facts of this case, nor shown as to which other prescribed method of ascertaining arm’s length price of services received will be more appropriate to these facts.
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Similarly, in the case of AWB India Pvt. Ltd., ITA No.4454/Del/2011, the Delhi Bench of the Tribunal had noted that the assessee had produced
evidence and that the contents of thereof were found to be “amply supportive” of the assessee’s claim. The TPO had rejected TNMM and
adopted CUP method for determining ALP. The Tribunal held that the TPO
remained ‘oblivious’ to the fact that Rule 10B(1)(a) stipulates ‘comparable’ and ‘uncontrolled’ transactions while applying the CUP method. Only a
general observation was made by the TPO that no independent party would have made payment in uncontrolled circumstances.
In view of the above decisions of the Delhi Bench of the Tribunal in
the case of Dresser Rand India Pvt. Ltd. and AWB India Pvt. Ltd. (supra), we delete the addition of Rs.1,53,40,000 towards TP adjustment on
account of payment of cost contribution charges made by the assessee.
The next issue is with respect to the objection of the assessee in making TP adjustment in connection with notional interest of Rs.1,104,290
on outstanding receivables from AEs.
The brief facts are that the during the assessment proceedings, the
assessee submitted the details of the receivables with its AEs and Non AEs
for more than 6 months and less than 6 months. The TPO observed that there are certain receivables from the AEs which are due exceeding six
months at the end of the financial year. The TPO in his order argued that outstanding receivables (amounting to Rs. 74,91,793) for a period
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exceeding 6 months take the characterisation of a loan transaction for which interest is chargeable. Further, he observed that if interest had been
charged by the assessee on its AEs for the outstanding balance, it would have been included in the profit of the assessee.
Accordingly, the TPO determined the credit rating of the AEs as ‘BB’
on adhoc basis and thereby imputing interest on the outstanding receivables (beyond 6 months) from the AEs at a rate of 14.74% which was
derived based on the annual average yield for ‘BB’ rated bond for 5 year or more term at 12.28% plus adhoc 20% premium which was obtained from
CRISIL under section 133 (6) of the Act.
Therefore, the TPO made the transfer pricing adjustment of Rs. 11,04,290 towards notional interest on the receivables from AE.
The ld. counsel for the assessee submitted the computation of
notional interest before us as follows:-
The ld. counsel for the assessee submitted that while proposing the
notional interest on receivables outstanding from AE, the TPO has tried to bring within the ambit of Section 92, a transaction that is non-existent. It
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was submitted that in the absence of any specific provision in the Act which seeks to tax any hypothetical income, the assessee cannot be subject to tax in respect of ‘hypothetical income’, i.e., to say an income which ought to have been earned or that the assessee failed to earn. It was further submitted that in the present case, since no income has been earned or can be said to have been earned by the assessee in respect of interest chargeable from AEs, the question of applying the provisions of section 92 of the Act does not arise.
Section 92(1) of the Act provides that, ‘Any income arising from an international transaction shall be computed having regard to the arm’s length price”. Further, Section 92B(1) of the Act defines an “international transaction” as under:
“For the purposes of this section and sections 92, 92C, 92D and 92E, “international transaction” means a transaction between two or more associated enterprises, either or both of whom are non- residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises to mean the ALP in length price under section 92C” (emphasis supplied)
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It was submitted by the ld. counsel for the assessee that the above definition implies that there should be a ‘real transaction’ between two AE’s,
i.e., a transaction involving actual exchange of goods/services to constitute an ‘international transaction’. It does not seek to cover any hypothetical
transaction which has not taken place between the AEs.
The ld. counsel for the assessee submitted that to examine the transactions that could be subject to tax under the Act, it would be
necessary to understand the concept of ‘income’ under the Act. Section 2(24) of the Act defines ‘income’. The definition of ‘income’ under the Act is
of an inclusive nature, i.e., apart from the items listed in the definition, any
receipt which satisfies the basic condition of being income is also to be treated as income and charged to income tax accordingly. Additionally, the
Act also contains specific provisions which have a deeming fiction on income that could be subject to tax, e.g. Section 115JB (minimum alternate
tax). It can be construed that the Act provides for taxing only real income
whether received or accrued under the normal provisions and specifically provides for taxation of presumptive income. Reliance was placed on the
decision of Vodafone India Services Pvt. Ltd. v. UOI (W.P. No.871 of 2014) Ltd. v.. Union of India (Writ Petition No.871 OF 2014) and the decision of
the Mumbai Bench of the Tribunal in the case of Evonik Degussa India P. Ltd. v. ACIT (ITA No.7653/Mum/2011) in support of its claim.
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The ld. counsel for the assessee submitted that ITAT Bangalore Bench in the assessee’s own case for the A.Y. 2006-07 deleted the addition on account of notional interest relating to alleged delayed payment of receivables from AEs.
We have heard both the parties. We find that the coordinate Bench of this Tribunal in the assessee’s own case for the AY 2006-07 in IT(TP)A No.1529/Bang/2010 vide order dated 24.04.2015 while dealing with an identical issue, has held as follows:-
“11.2.2 On the first issue of taxability of notional income, the assessee submitted that the TPO has tried to bring within the ambit of Section 92, a transaction that is non-existent and in the absence of any provision in the Act, the tax-payer cannot be subjected to tax in respect of ‘hypothetical income’. In the case on hand, since no income has been earned or can be said to have been earned by the assessee in respect of interest chargeable from AEs, the question of applying the provisions of Section 92 of the Act does not arise. In support of this proposition, the assessee placed reliance on the following judicial pronouncements :- 1) Vodafone India Services Pvt. Ltd. V UOI (W.P. No.871 of 2014) 2) Evonik Degussa P. Ltd. V ACIT – OSD, Circle 3(1) (ITA No.7653/Mum/2011) of ITAT, Mumbai Bench. 11.2.3 It was also submitted by the assessee that it had not charged any interest for delayed realisations even in the case of Non-AE transactions. It was submitted that the debts were outstanding with both the AEs and Non-AEs for a period exceeding the credit period purely because of business reasons and that this is a common business practice prevailing in the industry and the delay if any in the payment is not due to extension of credit period by the assessee to its AEs. In this regard, the assessee placed reliance on the decision of the Hon'ble
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High Court of Bombay in the case of CIT V Indo American Jewellery Ltd., in ITA No.1053 of 2012. 11.2.4 The assessee further made the following submissions :- (i) The TPO had mentioned, in his order under Section 92CA of the Act, that debts outstanding for more than 6 months is considered for making the T.P. Adjustment towards notional interest. However, the actual adjustment has been made on the total amount of receivables. In this regard, it was submitted by the learned Authorised Representative that there were no receivables from AEs outstanding for more than 6 months. (ii) It was submitted that if at all any adjustment had to be made, the notional interest is to be computed on the net receivables after netting off payables to all the AEs and not only to the holding company, as taken by the TPO. (iii) It was submitted that the TPO has erred in adopting an interest rate of 14% by stating that in terms of the financial health, the AEs of the assessee are not considered fit to be returned even as BBB (Moderate Safety) as per CRISIL rating. Having so stated, the TPO arbitrarily concluded that the interest rate for BBB rated corporate Bond rates at 11.45% and with an upward adjustment of 20% to arrive at the conclusion that the rate of interest of 14% is reasonable. 11.3 Per contra, the learned Departmental Representative supported the orders of the authorities below. 11.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decision cited and placed reliance upon. We find that the decision of the ITAT, Mumbai Bench, in the case of Evonik Degussa P. Ltd. V ACIT – OSD, Circle 3(1), Mumbai (ITA No.7653/Mum/2011, dt.21.11.2012) of ITAT, Mumbai Bench is squarely applicable to the facts of the case in the case on hand. In this decision the ITAT, Mumbai Bench at para 28 thereof has held as under :
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“28. After carefully considering the rival submissions and the orders of the TPO as well as the direction of the DRP, we find that the assessee has no interest liability and it does not have any external borrowings. Even if the payments have been made by the AE beyond the normal credit period, there is no interest cost to the assessee. Moreover, there is no such agreement whereby interest is to be charged on such a delayed payment. From the summary of payment submitted by the learned Counsel, it is seen that the billing is done on quarterly basis and, accordingly, the payment is being received. Therefore, the delay is not wholly on account of late payment by the AEs only. Moreover, the T.P. Adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. Thus, on the facts and circumstances of the case, we are of the opinion that addition an account of notional interest relating to alleged delayed payment in collection of receivables from the AEs is uncalled for on the facts of the present case and is, accordingly, deleted.” 11.4.2 Following the above decision of the ITAT, Mumbai Bench in the case of Evonik Degussa India P. Ltd. (supra), we also hold that the addition on account of notional interest relating to alleged delayed payment in collection of receivables from AEs is not called for. However, as can be seen from the extract of the decision reproduced above, the above decision has been rendered in the factual context that there has been no agreement for charging interest on delayed payment. We, therefore, deem it appropriate to remand this issue back o the file of the Assessing Officer / TPO for examination as to whether there was any agreement for charging interest on late payments or not and if it is found that there was no such agreement, then the T.P. Adjustment made in this regard requires to be deleted. As this issue has been decided, in principle, in favour of the assessee by placing reliance on the aforesaid decision of the ITAT, Mumbai Bench (supra), it is not necessary for us to adjudicate on the other grounds of appeal raised on this issue. Consequently, the grounds
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raised at S.Nos.10 to 13 relating to the issue of interest on receivables are disposed off accordingly.”
Respectfully following the aforesaid decision of the coordinate Bench of this Tribunal cited supra in assessee’s own case for the AY 2006- 07, we are of the view that the lower authorities erred in making TP adjustment on account of notional interest on outstanding receivables from AEs and hence the assessee’s ground(s) of appeal on this issue is allowed.
The next ground of appeal (ground No.3) by the assessee is with regard to the short credit of taxes deducted at source. The ld. counsel for the assessee submitted that the AO has granted credit for TDS to the extent of Rs.5,92,70,316 as against Rs.6,05,12,937 claimed by the assessee in the revised return of income, thus resulting in a short credit of Rs.12,42,621. We remit this issue back to the file of the Assessing Officer to examine and rework the short credit of taxes deducted at source.
With respect to ground No.4 regarding interest u/s. 234B of the Act, charging of interest is mandatory and there is no discretion in the matter as held by the Hon’ble Apex Court in the case of Anjum M.H. Ghaswala (252 ITR 1) (SC). We therefore uphold the action of the AO in charging of the interest. The AO is directed to recompute interest u/s. 234B after giving effect to this order.
IT(TP)A No.228/Bang/2015 Page 24 of 24
In the result, the appeal by the assessee is partly allowed.
Pronounced in the open court on this 5th day of November, 2015.
Sd/- Sd/-
( JASON P. BOAZ ) (ASHA VIJAYARAGHAVAN ) Accountant Member Judicial Member
Bangalore, Dated, the 5th November, 2015.
/D S/
Copy to:
Appellant 2. Respondents 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar, ITAT, Bangalore.