BRAKE PARTS INDIA PVT LTD,DELHI V. ACIT, 5(1) DELHI, DELHI

ITA 2221/DEL/2022

AI Insights

The case involves Brake Parts India Pvt. Ltd., which appealed against the final assessment order passed by the ACIT for the Assessment Year 2017-18. The primary contention was regarding the TP adjustment made on account of delay in receiving trade receivables from its Associate Enterprise (AE), which was treated as a separate international transaction akin to an unsecured loan. The TPO had made a TP adjustment of Rs.1,68,25,273, charging interest for the delay beyond 30 days. The assessee contested this adjustment, arguing that the impact of receivables was already factored into the working capital adjustment in its TP report. The Tribunal considered various precedents and the specific circumstances of the case, including the terms of trade receivables and the financial practices of the assessee, before arriving at its decision.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 474578 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-01-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2017-2018
• Other Referred Cases: Mckinsey Knowledge Centre India (P) Ltd. vs. PCT, Kusum Health Care (P.) Ltd. vs. CIT, Bechtel India (P.) Ltd. vs. ACIT, Circle-4(2), New Delhi, CIT vs. Cotton Naturals (I) (P.) Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DHARM VEER SINGH
• Assessee Lawyers: SACHIT JOLLY; DECISION OF DELHI HIGH COURT
• Keywords: Additional evidence; Transfer pricing; International transaction; Principle of natural justice
• Section: 143(3); 195; 192; 13; 92CA; 43B; 144C; 92B

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘I’: NEW DELHI BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENT AND SHRI NAVEEN CHANDRA, ACCOUNTANT MEMBER ITA No.2221/Del/2022 (ASSESSMENT YEAR 2017-18) Brake Parts India Private Limited, 236 RG Mall, Sector-9, Naharpur Village, North West, Delhi-110085 PAN:AAGCA5049Q Vs. ACIT-5(1), Delhi (Appellant) (Respondent) Assessee by Shri Sachit Jolly, Sr. Advocate Shri Aditya Rathore, Advocate & Shri Abhyudaya Shankar Bajpai, Advocate Department by Shri Dharm Veer Singh, CIT-DR Date of Hearing 06/01/2025 Date of Pronouncement 29/01/2025 O R D E R PER MAHAVIR SINGH, VP: This appeal by assessee is arising out of the final assessment order passed by DCIT/ACIT, TP 1(1), Delhi for the Assessment Year 2017-18 u/s 143(3) r.w.s. 143C (13) r.w.s 144B of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide dated 15/07/2022. This order was passed in terms of directions issued by 2 ITA No. 2221/Del/2022 Brake Parts India Pvt. Ltd. vs. ACIT DRP u/s 144C of the Act dated 04/05/2022. The Draft Assessment Order was framed by AO, National Faceless Assessment Centre, Delhi u/s 144C of the Act for Assessment Year 2017-18 dated 26/08/2021 in terms of reference from ACIT, Circle 5(1), Delhi, TPO passed Transfer Pricing Adjustments u/s 92CA of the Act vide order dated 24/01/2021. 3. The first issue in this appeal of assessee as regards to the order of AO passed inconsequence to directions issued by DRP making TP Adjustment of Rs.1,68,25,273/- on account of delay in receiving the trade receivables is a separate international transaction akin to unsecured loan entered by the assessee with its Associate Enterprises(AE) and, accordingly, charged interest @ 5.068% for 93.6 days as being number of days over and above 30 days. For this assessee has raised following grounds No.2 to 2.5 which are exhaustive, argumentative and need not be reproduced. 4. Brief facts are that the assessee company is engaged in the business of design, develop, manufacture, prepare, process, buy, sell, re-sell, import, export, deal in all kinds of brake pads/friction products of passenger cars and other motor vehicles. The assessee filed its return income for the relevant Assessment Year 2017-18 and the same was processed CPC, Banglore u/s 143(1)(a) Act vide intimation dated 02/02/2019. Subsequently, assessee’s case was selected for scrutiny assessment for the reason that the assessee has entered into international transactions with respect of lending 3 ITA No. 2221/Del/2022 Brake Parts India Pvt. Ltd. vs. ACIT or borrowing of money with its AE. The AO noted that the assessee has trade receivables from its AE and accordingly it has entered into the borrowing or lending transaction with its AE and had not charged interest. Accordingly, it under reported its income to the extent of Rs.6,06,24,311/-. Hence, he prepared draft assessment order after referring the matter to TPO. The TPO noted that the assessee has entered into international transaction during the relevant assessment year as per audit report submitted in Form No.3CE. He narrated the transaction in his order passed u/s 92CA(3) of the Act page 2 & 3. The TPO noted that the assessee has declared international transaction of trade receivable of Rs.43,82,38,210/- from its AE Brake Parts Inc. LLC, USA as per form 3CEB. He noted that the assessee’s turn over/sales from this party is Rs.129,46,20,676/- during the year, which comes to 33.85% equivalent to receivables. He noted that the trade receivables are as old as at an average of 123.6 days on account of credit to this party for sale of goods. He noted that no enterprise in an uncontrolled environment would provide such a long credit for sale of goods in international trade. Thus, according to him the Arm’s Length Price (ALP) of interest on this long credit/trade receivable needs to be determined under CUP method. The TPO, thereafter discussing the facts of the case i.e., purchase of raw material, sale of raw materials, sale of goods, trade payable, trade receivables and reimbursement of expenses paid, IT Support charges, freight charges paid noted that the assessee has allowed 4 ITA No. 2221/Del/2022 Brake Parts India Pvt. Ltd. vs. ACIT credit period of trade receivables to the extent of Rs.123.6 days at an average. The TPO relying on the decision of the Delhi High Court in the case of Mckinsey Knowledge Centre India (P) Ltd. vs. PCT [(2018) 96 taxmann.com 237 (Delhi) computed the ALP on interest receivables at Rs.4,63,74,506/-. The TPO noted that the assessee was asked to filed details regarding receivables from its AE including details regarding date of issue of voucher of sales, date of receipt, and the amount. Finally, he noted that the legislature by adding clause ( c) to Explanation (i) to section 92B, introduced by the Finance Act, 2012 with effect from assessment year 2012-13 including any type of advance, payments or deferred payments or receivables. The AO referred to particulars (c) of Explanation (i) to Section 92B of the Act. :- “(c) Capital faineance, including any type of long-term or short term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business.” The assessee moved to DRP against TPO’s order and raised objection before DRP. The DRP after going through the details like invoices of sale and purchase and also period of payment, period of accruing of trade receivables during the financial year 2015-16, which are realized during the Financial Year 2016-17 relevant to this Assessment Year 2017-18 and considering remand report dated 21.03.2022 directed TPO to consider the additional evidences vide para. 4.3.2 as under:- 5 ITA No. 2221/Del/2022 Brake Parts India Pvt. Ltd. vs. ACIT “4.3.2 The Panel takes a note from the remand report that the assessee did not respond to the notices of the TPO properly but this is also a fact that the determination of ALP of expenses and also the assessment proceeding u/s 144C are at pre-stage of finalization of the assessment. The Panel also takes a note that the AO's action for not accepting the outstanding receivables on account of sales as unsecure loan is correct. But the spirit of the justice is to be maintained while invoking the provision of Income-tax Act by practicing the principle of the natural justice to the assessee. Therefore, the AO/TPO is directed to consider the assessee's additional evidence on this issue on merit and pass a speaking order before completing the assessment. This ground of objection is disposed off accordingly.” However, the DRP, as prayed by assessee, allowed working capital adjustment vide para 4.5 as under:- “4.5 Prayer for working capital adjustment: On the issue of working capital adjustment, DRP has held in various cases that working capital adjustment should be given in respect of the assessee and its comparables in order to arrive at an accurate and reliable comparison in view of the Rule 10B(3) of the IT Rules, 1962 and for which reliable data has to be provided by the assessee. The Panel has considered the AO's views recorded in the remand report on this issue. However, the TPO is directed to compute the working capital in accordance with OECD Guidelines as follows: i. Compute the average of opening and closing balances of inventories, trade debtors/receivables, trade creditors/payables of both the tested party and the comparables for the relevant year on revenue account only. ii. Compute the net working capital ratio (in percentage) after dividing the net working capital by operating cost/sales or such denominator (as is used in the PLI) both for the tested party and the comparables. iii. Determine the difference between the tested party's ratio with that of each comparable. iv. Multiply the above difference by the interest rate i.e. SBI Prime Lending Rate as on 30th June of the relevant financial year. v. The above adjustments shall be added to the profit margin of comparable companies as finally determined in accordance with the directions of this Panel. 6 ITA No. 2221/Del/2022 Brake Parts India Pvt. Ltd. vs. ACIT vi. Credits received from various group concerns or loans etc., should not be taken into account. This ground of objection is disposed off accordingly.” Aggrieved, assessee filed appeal against directions of DRP before the Tribunal. 5. Now, before us, Ld. Counsel for the assessee filed paper book consisting of pages 1 to 235 i.e. factual paper book and also case laws. The Ld. Counsel for the assessee first of all drew our attention to trade receivables and trade of debts concluded with effect from 01/04/2016 which are enclosed at assessee’s paper book pages 163 to 173. He stated that the maximum outstanding period is 126 days. He drew our attention to the invoices enclosed at page 192 i.e., purchase order dated 12/01/2016 wherein the nomenclature given is as “EX WORKS 120 NET”. He explained that time allowed for trade receivables is 120 days net. He stated that this is on example basis and almost as per invoices the period allowed is 95 days + 1 month i.e., total time allowed is 125 days. He stated that there may be variation of 1 or 2 days in receiving the amount of trade receivables. Alternatively also, he made submission that once DRP has allowed working capital adjustment, in that eventuality, the issue now stands covered in favour assessee by decision of Delhi High Court in the case of Kusum Health Care (P.) Ltd. [2018] 99 taxmann.com 431 (Delhi). He also pointed out that reliance placed by TPO & Ld CIT-DR on the decision of Hon’ble Delhi High Court in the case if 7 ITA No. 2221/Del/2022 Brake Parts India Pvt. Ltd. vs. ACIT McKinsey Knowledge Centre India Pvt. Ltd. (supra) and stated that Hon’ble Delhi High Court for Revenue petition 360/2018 in ITA 461/2017: Dated 16/04/2019 has recalled the decision for MaKinsey Knowledge Center India Pvt. Ltd. (supra) remanded the matter back to Tribunal for fresh consideration. The Hon’ble High Court has recently has remanded this matter back to the file of ITAT vide order dated 07/02/2018 in ITA No.461/2017 & 526/2017. He stated that this matter is pending before the Tribunal. Hence, according to Ld. Counsel for the assessee, this issue has not been crystallized at the level of the High Court but only in the case of Kusum Health Care. This issue has been crystallized that once the assessee undertaken working capital adjustment in the comparable companies selected in its TP report, 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 working capital adjustment 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. This has not been inserted by Hon’ble Delhi High Court that the assessee having factored impact of receivable on the working capital, the further adjustment on account of outstanding receivable would have distorted the picture and re-characterized the transaction. Accordingly, he requested that the TP adjustment is to be deleted. 8 ITA No. 2221/Del/2022 Brake Parts India Pvt. Ltd. vs. ACIT 6. On the other hand, CIT-DR heavily relied on the order of TPO and that of the DRP. He drew our attention to the accounts of the assessee and argued that the assessee is debt company and currently it is paying interest on borrowings to the extent of 42,53,458/-. He drew our attention to trade receivables of assessee at Rs.441,407,587/- as against Revenue from operations at 1,407,195,719/-. Hence, this debt written company and trade debtors without charging interest will under report the income and, accordingly, TPO has rightly made adjustment of this ALP. He also drew our attention to the relevant purchase order but could not answer to the nomenclature in ““EX WORKS 120 NET”dated 12/1/2016 and agreed that these are 120 days but he drew our attention to purchase order Number 500146-753 Rev 0 enclosed at page 195 assessee’s paper book wherein the terms and conditions of the invoices order purchase order is final in term of receivables. He particularly drew our attention to the following clause:- “1. CONTRACT, This Purchase Order (\"Order\") is the entire contract between the entity named as Buyer on the face of the Order, herein referred to as Buyer, and the Seller named on the face of the Order herein referred to as Seller, with respect to the goods or materials ordered and any related services (collectively, \"Goods\"). None of the terms and conditions in this purchase order may be added to, modified, superseded, or otherwise altered written instrument signed by except by an authorized representative of Buyer and delivered by Buyer to Seller. Any documents incorporated or referred to in this Order or in any releases issued to Seller hereunder are a part of this Order, except that any references. to Seller's quotation or other form of offer for the Goods is for information purposes only and Buyer hereby rejects all terms and conditions proposed by Seller therein. These Terms and Conditions (\"Terms\") will apply to all purchases made by Buyer under this Order and any related releases unless modified or waived by any specific different terms stated the face of the 9 ITA No. 2221/Del/2022 Brake Parts India Pvt. Ltd. vs. ACIT Order or release, or by written Supply Agreement signed by an authorized representative of Buyer, regardless of any course in these Terms are of dealing or Industry practice to the contrary, Captions in for convenience only. He further drew our attention to clause 12 regarding payment of invoices which read as under:- “12 INVOICES, PAYMENT, Seller will invoice Buyer for the Goods when shipped. Invoices will be in a form acceptable to Buyer and in compliance with applicable tax regulations. Unless otherwise stated on the face of the Order, invoices will be paid once monthly on a regular schedule on payment terms of 95 days from the date of invoice. All payments be paid once monthly on a be scheduled on the next payment date following The expiration of the 95 days. Buyer may withhold or set off from any invoice payment any amount as to which a bona fide dispute exists under this Order or non-conforming Goods. arising out of any other transaction with Seller. Payment will not constitute acceptance of any defective or non- confirming Goods.” In terms of the above, he stated that the trade receivables outstanding more than 95 days attract interest and, therefore, TPO rightly computed the ALP of the trade receivables and, accordingly, proposed adjustment and the same was confirmed by DRP. As regard another argument or alternative argument of assessee that the trade receivables subsumed capital adjustment, he cited the decision of Co-ordinate Bench of this Tribunal in the case of Bechtel India (P.) Ltd. vs. ACIT, Circle-4(2), New Delhi [2017] 85 taxmann.com 121 (Delhi-Trib) dated 16/05/2017. He also drew our attention to the decision of Hon’ble Delhi High Court in the case of CIT vs. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523 (Delhi). 10 ITA No. 2221/Del/2022 Brake Parts India Pvt. Ltd. vs. ACIT 7. We have heard the rival contention and gone through the facts and circumstances of the case. We find that this issue is squarely covered by the decision of Hon’ble Delhi High Court in the case of PCIT vs. Kusum Health Care (P) Ltd (supra) wherein the Hon’ble High Court has laid down ratio that where the assessee having factored the impact of receivables on the working capital adjustment thereby on its “pricing/profitability vis-à-vis that its comparables, any further adjustment on the basis of outstanding receivables would distort the profitability and re-characterize the transaction. We noted that Hon’ble Delhi High Court in the case of Kusum Health Care Pvt. Ltd. (supra) has held as under: “11. The court finds that the entire focus of the Assessing Officer was on just one assessment year and the figure of receivables in relation to that assessment year can hardly reflect a pattern that would justify a Transfer Pricing Officer concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction. This was clearly impermissible in law as explained by this court in CII v. EKL Appliances Ltd. [2012] 209 Taxman 200/345 ITR 241/345 ITR 241(Delhi). Hence, we are of the view that this issue is covered by the decision of Hon’ble Delhi High Court in the case of Kusum Health Care Pvt. Ltd. (supra). As regards to merits of the case, we need not to go into the same as we have accepted the alternative contention of the assessee. 11 ITA No. 2221/Del/2022 Brake Parts India Pvt. Ltd. vs. ACIT 8. Next issue as regards to Corporate Taxation i.e., addition made by disallowance the provisions of gratuity u/s 43B of the Act amounting to Rs.17,49,699/-. For this, assessee has raised following ground No.5:- “5. That on the facts and circumstances of the case and in law, the Ld. AO/Central Processing Cell of Income Tax Department, Bangalore (CPC) has erred in confirming proposed disallowance of INR 17,49,699 (representing provision for gratuity) under section 438 of the Act on the premise that such expenditure has not been disallowed without appreciating the fact that the said amount has been duly disallowed by the Appellant in return of Income.” 9. We have heard the rival contention and gone through the facts and circumstances of the case, we noted that the assessee has already added the provision of gratuity in its computation of income, which is not disputed by Ld. CIT-DR, however, to verify the same, we remit this issue to back to the file of the AO, who will verify the computation of income, whether the provisions of gratuity has been added by the assessee and not claim any further deduction. Hence, we remit this issue back to the file of the AO. 10. The next ground of this appeal is as regards to the order of DRP confirming the disallowance to Rs.2,99,788/- made on account of late payment towards employee’s contribution to provident fund/ESI as prescribed under respective adds. 11. At the outset, the Ld. Counsel for the assessee conceded this ground and stated that the issue is covered by decision of Hon’ble Supreme Court of India in the case of Checkmate Services Pvt. Ltd. 12 ITA No. 2221/Del/2022 Brake Parts India Pvt. Ltd. vs. ACIT vs. CIT, (2022) 448 ITR 518 (SC).Since, payments are belated payments in terms of respective statutes of ESI and PF Act, and, hence, appeal of the assessee on this issue is dismissed. 12. In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced on 29th January, 2025. Sd/- Sd/-/- (NAVEEN CHANDRA) (MAHAVIR SINGH) ACCOUNTANT MEMBER VICE PRESIDENT Dated: 29/01/2025 Pk/sps Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI 13 ITA No. 2221/Del/2022 Brake Parts India Pvt. Ltd. vs. ACIT "