PHOENIX LAMPS LTD.,NOIDA vs. DCIT, NOIDA

Identical issues are involved in both these appeals, hence, they are taken up together and disposed of by this common order for the sake of convenience. Let us take up the appeal of the assessee in for AY 2011-12 first.

Ground No.1 raised by the assessee is general in nature and does not require any specific adjudication.

Ground Nos.2 to 4.5 raised by the assessee are challenging the transfer pricing adjustment made on account of alleged corporate guarantee and alleged standby letter of credit given by the assessee on behalf of its associate enterprise (AE).

We have heard the rival submissions and perused the material available on record. The assesse, Phoenix Lamps Ltd is engaged in the business of manufacturing and trading of Automative Halogen Lamps, CFL’s (Compact Fluorescent Lamps) and General Lighting Lamps. Auto Halogen Lamps are supplied to major original equipment manufacturers (OEMs) in Automobile Industry, original lamp manufacturers (OLMs) are also sold in after sales market in India and outside India. CFLs are supplied to the domestic as well as industrial markets while General Lighting lamps are mainly sold in domestic market though its depots situated in various cities across India. The international transactions of the assessee as tabulated in the order of the ld. DRP are as under:- S.No. Nature of Transaction Method Selected Amount (INR) 1. Export of automotive lamps Comparable 34,25,33,470 Uncontrolled Price 2. Standby letter of credit (SBLC for No Benchmarking 6,32,40,000 short) Required 3. Corporate Guarantee (CG for No Benchmarking 10,71,86,440 short) required

The ld. AO was of the view that the transactions in relation to Corporate Guarantee (CG) and standby letter of credit (SBLC) were international transactions and proceeded to make a reference to the ld. TPO for determining the arm’s length price of the international transactions of the assessee. In other words, according to the ld. TPO, the assessee had granted corporate guarantee on behalf of Trifa Lamps Gmbh and Luxite Lamps Sarl who are alleged associated enterprises of the assessee during the year under consideration. It has been the consistent stand of the assessee that master agreement for sale and purchase of assets in Europe was dateless and that pursuant to this agreement only, the assessee was to give CG and SBLC on behalf of the two parties mentioned, supra. But, the transaction did not materialize at all and, accordingly, the assessee did not give CG and SBLC on behalf of the aforesaid two parties. Accordingly, it was pleaded vehemently that the aforesaid two parties would not fall within the definition of associate enterprises per se and, hence, it cannot even be an international transaction as no international transaction per se was carried on. Accordingly, no benchmarking is required to be done by the assessee with regard to the same. This transaction pursuant to an agreement though not dated and though not acted upon, still, as a matter of abundant caution had been reflected by the assessee as an international transaction in the transfer pricing study report.

The ld. TPO, however, did not agree to the contentions of the assessee and proceeded to treat both CG and SBLC as being extended or intended to be extended by the assessee for the benefit of AEs, to be international transactions and, accordingly, proceeded to benchmark the same on ad hoc basis without applying any method prescribed in the provisions of section 92C of the Act r.w.r 10B of the IT Rules. The ld. TPO observed that the CG and SBLC facility advanced to Trifa Lamps GmbH was part of overall proposed acquisition deal and was given under the supposition that these entities would be eventually acquired as subsidiaries.

The ld. DRP admitted the fact that the master agreement for sale and purchase of assets in Europe dateless. Having agreed to the said fact, the ld. DRP proceeded to uphold the action of the ld. TPO. Final assessment order was passed pursuant to the directions of the ld. DRP making the transfer pricing adjustment in respect of CG and SBLC intended to be issued by the assessee on behalf of its AE. Aggrieved, the assessee is in appeal before us.

We find that the ld. AR drew our attention to the annual report of the assessee company for AY 2011-12 wherein in the Director’s Report, it has been specifically mentioned under the head ‘Acquisition of assets and trademarks of companies in Europe’ as under:- “Since the terms & conditions of the various agreements entered into by the parties could not be fulfilled either in terms of spirit or by action, the Board of Directors decided that the acquisition of overseas entities be called off. Further, as per the terms of the Agreements, the transaction shall get RESTITUTED and the Seller shall be required to refund the purchase price towards sale and purchase of the Sale Shares / equity investment and / or unsecured loans made by the Purchaser to the Company. Accordingly, the accounts of the subsidiaries have not been consolidated with the Company's accounts as on 31.03.11. The Directors of the Company are also of the opinion that all the dues from overseas companies are fully recoverable, including the Corporate guarantee and SBLC aggregating to Euro 2.7 million.”

In any case, we find that the CG and SBLC was intended to be issued only from 01.04.2011 which falls in AY 2012-13. Hence, this fact goes to prove categorically that no guarantee/SBLC was neither intended nor given by the assessee on behalf of the aforesaid two parties upto 31.03.2011. Hence, there is no international transaction at all carried out by the assessee. In any case, only in the event of acquisition of the aforesaid two overseas entities by the assessee, they would become Associated Enterprises in the capacity of subsidiaries. We hold that the assessee including these transactions of CG and SBLC intended to be issued as an international transaction in its transfer pricing study report, is only as a matter of abundant caution and hence the argument of the assessee in this regard holds lot of force. In the absence of any international transaction and in the absence of any existence of AE, there is no requirement of any benchmarking. Hence, the transfer pricing adjustment made on the alleged issuance of CG and SBLC is hereby directed to be deleted for the AY 2011-12. Accordingly, grounds No.2 to 4.5 raised by the assessee are allowed on merits.

Grounds No.5 and 5.1 raised by the assessee is with regard to transfer pricing adjustment made on account of interest on outstanding receivables from AE.

We have heard the rival submissions and perused the material available on record. It is not in dispute that the assessee had made export of goods to its AEs and have realized export proceeds thereon with delay beyond the agreed credit period of 60 days given to AE. The TPO extended the credit period to 70 days. The details of bill-wise outstanding receivables from AEs and non-AEs were sought for by the Ld. TPO. The same was provided by the assessee. The ld. TPO concluded that the assessee had literally carried out capital financing to its AE by extending credit period for realization of export dues beyond the agreement and this capital financing would become an international transaction in terms of Explanation (iii) to section 92B of the Act. It is not in dispute that working capital adjustment has been duly granted by the ld. TPO in respect of the export transactions carried out with the AE. Hence, it was argued that once the working capital adjustment is granted by the assessee which is worked out by taking into account the outstanding trade receivables and outstanding trade payables at the end of the year, there is no need for separate imputation of interest on outstanding receivables from the AE as the same would get subsumed in working capital adjustment itself. Reliance was placed in support of this argument on the decision of the Hon’ble Jurisdictional High Court in the case of PCIT vs. Kusum Healthcare Pvt. Ltd. in ITA 765/2016 dated 25.04.2017.

We have gone through the judgement of the Hon’ble Delhi High Court in the case of Kusum Healthcare Pvt. Ltd (supra) and we find that the Court has held as under:- “8. Aggrieved by the said order, the Assessee filed an appeal before the ITAT. By the impugned order dated 31th March 2015, the ITAT set aside the assessment order. The ITAT noted that the Assessee had undertaken working capital adjustment for the comparable companies selected in its transfer pricing report. It was further noted that “the differential impact of working capital of the Assessee vis-à-vis its comparables had already been factored in the pricing/profitability” which was more than the working capital adjusted margin of the comparables and, therefore, “any further adjustment to the margins of the Assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified.” 9. Mr. Raghvendra Singh, learned counsel appearing for the Revenue submitted that the ITAT overlooked the fact that the expression “international transaction” as defined in Explanation (i)(c) to Section 92B of the Act included “payments or deferred payment or receivable or any other debt arising during the course of business”, and therefore, the outstanding receivables could by themselves constitute an international transaction. He further referred to the OCED Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Paras 3.48 & 3.49 under Chapter III para A.6.1 of the said Guidelines titled “Different types of comparability adjustments” spoke of the need to eliminate differences that may arise from different accounting practices between controlled and uncontrolled transactions. In particular, it was noted under para 3.49 that “a significantly different level of relative working capital between the controlled and uncontrolled parties may result in further investigation of the comparability characteristics of the potential comparable.” Mr. Singh submitted that the ITAT erred in disagreeing with the TPO, who had characterised the outstanding receivables as an international transaction by itself which required benchmarking. 10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 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 characterised 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-à-vis the receivables for the 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-à-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction. This was clearly impermissible in law as explained by this Court in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi).”

From the perusal of the aforesaid decision, it is amply clear that the assessee is duty-bound to prove before the ld. TPO, the pattern of realization of export proceeds from its AEs in the past as well as in the subsequent years. In the instant case, the assessee had merely given the bill wise outstanding details from AEs together with the corresponding date of realization thereon. Admittedly, these details pertained only for the year under consideration. But, in order to give proper weightage to provisions of Explanation (iii) to section 92B of the Act and also to the decision of the Hon’ble Delhi High Court in the case of Kusum Health Care Pvt. Ltd. (supra), the assessee is directed to furnish the complete details of bill-wise outstanding in the preceding three years, for the year under consideration and for subsequent two years. This data would certainly make the ld. TPO to understand the regular pattern in which the export proceeds are realized either before the agreed credit period or beyond the agreed credit period.

In the instant case, the assessee is exporting goods to its AEs as well as to its Non-AEs. It has been the argument of the assessee that it is not charging interest on delayed receivables from both AEs and Non-AEs. In order to give the true weightage to the provisions of Chapter X of the Act, every transaction carried out with the AE is to be benchmarked if it falls within the ambit of an international transaction as defined in Section 92B of the Act read with Explanation thereon. Hence interest on delayed receivables from AEs would have to be benchmarked separately by the assessee.

Further, we have absolutely no quarrel to the proposition laid down by the Hon’ble Delhi High Court that once working capital adjustment is granted to the assessee, there is no need for further imputation of interest on outstanding receivables at the end of the year as the same gets subsumed in the working capital adjustment. However, it has to be seen that the ld. TPO, in the instant case, had granted credit period of 70 days to the assessee to recover its dues from its AEs. Hence, the ld. TPO is directed to look into the following:- (a) In respect of bills raised on or after 01.04.2010 to its AEs, what was the date of realization and whether the same has been realized within the credit period allowed of 70 days. If not, interest is to be imputed on those bills also. (b) In respect of outstanding bills as on 01.04.2010 (i.e., opening balance) from these AEs, what was the date of realization thereof and if the bills are 70 days, interest is to be imputed on those bills also.

In our considered opinion, the aforesaid directions to ld. TPO to recompute the interest on outstanding receivables would meet the ends of justice as it would be in true spirit of the decision of the Hon’ble Delhi High Court and also the provisions of Explanation (iii) to section 92B of the Act. With these directions, ground Nos.5 and 5.1 raised by the assessee are allowed for statistical purposes.

Ground Nos.6, 7 and 8 are general in nature and does not require any specific adjudication.

Ground No.9 is regarding the initiation of penalty proceedings u/s 271(1)(c) of the Act which would be premature for adjudication at this stage, hence, dismissed.

In the result, the appeal of the assessee is partly allowed for statistical purposes.

Ground No.2 to 4.5 raised by the assessee for AY 2012-13 are exactly identical to those raised for AY 2011-12. 10

We have heard the rival submissions and perused the material available on record. We have also held hereinabove that the CG and SBLC were intended to be given on behalf of its AEs only from 01.04.2011, but, the fact is that the decision to acquire the overseas entities were duly called off by the assessee company. This fact is evident from the facts mentioned in the Director’s report of the assessee company reproduced supra. Hence, the ld. AR vehemently argued that even for this year, no CG or SBLC was ever extended by the assessee on behalf of the aforesaid two overseas entities. Accordingly, there were no AEs and no international transaction carried out by the assessee warranting any benchmarking thereon. In this regard, the Bench posed a query to the ld. AR as to whether the acquisition transaction had fructified in future and called for a written confirmation from the assessee in this regard. Accordingly, the ld. AR filed a letter before us confirming the fact that the agreement for acquisition was finally done on 3rd December, 2012 which falls in AY 2013-14. The ld. AR also placed on record the annual report of FY 2012-13 relevant to AY 2013-14 wherein in the Director’s Report, it has been mentioned as under:- “During the year, Company completed the acquisition of 100% shareholding of International Lamps Holding Company SA, Luxembourg and with this international Lamps Holding Company SA, Luxembourg, has become a 100% wholly owned subsidiary of Halonix Limited. With this acquisition Halonix has acquired assets and business of its distributors (Luxlite Lamps Sarl and Trifa Lamps Germany GmbH) in Europe, including of brands ‘Luxlamps’ and ‘Trifa’.”

Pursuant to this acquisition, the aforesaid overseas subsidiaries were also duly reflected as related party under Note No.38 of related party disclosure in the annual 11 212(3) of the Companies Act, 1956. These facts categorically go to prove that overseas subsidiaries were actually acquired by the assessee company only on 03.12.2012 which falls in AY 2013-14. Hence, for AY 2012-13, these two entities i.e., Luxlite Lamps Sarl and Trifa Lamps Germany GmbH cannot be considered as AEs of the assessee and once these parties are held to be non-AEs, the transactions, if any, carried out with them would not fall within the definition of international transactions as per section 92B of the Act and thereby no benchmarking is required thereon. Accordingly, we direct the ld. TPO to delete the transfer pricing adjustment made in respect of the alleged extension of CG and SBLC on behalf of these two parties. Accordingly, ground Nos. 2 to 4.5 raised by the assessee are allowed on merits.

The grounds No.5 and 6 raised by the assessee for AY 2012-13 are identical to grounds No.5 and 5.1 raised for AY 2011-12. The decision rendered thereon would apply with equal force for AY 2012-13 also. Accordingly, grounds No.5 and 6 are allowed for statistical purposes.

The ground No.7 raised by the assessee is with regard to brought forward loss not allowed to be set off and full credit for advance tax not given while computing the tax liability. These two matters require factual verification and, hence, they are remanded to the file of the ld. AO for denovo adjudication in accordance with law.

The ground No.8 raised by the assessee is challenging the interest levied u/s 234D of the Act and non granting of interest u/s 244A of the Act. It was pleaded by the ld. AR that no refund was ever received by the assessee for the instant assessment year. This matter require factual verification and, accordingly, the ld. AO is directed to charge interest u/s 234D, if any, in accordance with law. Similarly, the ld. AO is also directed to grant interest u/s 244A in accordance with law, if, ultimately, the order giving effect results in refund.

The ground No.11 is regarding the initiation of penalty proceedings u/s 271(1)(c) of the Act which would be premature for adjudication at this stage, hence, dismissed.

In the result, the appeal of the assessee is partly allowed for statistical purposes.