Dell International Services India Private Limited, Bangalore V. JCIT, Bangalore

ITA 308/BANG/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0322 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 3 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 16-05-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 05-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P CHANDRASHEKAR
• Assessee Lawyers: SAMPATH RAGHUNATHAN
• Keywords: Transfer pricing; International transaction; Retrospective amendment; Wholly owned subsidiary; Notional interest
• Section: 143(3); 92B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO , JUDICIAL MEMBER I.T. (T.P.) A. NO. 308 /BANG/201 5 (ASSESSMENT YEAR : 20 10 - 11 ) M/S. DELL INTERNATIONAL SERVICES INDIA PVT . LTD., NO.12/1, 12/2A, 13/1A, DIVYASHREE GARDENS, CHALLAGHATTA VILLAGE, VARTHUR HOBLI, BANGALORE - 560 071 PAN AABCD 1741M VS. JOINT COMMISSIONER OF INCOME TAX, LTU, BANGALORE. APPELLANT RESPONDENT. APPELLANT BY : SHRI SAMPATH RAGHUNATHAN, ADV OCATE. RESPONDENT BY : SHRI P. CHANDRASHEKAR, CIT (D.R). DATE OF H EARING : 16.05.2016. DATE OF P RONOUNCEMENT : 17 .6 . 201 6 . O R D E R PER SHRI VIJAY P AL RAO, J. M. : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ASSESSMENT ORDER DT.19.1.2015 PASSED UNDER SECTION 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 2 IT (T.P) A NO. 308 /BANG/ 2015 1961 (IN SHORT 'THE ACT') IN PURSUANT TO THE DIREC TIONS OF THE DISPUTE RESOLUTION PANEL (IN SHORT DRP ) DT.21.11.2014 FOR THE ASSESSMENT YEAR 2010 - 11. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS : - 1. THE LEARNED ASSESSING OFFICER AND THE LEARNED TRANSFER PRICING OFFICER GROSSLY ERRED IN DETERMI NING A TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF THE INTEREST ON OUTSTANDING RECEIVABLES AMOUNTING TO R S. 60,20,331 . 2. THE LEARNED TPO AND LEARNED AO HAVE ERRED BY TREATING RECEIVABLES FROM AE AS A SEPARATE INTERNATIONAL TRANSACTION. 3. THE LEARNED TPO AND LEAR NED AO HAS ERRED IN TREATING OUTSTANDING RECEIVABLE FROM THE ASSOCIATED ENTERPRISE AS LOAN AND COMPUTING THE NOTIONAL INTEREST TO MAKE UPWARD ADJUSTMENT. 4. THE LEARNED TPO AND LEARNED AO HA VE ERRED IN BENCHMARKING A NOTIONAL TRANSACTION. 5. THE LEARNED TPO AN D LEARNED AO HA VE ERRED BY IGNORING THE FACT THAT THE ASSESSE HAS DONE A BUSINESS TRANSACTION (SALE OF SOFTWARE DEVELOPMENT SERVICES) WITH THE AE AT AN ARM S LENGTH AND HENCE THE CONSEQUENTIAL OUTSTANDING RECEIVABLE IS COVERED IN THE ARM S LENGTH PRICING. 6. THE LEARNED TPO AND LEARNED AO HAVE ERRED BY IGNORING THE FACT THAT THE ASSESSE HAS EARNED HIGHER MARGIN THAN THE COMPARABLE AND HENCE THE ANY NOTIONAL INTEREST ON THE EXTENDED CREDIT PERIOD IS FACTORED IN THE PRICING ITSELF AND NOT TO BE CHARGED ADDITION ALLY FROM THE AE. WITHOUT PREJUDICE GROUNDS 7. THE LEARNED TPO AND LEARNED AO HAVE ERRED BY GRANTING A CREDIT PERIOD OF ONLY ONE MONTH AS AGAINST THE NORMAL BUSINESS PRACTICE OF ALLOWING A CREDIT LIMIT OF UPTO 6 MONTHS. 8. THE LEARNED TPO AND LEARNED AO HAV E ERRED BY BENCHMARKING THE NOTIONAL INTEREST BASIS PLR OF SBI PLUS 150 BASIS POINT . THE RECEIVABLES BEING USD TRANSACTION THE BASIS FOR BENCHMARKING THE NOTIONAL LOAN TRANSACTION SHOULD BE THE LIBOR RATE WHICH IS RECOMMENDED APPROACH IN CASE OF FOREIGN CU RRENCY LOANS . 3 IT (T.P) A NO. 308 /BANG/ 2015 THE APPELLANT CRAVES LEAVE TO ADD, ALTER, RESCIND AND MODIFY THE GROUNDS HEREIN ABOVE OR PRODUCE FURTHER DOCUMENTS, FACTS AND EVIDENCE BEFORE OR AT THE TIME OF HEARING OF THIS APPEAL. FOR THE ABOVE AND ANY OTHER GROUNDS WHICH MAY BE RAIS ED AT THE TIME OF HEARING, IT IS PRAYED THAT NECESSARY RELIEF MAY BE PROVIDED. 3. THE ASSESSEE IS A 100% SUBSIDIARY OF GALE TECHNOLOGY INC., USA. THE ASSESSEE IS PRIMARILY ENGAGED IN SOFTWARE DEVELOPMENT FOR ITS U.S. PARENT COMPANY. IT ACTS AS BAC K OFFICE CONTRACT SERVICE PROVIDER TO GALE TECHNOLOGY INC., USA AND DOES NOT SERVE ANY EXTERNAL CUSTOMER. THEREFORE, THE ASSESSEE IS PROVIDING SERVICES TO ITS ASSOCIATED ENTERPRISE (IN SHORT AE ) AS A CAPTIVE SERVICE PROVIDER. THE ASSESSEE HAS REPORTED THE FOLLOWING INTERNATIONAL TRANSACTIONS : DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD UNDERTAKEN FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES : S.NO. INTERNAT IONAL TRANSACTIONS VALUE IN TRANSCTIONS. 1. SOFTWARE DEVELOPMENT SERVICES RS.8,38,56,154/ - 4. THE TPO ACCEPTED THE SOFTWARE DEVELOPMENT SERVICES PROVIDED TO ITS AE AT ARM S LENGTH. HOWEVER, THE TPO PROPOS ED TO MAKE AN ADJUSTMENT REGARDING INTEREST ON OUTSTANDING RECEIVABLE BY ADOPTING COMPARABLE UNCONTROLLED PRICE METHOD ( CUP ) AS AGAINST NIL SHOWN BY THE ASSESSEE. THE TPO ADOPTED BANK PRIME LENDING RATE ( PLR ) AT ARM S LENGTH PRICE ( ALP ) IN RESPECT O F THE INTEREST ON OUTSTANDING RECEIVABLE FROM AE AND ACCORDINGLY MADE AN ADDITION OF 4 IT (T.P) A NO. 308 /BANG/ 2015 RS.60,20,331. THE ASSESSEE CHALLENGED THE ACTION OF THE ASSESSING OFFICER/TPO BEFORE THE DRP BUT COULD NOT SUCCEED. 5. BEFORE US, THE LEARNED AUTHORISED REPRESENTATI VE OF THE A SSESSEE HAS SUBMITTED THAT THE CREDIT PERIOD ALLOWED TO THE AE REGARDING RECEIVABLE ON ACCOUNT OF SERVICE PROVIDED TO THE AE IS NOT AN INDEPENDENT INTERNATIONAL TRANSACTION, THEREFORE, NO ADJUSTMENT IS CALLED FOR ON ACCOUNT OF THE CREDIT PERIOD ALLOWED BY THE ASSESSEE ON THE RECEIVABLE FROM THE AE. THE LEARNED AUTHORISED REPRESENTATIVE HAS FURTHER CONTENDED THAT IT IS NOT AN ADVANCE OR LOAN GIVEN TO THE ASSESSEE BUT IT IS ONLY RECEIVABLE AGAINST THE SERVICE PROVIDED BY THE ASSESSEE TO THE AE AND THE SAID TRANSACTION OF SOFTWARE DEVELOPMENT SERVICES PROVIDED TO THE AE HAS BEEN ACCEPTED BY THE TPO AT ARM S LENGTH THEN NO SEPARATE ADJUSTMENT CAN BE MADE ON ACCOUNT OF NOTIONAL INTEREST ON THE RECEIVABLE. THE LD. AR FURTHER SUBMITTED THAT THE ASSESSE E HAS NOT INCURRED ANY INTEREST EXPENDITURE AND THEREFORE THERE CANNOT BE ANY COST INCURRED BY THE ASSESSEE IN RESPECT OF THE CREDIT PERIOD ALLOWED ON RECEIVABLE FROM AE. HE HAS RELIED UPON THE DECISION DT.31.3.2016 OF MUMBAI BENCH OF ITAT IN THE CASE OF S IRO CLINPHARM PRIVATE LIMITED VS. DCIT IN ITA NO.2618/MUM/2014 AND SUBMITTED THAT THE TRIBUNAL HAS HELD THAT THE EXPLANATION 2 TO SECTION 92B OF 5 IT (T.P) A NO. 308 /BANG/ 2015 THE ACT HAS BEEN INSERTED BY THE FINANCE ACT, 2012 WITH RETROSPECTIVE EFFECT FROM 1.4.20 1 2. HOWEVER, THE RET ROSPECTIVE AMENDMENT DOES NOT EXTEND THE SCOPE OF INTERNATIONAL TRANSACTION DEFINED U/S. 92B. THE LD. AR HAS POINTED OUT THAT THE TRIBUNAL HAS CONSIDERED THE T.P. PROVISIONS AT PAR WITH GAAR AND THEREFORE THE RETROSPECTIVE AMENDMENT CANNOT TRIGGER THE LEV Y OF TAXES ON THE TRANSACTION COMPLETED BEFORE THE AMENDMENT BROUGHT IN STATUTE. THE LD. AR THEN RELIED UPON THE DECISION OF THE CO - ORDINATE BENCH DT.24.4.2015 IN THE CASE OF INGERSO L L RAND (INDIA) LTD. VS. ACIT REPORTED IN 57 TAXMAN.COM 413 AND SUBMITTED THAT CO - ORDINATE BENCH HAS HELD THAT NO NOTIONAL ADJUSTMENT CAN BE MADE ON ACCOUNT OF INTEREST ON DELAYED PAYMENT IN COLLECTION OF RECEIVABLE FROM AE WHEN THERE IS NO SUCH AGREEMENT BETWEEN THE PARTIES FOR CHARGING INTEREST ON THE LATE PAYMENT. HE HAS CO NTENDED THAT IN THE CASE OF ASSESSEE THERE IS NO AGREEMENT BETWEEN THE PARTIES FOR CHARGING OF INTEREST. THE LD. AR THEN RELIED UPON THE DECISION OF HYDERABAD BENCH DT.16.10.2015 IN CASE OF PEGA S YSTEM S WORLDWIDE INDIA PVT. LTD. VS. ACIT IN ITA NO.1758/H YD/2014 AND SUBMITTED THAT A SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL BY HOLDING THAT WHEN THE ASSESSEE HAS NO INTEREST LIABILITY AT ALL, THEN NOTIONAL INTEREST CANNOT BE BROUGHT TO TAX UNDER THE PROVISIONS OF TRANSFER PRICING. ALTERNATIVELY, THE LD. 6 IT (T.P) A NO. 308 /BANG/ 2015 A R HAS SUBMITTED THAT THE TPO HAS APPLIED ONE MONTH CREDIT PERIOD AS BENCH - MARK AND ALSO APPLIED THE BANK PLR AS BENCH - MARK INTEREST RATE WHICH IS NOT JUSTIFIED A S THE PROPER CREDIT PERIOD ON NORMAL CASE SHOULD BE SIX MONTHS. THUS THE LD. AR HAS SUBMITTED THAT THE BENCH MARK INTEREST SHOULD BE LIBOR RATE. 6. ON THE OTHER HAND, THE LD. DR HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT EXTENDING THE CREDIT PERIOD ON RECEIVABLE FROM AE IS CLEARLY AN INTERNATIONAL TRANSACTION AS PE R THE PROVISIONS OF SECTION 92B AND EXPLANATION 2 TO THE SAID SECTION. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT ALLOWING A CREDIT PERIOD ON RECEIVABLE FROM AE IS NOT AN INDEPENDENT INT ERNATIONAL TRANSACTION HOWEVER, IT IS PART OF THE MAIN INTERNATIONAL TRANSACTION OF PROVIDING SOFTWARE DEVELOPMENT SERVICES BY THE ASSESSEE TO ITS A ES. THERE ARE SERIES OF DECISI ONS WHEREIN THE TRIBUNAL HAS CONSIDERED THIS TRANSACTION AS PART OF THE MAIN INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND ITS AE AND THEREFORE THE TREATMENT OF THE SAME AT THE TIME OF DETERMINING THE ARM S LENGTH OF THE INTERNATIONAL TRANSACTION HAS TO BE GIVEN IN THE SHAPE OF ALLOWING THE NEC E SSARY ADJUSTMENT IN THE COMPARA BLE PRICES ON ACCOUNT OF WORKING CAPITAL ADJUSTMENT. WE FIND THAT THE MUMBAI 7 IT (T.P) A NO. 308 /BANG/ 2015 BENCH OF THE TRIBUNAL IN THE CASE OF GOLDSTAR JEWELLERY LTD . IN ITA NO.6570/MUM / 2012 VIDE ORDER DT.14.1.2015 AS WELL AS THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF KUS UM HEALT H CARE PVT. LTD. VS. ACIT IN ITA NO.6814/DEL/2014 VIDE ORDER DT.31.3.2015 HAS TAKEN THIS VIEW THAT ALLOWING THE CREDIT PERIOD OVER AND ABOVE NORMAL CREDIT PERIOD PREVAILING IN THE INDUSTRY IS CERTAINLY RELEVANT AND PART OF THE MAIN INTERNATIONAL TRANSACTION OF SALE OR PURCHASE BETWEEN THE ASSESSEE AND THE AE. HOWEVER, IT WAS HELD THAT IT CANNOT BE TREATED AS AN INDEPENDENT INTERNATIONAL TRANSACTION DE HORSE THE MAIN INTERNATIONAL TRANSACTION BETWEEN THE PARTIES. WE FURTHER NOTE THAT AN IDENTICAL ISSUE WAS CONSIDERED AND DECIDED BY THE MUMBAI BENCH OF THIS TRIBUNAL IN THE CASE OF INFORMATION SYSTEMS RESOURCE CENTRE PVT. LTD. VS. ACIT IN ITA NO.7757/MUM/2012 AND C.O. 282/MUM/2013 VIDE ORDER DT.29.5.2015 IN PARAS 11 TO 13 AS UNDER : 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. IN THE PRESENT CASE, THE SALE TRANSACTION OF THE ASSESSEE WITH ITS A.E. HAVE BEEN ACCEPTED BY THE TRANSFER PRICING OFFICER / ASSESSING OFFICER AT ARM'S LENGTH AND NO ADJUSTMENT HAS BEEN MADE IN RESPECT OF THE SALE TRANSACTION. HOWEVER, THE TRANSFER PRICING OFFICER HAS MADE THE ADJUSTMENT ON ACCOUNT OF CREDIT PERIOD PROVIDED BY THE ASSESSEE TO THE A.E. ON REALISATION OF SALE PROCEEDS. AT THE OUTSET, WE NOTE THAT AN IDENTICAL ISSUE HAS BEEN CON SIDERED BY THE CO ORDINATE BENCH OF THE TRIBUNAL, MUMBAI BENCHES, IN GOLDSTAR JEWELLERY LTD. (SUPRA), VIDE PARA 8, HELD AS UNDER: 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND RELEVANT MATERIAL ON RECORD. THE ASSESSEE HAS REPORTED INTERNATIONAL TRANSA CTION IN ITS TP REPORT REGARDING SALE TO ITS AE FROM MANUFACTURE OF JEWELLERY UNITS AND DIAMOND TRADING UNIT. THE TPO ACCEPTED THE PRICE CHARGED BY THE ASSESSEE FROM AE AT ARM S LENGTH. HOWEVER, THE TPO HAS MADE THE ADJUSTMENT ON ACCOUNT OF NOTIONAL INTERE ST FOR THE EXCESS PERIOD ALLOWED BY THE ASSESSEE TO AE FOR REALIZATION OF DUES. THE TPO APPLIED 18.816% PER 8 IT (T.P) A NO. 308 /BANG/ 2015 ANNUM AS ARM S LENGTH ON THE OVER DUE AMOUNTS OF AE AND PROPOSED ADJUSTMENT OF RS. 2,49,95,139/ - . THE DRP THOUGH CONCURRED WITH THE VIEW OF THE ASSE SSING OFFICER/TPO ON THE ISSUE OF INTERNATIONAL TRANSACTION, HOWEVER, THE ADJUSTMENT WAS REDUCED BY APPLYING THE INTEREST RATE OF 7% INSTEAD OF 18.816% APPLIED BY THE TPO. THE FIRST ISSUE RAISED BY THE ASSESSEE IS WHETHER THE AGGREGATE PERIOD EXTENDED BY T HE ASSESSEE TO THE AE WHICH IS MORE THAN THE AVERAGE CREDIT PERIOD EXTENDED TO THE NON - AE WOULD CONSTITUTE INTERNATIONAL TRANSACTION. WE ARE OF THE VIEW THAT AFTER THE INSERTION OF EXPLANATION TO SECTION 92B(1), THE PAYMENT OR DEFERRED PAYMENT OR RECEIVABL E OR ANY DEBT ARISING DURING THE COURSE OF BUSINESS FALL UNDER THE EXPRESSION INTERNATIONAL TRANSACTION AS PER EXPLANATION. THEREFORE, IN VIEW OF THE EXPANDED MEANING OF THE INTERNATIONAL TRANSACTION AS CONTEMPLATED UNDER CLAUSE (I) (E) OF EXPLANATION TO S ECTION 92B(1), THE DELAY IN REALIZATION OF DUES FROM THE AE IN COMPARISON TO NON - AE WOULD CERTAINLY FALLS IN THE AMBIT OF INTERNATIONAL TRANSACTION. HOWEVER, THIS TRANSACTION OF ALLOWING THE CREDIT PERIOD TO AE ON REALIZATION OF SALE PROCEEDS IS NOT AN IND EPENDENT INTERNATIONAL TRANSACTION BUT IT IS A CLOSELY LINKED OR CONTINUOUS TRANSACTION ALONG WITH SALE TRANSACTION TO THE AE. THE CREDIT PERIOD ALLOWED TO THE PARTY DEPENDS UPON VARIOUS FACTORS WHICH ALSO INCLUDES THE PRICE CHARGED BY THE ASSESSEE FROM PU RCHASER. THEREFORE, THE CREDIT PERIOD EXTENDED BY THE ASSESSEE TO THE AE CANNOT BE EXAMINED INDEPENDENTLY BUT HAS TO BE CONSIDERED ALONG WITH THE MAIN INTERNATIONAL TRANSACTION BEING SALE TO THE AE. AS PER RULE 10A(D) IF A NUMBER OF TRANSACTIONS ARE CLOSEL Y LINKED OR CONTINUOUS IN NATURE AND ARISING FROM A CONTINUOUS TRANSACTIONS OF SUPPLY OF AMENITY OR SERVICES THE TRANSACTIONS IS TREATED AS CLOSELY LINKED TRANSACTIONS FOR THE PURPOSE OF TRANSFER PRICING AND, THEREFORE, THE AGGREGATE AND CLUBBING OF CLOSEL Y LINKED TRANSACTION ARE PERMITTED UNDER SAID RULE. THIS CONCEPT OF AGGREGATION OF THE TRANSACTION WHICH IS CLOSELY LINKED IS ALSO SUPPORTED BY OECD TRANSFER PRICING GUIDELINES. IN ORDER TO EXAMINE WHETHER THE NUMBER OF TRANSACTIONS ARE CLOSELY LINKED OR C ONTINUOUS SO AS TO AGGREGATE FOR THE PURPOSE OF EVALUATION WHAT IS TO BE CONSIDERED IS THAT ONE TRANSACTION IS FOLLOW - ON OF THE EARLIER TRANSACTION AND THEN THE SUBSEQUENT TRANSACTION IS CARRIED OUT AND DEPENDENT WHOLLY OR SUBSTANTIALLY ON THE EARLIER TRAN SACTION. IN OTHER WORDS, IF TWO TRANSACTIONS ARE SO CLOSELY LINKED THAT DETERMINATION OF PRICE OF ONE TRANSACTION IS DEPENDENT ON THE OTHER TRANSACTION THEN FOR THE PURPOSE OF DETERMINING THE ALP, THE CLOSELY LINKED TRANSACTION SHOULD BE AGGREGATED AND C LUBBED TOGETHER. WHEN THE TRANSACTION ARE INFLUENCED BY EACH OTHER AND PARTICULARLY IN DETERMINING THE PRICE AND PROFIT INVOLVED IN THE TRANSACTIONS THEN THOSE TRANSACTIONS CAN SAFELY BE REGARDED AS CLOSELY LINKED TRANSACTIONS. IN THE CASE IN HAND THE CRED IT PERIOD EXTENDED TO THE AE IS A DIRECT RESULT OF SALE TRANSACTION. THEREFORE NO QUESTION OF CREDIT PERIOD ALLOWED TO THE AE FOR REALIZATION OF SALE PROCEEDS WITHOUT HAVING SALE TO AE. THE CREDIT PERIOD EXTENDED TO THE AE CANNOT BE TREATED AS A TRANSACTIO N STAND ALONE WITHOUT CONSIDERING THE MAIN TRANSACTION OF SALE. THE SALE PRICE OF THE PRODUCT OR SERVICE DETERMINED BETWEEN THE PARTIES IS ALWAYS INFLUENCED BY THE CREDIT PERIOD ALLOWED BY THE SELLER. THEREFORE, THE TRANSACTION OF SALE TO THE AE AND CREDIT PERIOD ALLOWED IN REALIZATION OF SALE PROCEEDS ARE CLOSELY LINKED AS THEY ARE INTER LINKED AND THE TERMS AND CONDITIONS OF SALE AS WELL AS THE PRICE ARE DETERMINED BASED ON THE TOTALITY OF THE TRANSACTION AND NOT ON INDIVIDUAL AND SEPARATE TRANSACTION. TH E APPROACH OF THE TPO AND DRP IN ANALYZING THE CREDIT PERIOD ALLOWED BY THE ASSESSEE TO THE AE WITHOUT CONSIDERING THE MAIN INTERNATIONAL TRANSACTION BEING SALE TO THE AE WILL GIVE DISTORTED RESULT BY DISREGARDING THE PRICE CHARGED BY THE ASSESSEE FROM AE. THOUGH EXTRA PERIOD ALLOWED FOR REALIZATION OF SALE PROCEEDS FROM THE AE IS AN INTERNATIONAL TRANSACTION, HOWEVER, FOR THE PURPOSE OF DETERMINING THE ALP, THE SAME HAS TO BE CLUBBED OR AGGREGATED WITH THE SALE TRANSACTIONS WITH THE AE. EVEN BY CONSIDERING IT AS AN INDEPENDENT TRANSACTION THE SAME HAS TO BE COMPARED WITH THE INTERNAL CUP AVAILABLE IN THE SHAPE OF THE CREDIT ALLOWED BY THE ASSESSEE TO NON AE. WHEN THE 9 IT (T.P) A NO. 308 /BANG/ 2015 ASSESSEE IS NOT MAKING ANY DIFFERENCE FOR NOT CHARGING THE INTEREST FROM AE AS WELL AS NONA E THEN THE ONLY DIFFERENCE BETWEEN THE TWO CAN BE CONSIDERED IS THE AVERAGE PERIOD ALLOWED ALONG WITH OUTSTANDING AMOUNT. IF THE AVERAGE PERIOD MULTIPLIED BY THE OUTSTANDING AMOUNT OF THE AE IS AT ARM S LENGTH IN COMPARISON TO THE AVERAGE PERIOD OF REALIZA TION AND MULTIPLIED BY THE OUTSTANDING FROM NON AES THEN NO ADJUSTMENT CAN BE MADE BEING THE TRANSACTION IS AT ARM S LENGTH. THE THIRD ASPECT OF THE ISSUE IS THAT THE ARM S LENGTH INTEREST FOR MAKING THE ADJUSTMENT. BOTH THE TPO AND DRP HAS TAKEN INTO CONS IDERATION THE LENDING RATES, HOWEVER, THIS IS NOT A TRANSACTION OF LOAN OR ADVANCE TO THE AE BUT IT IS ONLY AN EXCESS PERIOD ALLOWED FOR REALIZATION OF SALES PROCEEDS FROM THE AE. THEREFORE, THE ARM S LENGTH INTEREST IN ANY CASE WOULD BE THE AVERAGE COST O F THE TOTAL FUND AVAILABLE TO THE ASSESSEE AND NOT THE RATE AT WHICH A LOAN IS AVAILABLE. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER/TPO TO RE - DO THE EXERCISE OF DETERMINATION OF ALP IN TERMS OF ABOVE OBSERVATION. 12. THUS, IT IS CLEAR THAT THE TRIBUNA L HAS TAKEN A VIEW THAT THE TRANSACTION OF ALLOWING THE CREDIT PERIOD TO THE A.E. ON REALISATION OF SALE PROCEEDS HAS TO BE CONSIDERED ALONG WITH THE MAIN INTERNATIONAL TRANSACTION IN RESPECT OF SALE TO A.E. A SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL, D ELHI BENCH, IN KUSUM HEALTHCARE PVT. LTD. (SUPRA), WHEREIN THE TRIBUNAL, VIDE PARA 7 TO 10, HELD AS UNDER: 7. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. AN UNCONTROLLED ENTITY WILL EXPECT TO EARN A MARKET RATE OF RETURN ON ITS WORKING CAPITAL INVESTMENT INDEPENDENT OF THE FUNCTIONS IT PERFORMS OR PRODUCTS IT PROVIDES. HOWEVER, THE AMOUNT OF CAPITAL REQUIRED TO SUPPORT THESE FUNCTIONS VARIES GREATLY, BECAUSE THE LEVEL OF INVENTORIES, DEBTORS AND CREDITORS VARIES. HIGH LEVELS OF WORKING CAPITAL CREATE COSTS EITHER IN THE FORM OF INCURRED INTEREST OR IN THE FORM OF OPPORTUNITY COSTS. WORKING CAPITAL YIELDS A RETURN RESULTING FROM A) HIGHER SALES PRICE OR B) LOWER COST OF GOODS SOLD WHICH WOULD HAVE A POSITIVE IMPACT ON THE OPERATIO NAL RESULT. HIGHER SALES PRICES ACTS AS A RETURN FOR THE LONGER CREDIT PERIOD GRANTED TO CUSTOMERS. SIMILARLY IN RETURN FOR LONGER CREDIT PERIOD GRANTED, A FIRM SHOULD BE WILLING TO PAY HIGHER PURCHASE PRICE WHICH ADDS TO THE COST OF GOODS SOLD. THEREFORE, HIGH LEVELS ACCOUNTS RECEIVABLE AND INVENTORY TEND TO OVERSTATE THE OPERATING RESULTS WHILE HIGH LEVELS OF ACCOUNTS PAYABLE TEND TO UNDERSTATE THEM THEREBY NECESSITATING APPROPRIATE ADJUSTMENT. THE APPROPRIATE ADJUSTMENTS NEED TO BE CONSIDERED TO BRING PA RITY IN THE WORKING CAPITAL INVESTMENT OF THE ASSESSEE AND THE COMPARABLES RATHER THAN LOOKING AT THE RECEIVABLE INDEPENDENTLY. SUCH WORKING CAPITAL ADJUSTMENT TAKES INTO ACCOUNT THE IMPACT OF OUTSTANDING RECEIVABLES ON THE PROFITABILITY. IN THIS REGARD, T HE RELIANCE IS PLACED ON THE FOLLOWING RULINGS WHEREIN THE NEED TO UNDERTAKE WORKING CAPITAL ADJUSTMENT HAS BEEN APPRECIATED BY THE HON BLE TRIBUNALS : MERCER CONSULTING INDIA PVT. LTD. [TS - 170 - ITAT - 2014(DEL)] MENTOR GRAPHICS (NOIDA) PRIVATE LIMITED [109 ITD 101] EGAIN COMMUNICATION (P) LTD. [ITA NO. 1685/PN/2007] SONY INDIA (PVT.) LTD. [2011 - TII - 43 - ITAT - DEL - TP] CAPGEMINI INDIA PRIVATE LIMITED [TS - 45 - ITAT - 2013(MUM) - TP] 8. IN VIEW OF THE ABOVE, A WORKING ADJUSTMENT APPROPRIATELY TAKES INTO ACC OUNT THE OUTSTANDING RECEIVABLE. THEREFORE, THE ASSESSEE HAS UNDERTAKEN A WORKING CAPITAL ADJUSTMENT TO REFLECT THESE DIFFERENCES BY ADJUSTING FOR DIFFERENCES IN WORKING CAPITAL AND THEREBY, PROFITABILITY OF EACH COMPARABLE COMPANY. ACCORDINGLY, WHILE CALC ULATING THE WORKING CAPITAL ADJUSTED, OPERATING MARGIN ON COSTS OF THE COMPARABLE COMPANIES, THE IMPACT OF OUTSTANDING RECEIVABLES ON THE PROFITABILITY HAS BEEN TAKEN INTO ACCOUNT. IF THE PRICING/ PROFITABILITY OF THE ASSESSEE ARE MORE THAN THE WORKING CAP ITAL ADJUSTED MARGIN OF THE COMPARABLES, THEN ADDITIONAL IMPUTATION OF INTEREST ON THE OUTSTANDING 10 IT (T.P) A NO. 308 /BANG/ 2015 RECEIVABLES IS NOT WARRANTED. 9. THE ASSESSEE HAD UNDERTAKEN A WORKING CAPITAL ADJUSTMENT FOR THE COMPARABLE COMPANIES SELECTED IN ITS TRANSFER PRICING REPOR T WHICH WAS ALSO SUBMITTED WITH THE LD. TPO. A SNAPSHOT OF THE RESULT IS PROVIDED BELOW: SEGMENT NAME APPELLANT S MARGIN (OP/TC) WORKING CAPITAL ADJUSTED MARGINS OF COMPARABLES (OP/TC) MANUFACTURING ACTIVITY 46.33% 11.84% TRADING ACTIVITY 17.44% 8.36% 10. THE ABOVE ANALYSIS EMPIRICALLY DEMONSTRATES THAT THE DIFFERENTIAL IMPACT OF WORKING CAPITAL OF THE VIS - A - VIS ITS COMPARABLES HAS ALREADY BEEN FACTORED IN THE PRICING/PROFITABILITY OF THE ASSESSEE WHICH IS MORE THAN THAT WORKING CAPITAL ADJUSTED MARGIN OF T HE COMPARABLES. HENCE, ANY FURTHER ADJUSTMENT TO THE MARGINS OF THE ASSESSEE ON THE PRETEXT OF OUTSTANDING RECEIVABLES IS UNWARRANTED AND WHOLLY UNJUSTIFIED. 13. FOLLOWING THE ORDERS OF THE TRIBUNAL, WE SET ASIDE THIS ISSUE TO THE RECORD OF THE ASSESSING OFFICER / TRANSFER PRICING OFFICER AND DIRECT TO RE DO THE EXERCISE OF DETERMINATION OF ARM'S LENGTH PRICE IN THE LIGHT OF THE ABOVE DECISIONS OF THE TRIBUNAL. THE GROUNDS RAISED IN THIS CROSS OBJECTION ARE ALLOWED FOR STATISTICAL PURPOSES. FOLLOWING T HE EARLIER ORDERS OF THIS TRIBUNAL, WE SET ASIDE THIS ISSUE TO THE RECORD OF THE A.O./TPO WITH THE DIRECTION TO REDO THE EXERCISE OF DETERMINATION OF ALP BY CONSIDERING THE PROPER WORKING CAPITAL ADJUSTMENT IN THE COMP ARABLE PRICES IN RESPECT OF TRANSACTIO N OF SOFTWARE DEVELOPMENT SERVICES PROVIDER TO THE AE. WE MAKE IT CLEAR THAT IF AFTER GIVING THE NECESSARY ADJUSTMENT THE INTERNATIONAL TRANSACTION OF THE AS SESSEE I S FOUND AT ARM S LENGTH THEN THERE IS NO QUESTION OF ANY SEPARATE ADJUSTMENT ON ACCOUNT O F ALLOWING THE CREDIT PERIOD ON THE RECEIVABLE FROM AE. WE FURTHER CLARIFY THAT THE NORMAL CREDIT PERIOD ALLOWED FOR THE RECEIVABLE FR O M THE AE SHAL L BE THE CREDIT PERIOD PREVAILING IN THE INDUSTRY AND THEREFORE WE ARE OF THE VIEW THAT TWO MONTHS CREDIT P ERIOD SHOULD BE TAKEN AS A NORMAL BUSINESS PRACTICE IN THE INDUSTRY. THE 11 IT (T.P) A NO. 308 /BANG/ 2015 TPO/A.O SHALL ALSO CONSIDER THE BENCHMARK INTEREST RATE AS LIBOR/PLR IN THE LIGHT OF VARIOUS PRECEDENTS ON THIS ISSUE. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 1 7 TH DAY OF JUNE, 201 6 . SD/ - (ABRAHAM P GEORGE) ACCOUNTANT MEMBER SD/ - (VIJAY PAL RAO) JUDICIAL MEMBER *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE. BY ORDER ASST. REGISTRAR, ITAT, BANGALORE