DEVI SEA FOODS LIMITED,VISAKHAPATNAM vs. DCIT, CIRCLE-3(1), VISAKHAPATNAM

PER Sri S. BALAKRISHNAN, Accountant Member :

This appeal filed by the assessee is directed against the final assessment order passed under section 143(3) r.w.s 144C(13) r.w.s 144B of the Income Tax Act 1961, (the Act) dated 26.02.2022 arising out of the directions of the Learned Dispute Resolution Panel-1, Bengaluru in F.No. 73/DRP-1/BNG/2021-22,

2 dated 28/01/2022 passed U/s. 144C(5) of the Act dated

28.01.2022 for the AY 2017-18.

business of export of processed and frozen shrimp, shrimp feed

and wind mill power. The assessee entered into various

international transactions with its Associated Enterprises (AE)

and bench marked its international transactions under

Transaction Net Margin Method (TNMM). The assessee filed its

revised return of income for the assessment year 2017-18 on

21.11.2018 admitting a total income of Rs 132,15,54,810/-. The

case was referred to the Transfer Pricing Officer [TPO] for

determining Arms LengthPrice (ALP) u/s 92CA(3) in respect of its

international transaction entered into with AE, after approval

from the Principal Commissioner of Income Tax-1,

Visakhapatnam on 1/4/2019. In response to the notices of the

Ld. TPO, the assessee filed various submissions and requested

for personal hearing which was allowed on 20/1/2021.

Considering the submissions made by the assessee’s

representative, the Ld. TPO determined the ALP of the

international transactions of the assessee with its AE, at Rs.

50,57,43,750/- and directed the AO to enhance the total income

3 of Rs. 50,57,43,750/- u/s. 92CA(3) of the Act. The TPO gave the

below summary of the adjustments u/s. 92CA(3) of the Act:

Sl Description Adjustment u/s. No. 92CA(3) (Rs.) 1. Sale of frozen shrimp 26,23,99,832 2. Corporate Guarantee-given 2,46,43,000 3. Trade receivable 21,87,00,918 4. Total adjustment u/s. 50,57,43,750 92CA(3)

draft assessment order u/s 143(3) r.w.s 144C of the Act on

20.04.2021. and made an upward TP adjustment to the total

income to the tune of Rs. 50,57,43,750/- and further made a

disallowance u/s. 14A for Rs. 13,20,907/- in his draft

assessment order U/s. 144C of the Act. Aggrieved by the order of

the Ld. AO, the assessee filed objections before the Ld. DRP-1,

Bengaluru and challenged the upward adjustments. In the mean

time the assessee also filed a rectification application on

04.03.2021 before the TPO. The TPO considering the rectification

passed an order of rectification u/s 154 revising the adjustment

u/s 92CA(3) of the Act as given below:

Sl Description Adjustment u/s. No. 92CA(3) (Rs.) 1. Sale of frozen shrimp NIL 2. Corporate Guarantee-given 2,46,43,000

The Ld. DRP in its detailed order discussed various judicial

precedents confirmed the additions made in the draft assessment

order by the Ld. AO. Aggrieved by the order passed by the Ld.AO,

based on the directions of the Ld. DRP, the assessee is in appeal

before us.

interest on overdue export receivables:

“2.1 The Transfer Pricing Officer (TPO)/AO erred in imputing notional interest on overdue receivables from Associated Enterprise (AE) and the DRP erred in sustaining the said adjustment.

2.2. The DRP/TPO/AO failed to appreciate that the delay in the realization of outstanding receivables from AE cannot be considered as an international transaction as it does not fall within the purview of the capital financing as contemplated under section 92B of the Act.

2.3. The DRP/TPO/AO erred in not appreciating the fact that the Act provides for taxing only real income whether received or accrued under the normal provisions.

2.4. The DRP/TPO/AO erred in not appreciating the fact that transfer pricing 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.

2.5. Without prejudice to the above, the DRP/TPO/AO erred in imputing notional interest on delayed receivables despite the fact that the primary transaction has already been

tested and considered to be at arms length under Transaction Net Margin Method at the entry level.

2.6. The DRP/TPO/AO ought to have appreciated that the appellant has earned a very high arms length net margin than that of the comparable companies (ie., 12.15% as against 8.07% with export incentive considered as operating income and 4.17% and 1.28% without export incentive). It impliedly demonstrates that the appellant is compensated for cost of delayed receivables through higher operating margin embedded in sales to AE.

2.7. Without prejudice to the above, the DRP/TPO/AO erred in not appreciating that the appellant has not charged interest on delayed realization of outstanding receivables from Non-AE’s and as such trade receivable transactions with respect to AE are to be deemed to have been done on arm’s length basis by applying internal CUP method, as resorted by the appellant.

2.8. Without prejudice to the above, the DRP/TPO/AO erred in not appreciating that the working capital adjustment would offset the impact of belated receipt of outstanding receivables and as such there is no requirement to make separate imputation of interest for belated receipt of outstanding receivables.

2.9. Without prejudice to the above, the DRP ought to have appreciated that the TPO has wrongly and arbitrarily adopted the notional and imaginary date of 20thDecember, 2016 as the date of realization of all the sales to AE made and realized during the financial year 2016-17. The DRP ought to have considered the information on actual realization dates furnished by the appellant and directed the AO to consider it while calculating the interest on receivables.

2.10. Without prejudice to the above, the DRP/TPO/AO erred in not considering the fact that the RBI guidelines provided for a credit period of twelve months to collect the invoices raised.

2.11. Without prejudice to levy of notional interest, the DRP/TPO ought to have reckoned the LIBOR rate of interest instead considering SBI short term interest rate as the trade receivable were in foreign currency.

2.12. Without prejudice to the above, the foreign exchange gain of Rs. 11,24,33,853/- which has a direct nexus with the period of realization of the receivables from the AE should be netted off against the notional interest charged on delayed receipt of trade receivables.

2.13. Without prejudice to the above grounds, the DRP/TPO/AO erred in considering uniform credit period of 60 days without any basis in the case of sales to AE without realizing the fact that the AE derived higher credit period in view of its substantial contribution to appellant’s business by way of higher sales patronage, higher sales margin, bulk and year long order continuity etc.

2.14. Without prejudice to the above, the DRP ought to have appreciated that the TPO has not adopted any of the prescribed methods while imputing interest on trade receivables.

2.15. Without prejudice to the above, the levy of interest is high and arbitrary.

imputing notional interest on the outstanding overdue

receivables from Associated Enterprises (AEs). The Learned

Authorized Representative (Ld. AR) submitted that the assessee

has adopted Transaction Net Margin Method (TNMM) and

therefore the interest on outstanding receivables is subsumed in

the Arm’s Length Price (ALP) charged to the AEs. The AR further

submitted that the assessee’s operating margin is 4.17% as

compared to the comparable selected by the Ld. TPO where the

operating margin is at 3.69% . The Ld. AR further submitted that

7 the assessee has made 72% of the total sales to AEs and 28% to

non-AEs. The Ld. AR confirmed that no interest is charged on

the outstanding receivables either to AE or Non-AE parties. The

Ld. AR relied on the following case laws:

(i) PCIT vs. Kusum Health Care (P) Ltd – [2018] 99 taxmann.com 431 (Delhi HC) (ii) PCIT vs. Amadeus India (P) Ltd [2020] 113 taxmann.com 393 (Delhi HC). (iii) Pegasystems Worldwide India Pvt Ltd vs. ACIT – [2015] 64 taxmann.com 470 (Hyd. Trib.) (iv) DCIT vs. CCL Products (India) (P) Ltd – [2019] 106 taxmann.com 11 (Visakhapatnam – Trib.) (v) Vestas Technology R & D Chennai Private Limited vs. ACIT – ITA No. 3081/Chny/2016 (Chennai Trib.) (vi) Gimpex (P) Limited vs. ACIT –[2019] 105 taxmann.com 365 (Chennai Trib.) (vii) Det Norske Veritas vs. ADIT – [2016] 67 taxmann.com 16 (Mum. Trib.) (viii) Hackett Group (India) Ltd vs. DCIT [2020] 116 Taxmann.com 631 (Hyd. Trib.) (ix) ERM India (P) Ltd. Vs. NEC [2021] 132 taxmann.com 220 (Delhi Trib.) (x) Turner International India (P.) Ltd vs. ACIT [2020]115 taxmann.com 334 (Delhi Trib.) (xi) Agilent Technologies India (P.) Ltd vs. DCIT – [2021] 124 taxmann.com 561 (Delhi Trib.) (xii) Indo American Jewellery Ltd vs. CIT – [2014] 44 taxmann.com 310 (Bombay HC). (xiii) Sharda Spuntex vs. PCIT – 93 taxmann.com 498 (Raj. HC) (xiv) CIT vs. Vaibhav Gems Ltd – 99 taxmann.com 2 (SC) (xv) CIT vs. Vaibhav Gems Ltd – [2017] 88 taxmann.com 12 (Raj. HC)

The Ld. AR heavily relied on the ratio laid down in PCIT vs.

Kusum Health Care (P) Ltd [2018] 99 taxmann.com 431 (Delhi).

8 6. The Ld. Departmental Representative (Ld. DR) argued that

there are huge delays in the receivables from AEs and hence

interest is to be charged on the same on notional basis. The Ld.

DR referred to the expression of “international transaction” as

given in Explanation (i)(c) to section 92B of the Act and argued

that deferred receivables would constitute international

transaction. The Ld. DR further argued that the deferred

payments or receivables arising during the course of business is

in the nature international transaction and hence interest to be

charged on the same. The Ld. DR further countered that the

notional interest cannot be subsumed in the TNMM. The Ld. DR

also argued that non-charging of interest to non-AEs is

irrelevant. The Ld. DR referred to the decision of the Delhi

Tribunal in the case of Bechtel India Pvt Ltd in ITA

No.6530/Del/2016, dated 16thMay, 2017.

material available on record and the orders of the Authorities

below. Admitted facts are that the assessee sells to both the AEs

non-AE where the AE being the major debtor. There is no

dispute with regard to the fact that receivables is included under

the definition of international transaction consequent to the

9 amendments made by the Finance Act, 2012 w.e.f 01.04.2002.

Therefore we are of the considered view that there is no merit in

the argument of Ld AR that receivables is not an international

transaction. Whether separate adjustment is required to be

made in respect of receivables is the subject matter. The assessee

also submitted the working capital adjustment made to the

operating margin of the comparable companies and the assessee.

From the submissions made by Ld AR, we find that if the export

incentives are considered as non-operating income, the operating

profit ratio of the comparable companies is 1.28% as against the

operating margin of 4.17% of the assessee. Alternatively, if the

export incentives are considered as operating income, the

operating margin of the comparable companies is 8.08% vis-à-vis

the assessee at 12.15% . We find from the above working the

assessee’s margin is significantly higher than the operating

margin of the comparable companies. There may be a delay in

the collection of receivables even beyond the agreed time limits

due to a variety of factors which has to be decided on a case to

case basis. When TNM method is considered as the most

appropriate method, which was also not disputed by Revenue, the

net margin thereunder would take care of such notional interest

cost. It was further explained by Ld.AR that the impact of the

delay in collection of receivables would have a bearing on the

working capital of the assessee. We find that these working

capital adjustments on the ALP has been already factored in its

pricing / profitability vis-à-vis that of its comparables. We

therefore are of the considered view that any further adjustment

to the margin of the assessee on the outstanding receivables

cannot be justified and no separate upward adjustment on

outstanding export receivables is required and therefore we direct

the Ld.AO to delete the upward adjustment made towards

overdue receivables from AE. We therefore allow this ground

raised by the assessee.

adjustment towards corporate guarantee:

“3.1. The TPO/AO erred in imputing corporate guarantee commissioner at the rate of 1.9% of the gross loan taken by the AE and the DRP erred in sustaining the said adjustment. 3.2. The DRP/TPO/AO failed to appreciate that the extending guarantee for loan taken by AE cannot be considered as an international transaction as it does not fall within the purview of “capital financing” as contemplated under section 92B of the Act. 3.3. The DRP/TPO/AO erred in not appreciating the fact that the Act provisions for taxing only real income whether received or accrued under the normal provisions. 3.4. The DRP/TPO/AO erred in not appreciating the fact that transfer pricing 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.

3.5. The DRP/TPO/AO erred in not appreciating the fact that the appellant has not incurred any cost in providing corporate guarantee and as such the appellant cannot be expected to charge commission for providing corporate guarantee.

3.6. The DRP/TPO/AO failed to appreciate that the appellant has extended guarantee to its wholly owned subsidiary Devi Sea Foods Inc., USA (ie., Associated Enterprise) for furthering assessee’s own business and as such it is shareholder’s function, which does not warrant a commission.

3.7. The DRP/TPO/AO erred in not appreciating the fact that the loan availed by AE was secured and the AE had sufficient current assets (ie., loan utilized during the subject AY is USD 1,84,46,803 as against net current assets of USD 3,39,09,479 approximately 1.84 times the credit availed by the AE. This shows that there was no chance of the assessee being called upon by the bank to satisfy the obligation of the AE (and factually the same has nto occurred till date as well).

3.8. The DRP/TPO/AO erred in not appreciating the fact that due to the skewed debit-equity ratio of the AE, the banks would not be willing to grant loan unless it is guaranteed by the parent (ie., assessee) and providing such guarantee is an onerous responsibility of a shareholder.

3.9. The DRP/TPO/AO ought to have appreciated that the provision of corporate guarantee has not resulted in reduction of rate of interest and the AE has not derived any benefit which has an impact on its profits or loss or assets.

3.10. The DRP/TPO/AO erred in not adopting any of the prescribed methods for benchmarcking the corporate guarantee transaction.

3.11. Without prejudice to the above, the DRP/TPO/AO erred in considering the rate prescribed under Safe Harbour Rules as arms length price without appreciating that such rate is applicable only to parties who have resorted to safe harbor provisions.

3.12. The DRP/TPO/AO erred in holding that safe harbor rules is one of the prescribed methods, which is contrary to the provisions of the Act and as such unsustainable in law.

3.13. Without prejudice to the above, the DRP/TPO/AO ought to have adopted the rate of 0.5% as the rate of guarantee commission as held in various judicial precedents.

12 3.14. Without prejudice to the above, the DRP/TPO/AO ought to have adopted internal CUP method by considering the guarantee commission charged by Appellant’s domestic banker. 3.15. In any event, the rate of 1.9% rate of corporate guarantee determined by TPO and sustained by DRP is very high and arbitrary. 3.16. Without prejudice to the above, the DRP ought to have directed the TPO to restrict the adjustment to extent of loan utilized during the year instead of attributing guarantee commission on the total corporate guarantee amount as the risk of guarantee is restricted to actual loan utilized.”

adjustments made by the TPO/DRP in the corporate guarantee

commission on the gross guarantee given to AE. The Ld. AR

pleaded that it is not an international transaction as the assessee

has not charged the AE. However, the Ld. AR submitted that in

the case of CIT vs. Redington India Ltd [2021] 430 ITR 298,

Hon’ble Madras High Court held that corporate guarantee given

to the AE is covered by the retrospective amendment made by the

Finance Act, 2012. The ld. AR relied on the following case laws:

(i) DCIT vs. EIH Ltd – [2018] 89 taxmann.com 417 (Kolkata Trib). (ii) GVK Power & Infrastructure Ltd vs. ACIT – [2018] 94 taxmann.com 415 (Visakhapatnam Trib.) (iii) CIT vs. Everest Kanto Ltd – 378 ITR 57 (Bombay HC) (iv) PCIT vs. Thomas Cook Ltd – ITA Nos. 712 & 713/2017, dated 26/08/2019.

13 10. The Ld. AR further submitted that the Hon’ble Courts and

Tribunals have held that 0.50% on an average as corporate

guarantee commission on the guarantees extended to AE, should

it be treated as international transaction. The Ld. AR pleaded

that the AE of the assessee had utilized only $ 11.5 Million USD

and hence if the Hon’ble Bench decided to uphold the corporate

guarantee as an international transaction it may be charged @

0.50% on the amount utilized by the AE. The Ld. AR also

referred to the OECD guidelines wherein it is mentioned that

corporate guarantee is not an international transaction and it is

only a shareholder’s obligation. The Ld. AR further submitted

that merely relying on the information obtained U/s. 133(6) of

the Act which was not shared with the assessee, the Ld. TPO has

erred in determining the rate @ 1.9% of the corporate guarantee

given to AEs.

Per contra, the Ld. DR referred to the Notification of the

Central Board of Direct Taxes (CBDT) issued on 7/6/2017

wherein it is notified that the rate should not be less than 1% on

the corporate guarantee given to AEs. The Ld. DR further

submitted that the Ld. DRP has rightly considered the

Notification (supra) and thereby upheld the ALP rate of 1.9%

14 adopted by the Ld. TPO in respect of adjustment made to the

corporate guarantee given to AE. The Ld. DR therefore pleaded

that the order of the Ld.DRP / Ld.AO be upheld.

available on record and the orders of the Authorities below. It is

observed from the order of the Ld. TPO that the Ld. TPO has

obtained from various banks the rate of fees charged by them on

the issuance of financial guarantees for the computation of ALP.

The Ld. TPO has thus concluded that the median of the ALP

works out to 1.9% for the corporate guarantee of above Rs. 10

Crs. The Ld. TPO referred to section 92B of the Act which read

as “any other transaction having a bearing on the profits, income,

losses or assets of such enterprises” and thus concluded that in

the instant case the corporate guarantee issued on behalf of its

AEs must be taxed @ 1.9% on the guaranteed amount. The Ld.

TPO also observed in para 12.10 of his order that “when a default

is made in making repayment by the principal debtor, the banker

will be able to proceed against the guarantor/surely” and hence

this being the contingent liability on the assessee, we find that

the Ld. TPO made the adjustment by instances referring to the

commercial banks providing financial guarantees but did not

15 contemplate the issue of corporate guarantee. The concept of

bank guarantees and corporate guarantees was explained in the

case of Prolifics Corporation Ltd in ITA No.237/Hyd/2014, dated

31/12/2014 by the Hyderabad Tribunal wherein it has observed

that the provisions of corporate guarantee always involves risk

and there is a service provided to the AEs in increasing its

creditworthiness in obtaining loans in the market. We find that

there must be a minimum charge on the P & L Account but there

is an enhanced risk which cannot be ruled out in providing

guarantees. Ultimately, the Hon’ble Tribunal upheld the

adjustment made on guarantee commissions given to AEs. The

reliance placed by the Ld. AR on the Bombay High Court decision

in the case of CIT vs. Everest Kanto Ltd reported in 378 ITR 57

wherein the corporate guarantee commission was considered as

an international transaction and the rate restricted to 0.50% of

the corporate guarantee. We find merit in the arguments of the

Ld. AR that the rate of corporate guarantee should be restricted

to the amount utilized by the AE, @ $ 11.5 Million USD, but

should not be applied on the gross corporate guarantee. In view

of the above discussion and by respectfully following the ratio

laid down by the Hon’ble Bombay High Court in the case of CIT

vs. Everest Kanto Ltd (supra) we are of the considered view that

16 the corporate guarantee commission is an international

transaction and should be charged @ 0.50% on the corporate

guarantee amount utilized, by the AE. We therefore allow the

grounds raised by the assessee.

disallowance U/s. 14A of the Act.

“4.1. The AO erred in making disallowance under section 14A of the Act and the DRP erred in sustaining the said disallowance. 4.2. The AO/DRP failed to appreciate that in the absence of dividend income, the provisions of section 14A of the Act will not be applicable. 4.3. Without prejudice to the above, while computing the average value of investments under Rule 8D(ii), the AO ought to have excluded the investments which did not yield dividend income.”

with respect to disallowance U/s. 14A of the Act r.w.r 8D. The

Ld. AR argued that the assessee has not earned any exempt

income warranting the disallowance u/s. 14A of the Act. The Ld.

AR pleaded that the assessee’s holding shares is merely to retain

the controlling interest and no income has been received by the

assessee during the impugned assessment year. The Ld. AR

relied on the following decisions:

17 (i) CIT vs. Chettinad Logistics P. Ltd – 95 taxmann.com 250 (Supreme Court). (ii) CIT vs. Chettinad Logistics P. Ltd – [2017] 80 taxmann.com 221 (Madras) (iii) Marg Ltd vs. CIT – 120 taxmann.com 84 (Madras)

Hon’ble Supreme Court in the case of CIT vs. Chettinad Logistics

P. Ltd., [2018] 95 taxmann.com 250 (SC).

Per contra, the Ld. DR supported the order of the Ld. AO.

available on record and the orders of the Authorities below. We

find from the records submitted by the Ld. AR that the assessee

has not earned any exempt income during the relevant

assessment year mandating the invoking of provisions of section

14A of the Act. The Hon’ble Supreme Court in CIT vs. Chettinad

Logistics (P.) Ltd (supra) has dismissed the SLP of the Revenue

and held that section 14A can only be triggered if assessee claims

any expenditure against an income which does not form part of

the total income under the Act. The Hon’ble Supreme Court

further observed that Rule 8D only provides for a method to

determine the amount of expenditure incurred in relation to

income which does not form part of the total income of the

assessee. Respectfully following the ratio laid down by the

18 Hon’ble Supreme Court, we allow the appeal of the assessee on this ground.

Pronounced in the open Court on the 9th September, 2022.

Sd/- Sd/- (दु�वू�आर.एलरे�डी) (एसबालाकृ�णन) (DUVVURU RL REDDY) (S.BALAKRISHNAN) �या�यकसद�य/JUDICIAL MEMBER लेखासद�य/ACCOUNTANT MEMBER Dated : 09.09.2022 OKK - SPS आदेशक���त�ल�पअ�े�षत/Copy of the order forwarded to:- �नधा�रती/ The Assessee–M/s. Devi Sea Foods Limited, 50-1-51/1, 1. ASR Nagar, Seetammadhara, Visakhapatnam-530013, Andhra Pradesh. राज�व/The Revenue – Deputy Commissioner of Income Tax, Circle- 2. 3(1), Visakhapatnam. 3. The Principal Commissioner of Income Tax, आयकरआयु�त (अपील)/ The Commissioner of Income Tax (Appeals) 4. National Faceless Appeal Centre, Delhi. �वभागीय��त�न�ध, आयकरअपील�यअ�धकरण, �वशाखापटणम/ 5. DR,ITAT, Visakhapatnam गाड�फ़ाईल / Guard file 6. आदेशानुसार / BY ORDER

Sr. Private Secretary ITAT, Visakhapatnam