Bain Capability Centre India Pvt. Ltd., Gurgaon V. DCIT, Gurgaon

ITA 404/DEL/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 3600 (ITAT-DELHI)
• Duration Of Justice: 9 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-11-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 13-06-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 25-01-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; Principle of natural justice; International transaction; Working capital adjustments
• Section: 143(3); 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2 NEW DELHI BEFORE SHRI B.P. JAIN, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO. 404/DEL/2017 AY: 2012-13 BAIN CAPABILITY CENTRE INDIA PVT. LTD., VS DCIT, 5 TH FLOOR, TOWER A, CIRCLE-1(1), BUILDING NO. 8, GURGAON. DLF CYBER CITY, DLF PHASE-II, GURGAON 122002 (PAN: AACB4590M) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI KAMAL SAWHNEY, ADV. SHRI SHIKHAR GARG RESPONDENT BY : SHRI DEVENDRA GULATI, CA SHRI H.S. CHOUDHARY, CIT-DR DATE OF HEARING: 17.08.2017 DATE OF PRONOUNCEMENT: 13.11.2017 PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AGA INST THE FINAL ASSESSMENT ORDER PASSED U/S 143(3) R/W SECTIO N 144C OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS 'T HE ACT') PASSED SUBSEQUENT TO THE DIRECTIONS OF THE HONBLE DISPUTE RESOLUTION PANEL - 1, NEW DELHI FOR ASSESSMENT YEAR 2012-13. 2.0 BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I S A 99.99% SUBSIDIARY OF BAIN USA. THE ASSESSEE COMPANY WAS S ET UP IN THE YEAR 2006 AND DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE WAS ENGAGED IN THE FOLLOWING TWO SEGMENTS:- ITA NO. 404/DEL/2017 ASSESSMENT YEAR 2012-13 2 I) PROVISION OF IT-ENABLED BACK-OFFICE SERVICES (ITES SEGMENT) UNDER THIS SEGMENT, THE ASSESSEE PROVIDES INFORMATI ON TECHNOLOGY ENABLED BACK-OFFICE SERVICES SUCH AS IND USTRY, COMPANY AND FINANCIAL ANALYSIS WHICH COMPRISE BUSIN ESS INFORMATION, DATA GATHERING, ANALYSIS AND DELIVERY ETC. TO BAIN USAS GLOBAL OPERATIONS THROUGH CUSTOMIZED REM OTE RESEARCH AND INFORMATION SUPPORT SERVICES. II) SOFTWARE DEVELOPMENT SERVICES UNDER THIS SEGM ENT THE ASSESSEE PROVIDES CONTRACT RESEARCH DEVELOPMENT SER VICES TO BAIN USA FOR INTERNAL USES. 2.1 THE RETURN OF INCOME WAS FILED DECLARING INCOME OF RS. 7,75,29,795/- WHICH WAS INITIALLY PROCESSED U/S 143 (1) OF THE ACT AND WAS LATER SELECTED FOR SCRUTINY. A REFERENCE U/ S 92CA(1) OF THE ACT WAS MADE TO THE TRANSFER PRICING OFFICER (T PO) FOR DETERMINING THE ARMS LENGTH PRICE (ALP) U/S 92CA(3 ) OF THE ACT IN RESPECT OF INTERNATIONAL TRANSACTIONS ENTERED IN TO BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. THE TPO DETERMINED THE ADJUSTMENT/DIFFERENCE ON ACCOUNT OF ALP IN RESPECT OF INTERNATIONAL TRANSACTION WITH ASSOCIATE D ENTERPRISES (AE) IN RESPECT OF INTRA GROUP SERVICES AND PAYM ENT OF ROYALTY UNDER PROVISIONS OF IT ENABLED SERVICES AT RS. 2,4 9,28,004/- AND ITA NO. 404/DEL/2017 ASSESSMENT YEAR 2012-13 3 RECEIVABLES AT RS. 91,09,407/- RESPECTIVELY. AS FAR AS THE SOFTWARE DEVELOPMENT SEGMENT OF THE ASSESSEE WAS CO NCERNED, THE SAME WAS ACCEPTED BY THE DEPARTMENT AND NO ADJU STMENT WAS PROPOSED IN THE SAME. 2.2 AGGRIEVED, THE ASSESSEE APPROACHED THE HONBLE DRP AND FILED ITS OBJECTIONS TO THE PROPOSED ADJUSTMENTS. THE HONBLE DRP VIDE DIRECTIONS DATED 16.11.2016 DIRECTED AS UN DER:- I) THE ASSESSING OFFICER/TPO WAS DIRECTED TO GIVE AN OPPORTUNITY TO THE ASSESSEE TO ESTABLISH THE ARITHMETICAL ERRORS MADE AND MAKE NECESSARY CORRECTIONS. II) THE ASSESSING OFFICER/TPO WAS DIRECTED TO COMPUTE WORKING CAPITAL ADJUSTMENTS; III) THE ASSESSING OFFICER /TPO WAS DIRECTED TO COMPUTE THE ADJUSTMENT USING RATE SIX MONTHS LIBOR PLUS 400 BASIS POINTS AND THE PERIOD FOR WHICH INTEREST WAS TO BE CALCULATED WAS TO BE LIMITED TO THE YEAR UNDER CONSIDERATION. 2.3 SUBSEQUENT TO THE DIRECTIONS OF THE HONBLE DRP, THE ADJUSTMENT TO THE ALP WAS REVISED TO RS. 2,01,87,41 4/- AS UNDER:- ITA NO. 404/DEL/2017 ASSESSMENT YEAR 2012-13 4 1. ON ACCOUNT OF ITES RS. 1,86,38,499/- 2. ON ACCOUNT OF RECEIVABLES RS. 15,48,913/- 2.4 THE FINAL ASSESSMENT WAS COMPLETED AT A TOTAL I NCOME OF RS. 9,77,17,210/-. 2.5 NOW, THE ASSESSEE HAS APPROACHED THE ITAT AND H AS RAISED THE FOLLOWING GROUNDS APPEAL:- THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW: THAT THE LEARNED ASSESSING OFFICER (LD. AO) ERRED IN PROPOSING TO ASSESS THE INCOME OF THE ASSESSEE AT R S. 9,77,17,210/- AS AGAINST THE RETURNED INCOME DECLA RED BY THE ASSESSEE AT RS. 1,15,29,195 BY MAKING AN ADDITION OF RS. 2,01,87,414(RS. 1,86,38,499 FOR THE TRANSACTION PERTAINING TO PROVISION OF INFORMATION TECHNOLOGIES ENABLED SERVICES (ITES) AND RS. 15,48,913 ON ACCOUNT OF INTEREST ON RECEIVABLE OUTSTANDING) BY HOLDING THAT THE ASSESSEES INTERNATIONAL TRANSACTION DOES NOT SATISFY THE ARM S LENGTH PRINCIPLE ENVISAGED UNDER THE ACT. 1. THE LD. AO/ HONBLE DRP ERRED ON FACTS AND IN LA W IN ENHANCING THE INCOME OF THE ASSESSEE BY RS. 1,86,38,499 BY HOLDING THAT THE ASSESSEES INTERNAT IONAL TRANSACTION PERTAINING TO PROVISION OF ITES DOES NO T SATISFY THE ARMS LENGTH PRINCIPLE ENVISAGED UNDER THE ACT AND IN DOING SO, HAVE GROSSLY ERRED IN: 2.1 DISREGARDING MULTIPLE YEAR/ PRIOR YEARS DATA AS USED BY THE ASSESSEE IN THE TP DOCUMENTATION AND HOLDING THAT CURRENT YEAR (I.E. FY 2011-12) DATA FO R COMPARABLE COMPANIES SHOULD BE USED DESPITE THE FAC T THAT THE SAME WAS NOT NECESSARILY AVAILABLE TO THE ASSESSEE AT THE TIME OF PREPARING ITS TP DOCUMENTAT ION; 2.2 REJECTING COMPARABILITY ANALYSIS IN THE TP DOCUMENTATION AND IN CONDUCTING A FRESH COMPARABILI TY ANALYSIS BASED ON APPLICATION OF THE ADDITIONAL/ RE VISED ITA NO. 404/DEL/2017 ASSESSMENT YEAR 2012-13 5 FILTERS IN DETERMINING THE ARMS LENGTH PRICE AND W HILE DOING SO, ERRED IN: 2.2.1 REJECTING COMPANIES WHOSE ACCOUNTING YE AR DOES NOT END WITH MARCH 31, 2012 ON THE BASIS THAT THE TRANSACTIONS TAKING PLACE IN A DIFFERENT PERIOD CAN NOT BE COMPARED; 2.2.2 REJECTING COMPANIES HAVING SALES TURNOVER F ROM ITES SEGMENT IS LESS THAN 5 CRORE; 2.2.3 REJECTING COMPANIES HAVING EXPORT SALES LESS THAN EQUAL TO 75% OF THE SALES FROM ITES THEREBY MODIFYI NG THE ASSESSEES FILTER OF REJECTING COMPANIES WHOSE EXPORT SALES IS LESS THAN EQUAL TO 25%; 2.2.4 ERRONEOUSLY INCLUDING FUNCTIONALLY DIFFEREN T AND HIGH PROFIT MAKING ENTREPRENEURIAL COMPANIES IN T HE FINAL COMPARABLES SET FOR BENCHMARKING THE IT ENAB LED SERVICES SEGMENT (A LOW RISK CAPTIVE UNIT) OF THE ASSESSEE (DISREGARDING JUDICIAL PRONOUNCEMENTS ON THE ISSUE) AND THEREBY RESORTING TO CHERRY PICKING OF COMPARABLES WITH A PREJUDICIAL MIND SET FOR MAKING AN UPWARD ADJUSTMENT; 2.3 EXCLUDING CERTAIN COMPARABLE COMPANIES SUBMITTE D BY THE APPELLANT ON ARBITRARY GROUNDS EVEN THOUGH T HEY ARE COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIO NS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED; 2. THE LD. AO/ HONBLE DRP IGNORED THE BUSINESS/ COMMERCIAL REALITY THAT SINCE THE ASSESSEE IS REMUNERATED ON AN ARMS LENGTH COST PLUS BASIS, I.E . IT IS COMPENSATED FOR ALL ITS OPERATING COSTS PLUS A PRE- AGREED MARK-UP BASED ON A BENCHMARKING ANALYSIS, THE ASSESSEE UNDERTAKES MINIMAL BUSINESS RISKS AS AGAIN ST COMPARABLE COMPANIES THAT ARE FULL-FLEDGED RISK TAK ING ENTREPRENEURS, AND BY NOT ALLOWING A RISK ADJUSTMEN T TO THE ASSESSEE ON ACCOUNT OF THIS FACT. 3. THE LD. AO/ HONBLE DRP ERRONEOUSLY IMPUTED AN INTEREST OF RS. 15,48,913 FOR THE RECEIVABLES OUTS TANDING ITA NO. 404/DEL/2017 ASSESSMENT YEAR 2012-13 6 BEYOND 30 DAYS AND WHILE DOING SO, HAS GROSSLY ERRE D IN: 3.1 RECHARACTERISING THE OVERDUE RECEIVABLES AMOU NT AS DEEMED LOAN AND THAT IT CONSTITUTES AS AN INTERNATI ONAL TRANSACTION SEPARATE FROM THE MAIN TRANSACTION; 3.2 TREATMENT OF OUTSTANDING RECEIVABLES FROM AES AS SEPARATE INTERNATIONAL TRANSACTION I.E. UNSECURED L OAN; 3.3 NOT APPRECIATING THAT IN RELATION TO THE OVER DUE RECEIVABLES, THE CONDUCT OF THE APPELLANT WITH ITS AES AND NON AES WAS EXACTLY THE SAME; 3.4 NOT APPRECIATING THAT THE ARMS LENGTH PRICE DETERMINATION FOR OUTSTANDING RECEIVABLES IS SUBSUM ED WITHIN THE ARMS LENGTH PRICE DETERMINATION OF THE PRINCIPAL INTERNATIONAL TRANSACTION ITSELF; 3.5 NOT APPRECIATING THE FACT THAT WORKING CAPITAL ADJUSTMENT ADJUSTS THE MARK-UP OF COMPARABLE COMPANIES ON ACCOUNT OF VARIATION IN THE WORKING CA PITAL OF THE ASSESSEE; AND 3.6 DETERMINING AN INTEREST RATE OF LIBOR PLUS 40 0 BASIS POINTS WITHOUT GIVING REGARD TO VARIOUS FACTO RS RESPONSIBLE FOR DETERMINATION OF INTEREST RATE. 4. THE LD. AO/ HONBLE DRP ERRED IN ROUTING THE RECOVERY OF EXPENSES FROM GROUP COMPANIES THROUGH T HE PROFIT & LOSS ACCOUNT BY NOT APPRECIATING THAT ONLY VALUE ADDED FUNCTIONS WARRANT MARK-UP AND THEREBY RE- COMPUTING THE OPERATING MARGIN EARNED BY THE ASSESS EE. 5. DISREGARDING JUDICIAL PRONOUNCEMENTS IN INDIA I N UNDERTAKING THE TP ADJUSTMENT. 6. THE LD. AO HAS GROSSLY ERRED IN PROPOSING TO IN ITIATE PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. 7. THE LD. AO HAS ERRED IN FACTS AND IN LAW IN NOT GIVING THE BENEFIT OF MINIMUM ALTERNATE TAX (MAT) ELIGIBLE FOR SET OFF WHILE COMPUTING THE DEMAND OF INCOME VIA NOTICE UNDER SECTION 156 OF THE ACT FOR AY 2012 -13 8. THE LD. AO ERRED IN PROPOSING TO CHARGE INTEREST UNDER SECTION 234B & 234C OF THE ACT. ITA NO. 404/DEL/2017 ASSESSMENT YEAR 2012-13 7 THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTH ER. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER, DE LETE, RESCIND, FORGO OR WITHDRAW ANY OF THE ABOVE GROUNDS OF APPEAL EITHER BEFORE OR DURING THE COURSE OF THE PROCEEDINGS BEFORE THE HON'BLE INCOME TAX APPELLATE TRIBUNAL IN THE INTEREST OF THE NATURAL JUSTICE. TH E AFORESAID GROUNDS ARE MUTUALLY EXCLUSIVE AND WITHOU T PREJUDICE TO EACH OTHER. 3.0 THE LD. AR SUBMITTED THAT ALTHOUGH THE ASSESSEE IS AGGRIEVED WITH THE INCLUSION/EXCLUSION OF SEVERAL C OMPARABLES, HE WILL BE ARGUING FOR THE EXCLUSION OF ECLERX SERVICE S LIMITED AND TCS E-SERVE LTD. AND FOR INCLUSION OF R SYSTEMS INT ERNATIONAL LTD. THE ARGUMENTS OF THE LD. AR IN RESPECT OF THE THREE COMPARABLES ARE AS UNDER:- 1. TCS E-SERVE LTD. : THE LD. AR SUBMITTED THAT THIS COMPANY WAS NOT COMPARABLE TO THE ASSESSEE DUE TO INCOMPARABLE SCALE OF OPERAT IONS AND PRESENCE OF HUGE INTANGIBLES WITH TCS E-SERVE AND T HE BRAND VALUE OF TCS WHEREAS THE ASSESSEE WAS A CAPTIVE SER VICE PROVIDER WHICH DID NOT ENJOY ANY BRAND VALUE. THE LD. AR FU RTHER SUBMITTED THAT THE ISSUE OF COMPARABILITY OF TCS E- SERVE TO THE CAPTIVE BACK OFFICE SERVICE PROVIDERS WAS COVERED I N FAVOUR OF THE ASSESSEE FOR THE RELEVANT ASSESSMENT YEAR BY THE OR DER OF THE ITAT DELHI BENCH IN THE CASE OF BC MANAGEMENT SERVICES ( P) LTD. VS ITA NO. 404/DEL/2017 ASSESSMENT YEAR 2012-13 8 DCIT IN ITA NO. 5829/DEL/2015, 6134/DEL/2015 AND 6572/DEL/2016. THE LD. AR ALSO SUBMITTED THAT TCS E-SERVE WAS HELD TO BE INCOMPARABLE TO ITES OWING TO ITS IN COMPARABLE SCALE OF OPERATIONS, HUGE INTANGIBLES AND BRAND VAL UE IN THE FOLLOWING DECISIONS:- I) DELHI HIGH COURT IN PR. CIT VS ACTIS GLOBAL SERVIC ES PVT. LTD. IN ITA NO. 94/2017 II) ITAT DELHI IN BECHTEL INDIA PVT. LTD. VS DCIT IN IT A 1478/DEL/2015 III) ITAT DELHI IN EQUANT SOLUTIONS INDIA PVT. LTD. VS D CIT IN ITA NO. 1202/DEL/2015 3.1 IT WAS FURTHER SUBMITTED THAT IF TCS E-SERVE IS EXCLUDED FROM THE LIST OF COMPARABLES, THE ASSESSEE WOULD BE AT ARMS LENGTH AND, AS A CONSEQUENCE, THE ISSUE RELATING TO INCLUSION/EXCLUSION OF R SYSTEMS INTERNATIONAL LTD. AND ECLERX SERVICES LIMITED WILL BECOME ACADEMIC. IT WAS FURT HER SUBMITTED THAT UPPER MARGIN OF ARMS LENGTH MARK UP AFTER THE EXCLUSION OF TCS E-SERVE WILL WORK OUT AT 24.85%. 2. ECLERX SERVICES LIMITED: THE LD. AR SUBMITTED THAT TCS E-SERVE LTD. WAS NOT A COMPARABLE AS IT FOLLOWED AN OUTSOURCING MODEL OF B USINESS WHILE ITA NO. 404/DEL/2017 ASSESSMENT YEAR 2012-13 9 THE ASSESSEE WAS A CAPTIVE SERVICE PROVIDER PERFORM ING BACK OFFICE SUPPORT FUNCTIONS. IT WAS SUBMITTED THAT THE TWO M ODELS ARE ENTIRELY DIFFERENT AND HAVE A SIGNIFICANT IMPACT ON THE FAR OF THE COMPANIES AND, THEREFORE, COMPANIES FOLLOWING THE O UTSOURCING MODEL CANNOT BE COMPARED WITH THE ASSESSEE WHO PERF ORMS ITS OWN FUNCTIONS. THE LD. AR FURTHER SUBMITTED THAT T HE ISSUE OF COMPARABILITY OF ECLERX SERVICES LIMITED TO CAPTIVE BACK OFFICE SERVICE PROVIDERS IS COVERED IN FAVOUR OF THE ASSES SEE FOR THE RELEVANT ASSESSMENT YEAR BY THE ORDER OF THE ITAT D ELHI BENCH IN THE CASE OF B.C. MANAGEMENT SERVICES PVT. LTD. VS D CIT (SUPRA). IT WAS SUBMITTED THAT THE FACTS IN THE INSTANT CASE WERE SIMILAR TO THE FACTS IN B.C. MANAGEMENT SERVICES PVT. LTD. VS DCIT (SUPRA) AND HENCE ECLERX SERVICES LIMITED SHOULD BE EXCLUDE D ON THIS GROUND ONLY. IT WAS FURTHER SUBMITTED THAT ECLERX SERVICES LIMITED WAS NOT COMPARABLE TO THE ASSESSEE BECAUSE ECLERX SERVICES LIMITED WAS A HIGH-END KPO ENGAGED IN PROV IDING DATA ANALYTICS, DATA SOLUTIONS, SERVICES ETC. WHEREAS TH E ASSESSEE IS ENGAGED IN RENDERING IT ENABLED BACK-OFFICE SUPPORT SERVICES IN THE NATURE OF EXTRACTION OF COMPANY SNAPSHOTS/DETAI LS, INDUSTRY DATA AND OTHER MARKET INFORMATION FROM PUBLIC DATAB ASES AND SHARES THE SAME WITH ITS GROUP COMPANIES FOR RESEAR CH. IT WAS ITA NO. 404/DEL/2017 ASSESSMENT YEAR 2012-13 10 FURTHER SUBMITTED THAT THAT IF ECLERX SERVICES LIMI TED WAS EXCLUDED FROM THE LIST OF COMPARABLES THE ASSESSEE WOULD BE AT ARMS LENGTH HAVING AN UPPER MARGIN OF 24.85% AND A S A CONSEQUENCE THE ISSUE RELATING TO INCLUSION/EXCLUSI ON OF R SYSTEMS INTERNATIONAL LTD. AND TCS E-SERVE LTD. WIL L BECOME ACADEMIC. IT WAS FURTHER SUBMITTED THAT IF BOTH EC LERX SERVICES LIMITED AND TCS E-SERVE LTD. ARE EXCLUDED, THE ASSE SSEE WOULD BE AT ARMS LENGTH AS THE MARGIN OF THE ASSESSEE WI LL BE 18.9% WHILE THE MARGINS OF THE COMPARABLES WOULD BE 16.18 % AND AS A CONSEQUENCE, THE ISSUE RELATING TO INCLUSION/EXCLUS ION OF R SYSTEMS INTERNATIONAL LTD. WOULD BECOME ACADEMIC. 3. R SYSTEMS INTERNATIONAL LTD.: THE LD. AR SUBMITTED THAT R SYSTEMS INTERNATIO NAL LTD. HAS BEEN EXCLUDED BY THE TPO AS WELL AS THE HONBLE DRP ONLY FOR THE REASON THAT IT HAD A SEPARATE YEAR ENDING. IT WAS SUBMITTED THAT THE EXCLUSION OF A COMPARABLE ON THE GROUND OF SEPA RATE YEAR ENDING HAS BEEN SET ASIDE BY THE JURISDICTIONAL HIG H COURT IN MCKINSEY KNOWLEDGE CENTRE INDIA PVT. LTD. IN ITA 21 7/2014. RELIANCE WAS ALSO PLACED ON THE ORDER OF THE ITAT D ELHI BENCH IN THE CASE OF MERCER CONSULTING INDIA PVT. LTD. IN IT A NO. 966/DEL/2014. THE LD. AR SUBMITTED THAT THE ASSESS EE HAD USED ITA NO. 404/DEL/2017 ASSESSMENT YEAR 2012-13 11 THE AUDITED SEGMENTAL FINANCIALS OF THE COMPARABLE COMPANY AVAILABLE IN THE PUBLIC DOMAIN AND ACCORDINGLY HAVE COMPUTED ITS MARGIN BASED ON THE QUARTERLY RESULTS. IT WAS SUBM ITTED THAT IN VIEW OF THE FACTUAL AS WELL AS LEGAL POSITION, R SY STEMS INTERNATIONAL LTD. SHOULD BE INCLUDED AS A COMPARAB LE. LD. AR ALSO SUBMITTED THAT IF ONLY R SYSTEMS INTERNATIONAL LTD. IS INCLUDED IN THE LIST OF COMPARABLES, THE ASSESSEE W OULD BE AT ARMS LENGTH AFTER GETTING THE BENEFIT OF 5% BAND AND AS A CONSEQUENCE THE ISSUE RELATING TO INCLUSION/EXCLUSI ON OF TCS E- SERVE LTD. AND ECLERX SERVICES LIMITED WILL BECOME ACADEMIC. IT WAS SUBMITTED THAT THEN THE UPPER MARGIN OF THE ASS ESSEE WOULD BE 24.85%. 3.2 ON THE SECOND ISSUE BEING CHALLENGED BY THE ASS ESSEE PERTAINING TO INTEREST OF RS. 15,48,913/- FOR RECEI VABLES OUTSTANDING BEYOND 30 DAYS, THE LD. AR SUBMITTED TH AT THE INTEREST COMPONENT IS EMBEDDED IN THE SALE PRICE AN D COMMERCIAL CONSIDERATIONS NEED TO BE APPRECIATED AND SUCH COMP ENSATION OR CHARGING OF INTEREST ARE COMMONLY IGNORED BY BUSINE SSES. IT WAS SUBMITTED THAT WORKING CAPITAL ADJUSTMENT TAKES INT O ACCOUNT THE IMPACT OF OUTSTANDING RECEIVABLES ON THE PROFITABIL ITY AND ACCORDINGLY NO SEPARATE ADJUSTMENT IS WARRANTED ON ACCOUNT OF ITA NO. 404/DEL/2017 ASSESSMENT YEAR 2012-13 12 OUTSTANDING RECEIVABLES. THE LD. AR SUBMITTED THAT THE ASSESSING OFFICER/HONBLE DRP WERE PATENTLY WRONG I N RE- CHARACTERIZING THE OVERDUE AMOUNTS AS DEEMED LOAN. IT WAS FURTHER SUBMITTED THAT THE DELHI BENCH OF ITAT IN T HE CASE OF KUSUM HEALTHCARE PVT. LTD. IN ITA NO. 6814/DEL/2014 HAD HELD THAT IF THE IMPACT OF THE CREDIT PERIOD WAS DULY FA CTORED IN AS WORKING CAPITAL ADJUSTMENT WHILE DETERMINING THE ALP, THEN NO SEPARATE OR FURTHER ADJUSTMENT FOR INTEREST ON THE RECEIVABLES WAS WARRANTED IN THE HANDS OF THE TESTED PARTY. THE LD. AR FURTHER SUBMITTED THAT THIS ORDER OF THE ITAT WAS UPHELD BY THE HONBLE DELHI HIGH COURT VIDE ORDER DATED 25.4.2017 IN ITA NO. 765/2016 WHEREIN THE HONBLE DELHI HIGH COURT HAS HELD THAT WHEN THE ASSESSEE HAS ALREADY FACTORED IN THE IMPACT OF THE RECEIVABLES ON THE WORKING CAPITAL AND THEREBY ON ITS PRICING AND PROFITABILITY VIS--VIS THAT OF THE COMPARABLES, ANY FURTHER ADJU STMENT ONLY ON THE BASIS OF OUTSTANDING RECEIVABLES WOULD DISTORT THE PICTURE AND RE-CHARACTERIZE THE TRANSACTIONS. IT WAS ALSO SUBM ITTED THAT THE ASSESSEE IS A DEBT FREE COMPANY WHERE IT HAS NEITHE R RECEIVED ANY INTEREST FROM ITS CREDITORS NOR PAID ANY INTEREST T O ANY DEBTORS, AND, THEREFORE, IT COULD NOT INFERRED THAT THE ASSE SSEE HAD GIVEN ANY BENEFIT TO THE AE BY BLOCKING ITS INTEREST BEAR ING FUNDS BY ITA NO. 404/DEL/2017 ASSESSMENT YEAR 2012-13 13 EXTENDING CREDIT PERIOD TO THE AE. RELIANCE WAS AL SO PLACED ON ANOTHER ORDER OF THE ITAT DELHI BENCH IN THE CASE O F B.C. MANAGEMENT SERVICES PVT. LTD. VS DCIT (SUPRA) WHERE IN ITAT DELHI BENCH HAD DELETED TRANSFER PRICING ADJUSTMENT MADE BY THE TPO BY IMPUTING INTEREST ON DELAY IN RECEIPT OF PAY MENT. 4.0 IN RESPONSE, ON THE ISSUE OF EXCLUSION OF ECLER X SERVICES LIMITED, LD. CIT DR SUBMITTED THAT THE OUTSOURCING DID NOT INVALIDATE THE FUNCTIONAL PROFILE AND, THEREFORE, T HE SAME SHOULD NOT BE EXCLUDED. ON EXCLUSION OF TCS, IT WAS SUBMI TTED THAT BOTH THE ASSESSEE COMPANY AS WELL AS TCS WERE SERVICE PR OVIDERS AND NEITHER DOES THE TURNOVER AFFECT THE PROFIT LEVEL I NDICATOR (PLI) NOR DOES THE BRAND VALUE CHANGE THE FUNCTIONAL PROFILE. IT WAS ALSO SUBMITTED THAT INTANGIBLE ASSETS HAD RELEVANCE ONLY IN THE CASE OF PUBLIC LIMITED COMPANIES AND NOT IN THE CASE OF PRI VATE LIMITED COMPANIES AND, THEREFORE, THIS COMPARABLE WAS ALSO A GOOD COMPARABLE FOR THE ASSESSEE COMPANY. ON THE ISSUE OF ASSESSEES PLEA FOR INCLUDING R SYSTEMS IN THE SET OF COMPARAB LES, THE LD. CIT DR PLACED RELIANCE ON THE OBSERVATIONS OF THE T PO AND SUBMITTED THAT WHEN OTHER COMPARABLES WERE AVAILABL E, THEN THERE WAS NO JUSTIFICATION INTRODUCING A NEW COMPAR ABLE. ITA NO. 404/DEL/2017 ASSESSMENT YEAR 2012-13 14 4.1 ON THE SECOND ISSUE PERTAINING TO RECEIVABLES, THE LD. CIT DR SUBMITTED THAT ADJUSTMENT HAS TO BE MADE IRRESPE CTIVE OF WORKING CAPITAL ADJUSTMENT. LD. CIT DR ALSO SUBMIT TED THAT THE HONBLE DRP HAD DULY CONSIDERED THE OBJECTIONS OF T HE ASSESSEE IN THIS REGARD AND HAS GIVEN ITS DIRECTIONS THEREAF TER. IT WAS SUBMITTED THAT THAT WORKING CAPITAL ADJUSTMENT TAKE S INTO ACCOUNT ONLY TRADE CREDITORS AND NOT CREDITS RECEIV ED TOWARDS CAPITAL ITEMS, LOANS ETC. THE LD. CIT DR ALSO READ OUT FROM THE RELEVANT PARAGRAPHS AS CONTAINED IN THE DIRECTIONS OF THE HONBLE DRP AND ALSO SUBMITTED THAT ITAT DELHI BENCH IN THE CASE OF AMERIPRISE INDIA P. LTD. VS. ACIT REPORTED IN 2015- TII-347-ITAT- DEL-TP HAD HELD RECEIVABLES DO NOT HAVE ANY IMPACT ON WORKING CAPITAL ADJUSTMENT IN ANY MANNER. IT WAS ALSO SUBM ITTED THAT THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. COT TON NATURALS INDIA PVT. LTD. REPORTED IN 2015-TII-09-HC-DEL-TP H AD HELD THAT INTEREST ON RECEIVABLES WAS A SEPARATE INTERNATIONA L TRANSACTION IN TERMS OF EXPLANATION (I)(C) TO SECTION 92B. 5.0 WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE AL SO PERUSED THE MATERIAL ON RECORD. AS FAR AS THE ASSESSEES PL EA FOR INCLUSION OF R SYSTEMS INTERNATIONAL LIMITED IS CONCERNED, IT IS SEEN THAT THE TPO/HONBLE DRP HAD REJECTED THIS COMPANY ON AC COUNT OF ITA NO. 404/DEL/2017 ASSESSMENT YEAR 2012-13 15 DIFFERENT FINANCIAL YEAR ENDING. HOWEVER, THE ASSE SSEE HAS RE-CAST THE PROFIT AND LOSS ACCOUNT OF THE COMPANY AS PER T HE QUARTERLY AUDITED RESULTS AND HAS DERIVED THE UPDATED OPERATI NG MARGIN. THE HON'BLE HIGH COURT HAS HELD IN MCKINSEY KNOWLED GE CENTRE INDIA PVT. LTD. IN ITA NO. 217/2014 THAT IF FROM TH E AVAILABLE DATA ON RECORD, THE RESULTS FOR FINANCIAL YEAR CAN REASO NABLY BE EXTRAPOLATED, THEN THE COMPARABLE CANNOT BE EXCLUDE D SOLELY ON THE GROUND THAT THE COMPARABLES HAVE DIFFERENT FINA NCIAL YEAR ENDINGS. THEREFORE, WE DEEM IT APPROPRIATE TO REST ORE THIS COMPARABLE TO THE FILE OF THE TPO/ASSESSING OFFICER FOR VERIFYING THE COMPUTATION, AS RECAST BY THE ASSESSEE, AND INC LUDE THIS COMPARABLE IN THE FINAL SET OF COMPARABLES. 5.1 AS THE LD. AR HAS SUBMITTED THAT IF R SYSTEMS W AS DIRECTED TO BE INCLUDED IN THE FINAL SET OF COMPARABLES, THE ASSESSEES CHALLENGE AGAINST THE INCLUSION OF E CLERX SERVICES LTD AND TCS E-SERVE LTD WOULD BECOME ACADEMIC IN NATURE. ACCORD INGLY, AS WE HAVE DIRECTED THAT R SYSTEMS BE INCLUDED IN THE FIN AL SET OF COMPARABLES, WE DISMISS AS THE ASSESSEES CONTENTIO NS CHALLENGING THEIR INCLUSION AS HAVING BECOME ACADEM IC. WE, HOWEVER, NOTE THAT THE RIGHT OF THE ASSESSEE TO CHA LLENGE THESE ITA NO. 404/DEL/2017 ASSESSMENT YEAR 2012-13 16 COMPARABLES IN SUCCEEDING ASSESSMENT YEARS, IF IT I S SO REQUIRED, REMAINS PROTECTED. 5.2 THE SECOND ISSUE RELATES TO TREATING THE DELAY IN RECEIPT OF PAYMENTS FROM THE AE TO BE IN THE NATURE OF UNSECUR ED LOAN ADVANCED TO THE AE AND THEREBY CHARGING INTEREST. B EFORE US, THE MAIN CONTENTION OF THE ASSESSEE IS THAT SINCE NO IN TEREST HAS BEEN CHARGED ON THE DELAYED PAYMENT MADE BY THE THIRD PA RTIES, THEREFORE, NO INTEREST SHOULD BE IMPUTED IN RESPECT OF RECEIVABLES OUTSTANDING FROM THE AE ALSO. APART FROM THIS, IT H AS ALSO BEEN SUBMITTED THAT THE ASSESSEE IS A COMPLETELY DEBT FR EE COMPANY AND, THEREFORE, IT CANNOT BE HELD THAT ITS INTEREST -BEARING FUNDS HAVE BEEN LOCKED WITH THE AE FOR A LONG PERIOD. THE LD. AR HAS ALSO RELIED ON THE ORDER OF THE TRIBUNAL IN THE CAS E OF BC MANAGEMENT SERVICES LTD VERSUS DCIT IN ITA NO. 6134/DEL/2015 AND CONNECTED APPEALS WHEREIN THE DEL HI BENCH OF THE ITAT HAS, UNDER IDENTICAL CIRCUMSTANCES, DIR ECTED THAT THE TRANSFER PRICING ADJUSTMENT MADE BY THE TPO BY IMPU TING THE INTEREST ON DELAY IN RECEIPT OF PAYMENT BE DELETED. THE RELEVANT OBSERVATIONS OF THE ITAT DELHI BENCH IN THE AFORESA ID ORDER ARE CONTAINED IN PARAGRAPH 29 WHICH READS AS UNDER 29. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND ON PERUSAL OF THE RELEVANT MATERIAL PLACED ON RECORD, WE FIND THA T FIRST OF ALL, ITA NO. 404/DEL/2017 ASSESSMENT YEAR 2012-13 17 THE ASSESSEE IS A DEBT FREE COMPANY AS IT HAS NEITH ER RECEIVED ANY INTEREST FROM ANY CREDITORS NOR PAID INTEREST T O ANY DEBTOR. A PERUSAL OF PROFIT AND LOSS ACCOUNT SHOWS THAT INTEREST AND FINANCE CHARGES ARE ONLY RS. 73; AND I NTEREST ON CORPORATE TAX IS RS. 1,27,798/-. APART FROM THAT TH ERE IS NO DEBT OR LOAN WITH THE ASSESSEE ON WHICH IT HAS TO P AY ANY INTEREST. ONCE IT IS AN ACCEPTED FACT THAT ASSESSEE DOES NOT HAVE ANY INTEREST BEARING BORROWED FUNDS FOR EXTEND ING ANY KIND OF LOAN TO ITS AE, THEN IT CANNOT BE RECKONED THAT ASSESSEE HAS GIVEN ANY BENEFIT TO THE AE BY BLOCKIN G ITS INTEREST-BEARING FUNDS TO THE AE BY EXTENDING THE C REDIT PERIOD. THIS HAS BEEN SO HELD BY THIS TRIBUNAL IN T HE CASE OF BECHTEL INDIA PRIVATE LIMITED (SUPRA). MOREOVER AS POINTED OUT BY THE LD. COUNSEL, THE ASSESSEE HAS ALSO GIVEN SIM ILAR CREDIT PERIOD TO THE THIRD PARTIES WHICH ARE EXTENDING UP TO 181 DAYS. IF A SIMILAR CREDIT PERIOD IS GIVEN TO THE AE AS IS GIVEN TO THIRD PARTIES, THEN UNDER THE ARMS LENGTH SCENARIO IN LOOKING INTO THE SIMILAR CONDITIONS PREVAILING BETWEEN CONT ROLLED TRANSACTION AND COMPARABLE UNCONTROLLED TRANSACTION , THEN THERE CANNOT BE ANY ADJUSTMENT, BECAUSE IN A SITUAT ION LIKE THIS, THERE IS A DIRECT CUP TO ANALYSE SUCH TRANSAC TION. ACCORDINGLY, THE TRANSFER PRICING ADJUSTMENT AS MAD E BY THE TPO BY IMPUTING INTEREST ON DELAY IN RECEIPT OF PAY MENT IS UNCALLED FOR AND ON THE FACTS OF THE PRESENT CASE A ND SAME IS DIRECTED TO BE DELETED. 5.3 SIMILARLY, THE ITAT DELHI BENCH IN ANOTHER CASE OF KUSUM HEALTHCARE PRIVATE LIMITED VERSUS ACIT, IN ITA NO. 6814/DEL/2014, HAS HELD AS UNDER 7. AN UNCONTROLLED ENTITY WILL EXPECT TO EARN A M ARKET RATE OF RETURN ON ITS WORKING CAPITAL INVESTMENT INDEPEN DENT OF THE FUNCTIONS IT CONFIRMS OR PRODUCTS IT PROVIDES. HOWE VER, THE AMOUNT OF CAPITAL REQUIRED TO SUPPORT THESE FUNCTIO NS VARIES GREATLY, BECAUSE THE LEVEL OF INVENTORIES, DEBTORS AND CREDITORS VARIES. HIGH LEVELS OF WORKING CAPITAL 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 H AVE A ITA NO. 404/DEL/2017 ASSESSMENT YEAR 2012-13 18 POSITIVE IMPACT ON THE OPERATIONAL RESULT. HIGHER S ALES PRICES ACTS AS A RETURN FOR THE LONGER CREDIT PERIOD GRANT ED TO CUSTOMERS. SIMILARLY IN RETURN FOR LONGER CREDIT PE RIOD GRANTED, A FIRM SHOULD BE WILLING TO PAY HIGHER PURCHASE PRI CE WHICH ADDS TO THE COST OF GOODS SOLD. THEREFORE, HIGH LEV ELS ACCOUNTS RECEIVABLE AND INVENTORY TEND TO OVERSTATE THE OPER ATING RESULTS WHILE HIGH LEVELS OF ACCOUNTS PAYABLE TEND TO UNDERESTIMATE THEM THEREBY NECESSITATING APPROPRIAT E ADJUSTMENT. THE APPROPRIATE ADJUSTMENTS NEED TO BE CONSIDERED TO BRING PARITY IN THE WORKING CAPITAL I NVESTMENT OF THE ASSESSEE AND THE COMPARABLES RATHER THAN LOOKIN G AT THE RECEIVABLE INDEPENDENTLY. SUCH WORKING CAPITAL ADJU STMENT TAKES INTO ACCOUNT THE IMPACT OF OUTSTANDING RECEIV ABLES ON THE PROFITABILITY. 12. ACCORDINGLY, KEEPING IN VIEW THE ABOVE FACTUAL POSITION AS WELL AS THE JUDICIAL PRECEDENTS, ANY SEPARATE ADJUS TMENT ON THE PRETEXT OF OUTSTANDING RECEIVABLES WHILE ACCEPT ING THE COMPARABLES AND TRANSFER PRICE OF UNDERLYING TRANSA CTION THAT IS SALE OF GOODS BY APPLICATION OF TNMM IS UNJUSTIF IED 5.4 THIS ORDER OF THE ITAT DELHI BENCH IN THE CASE OF KUSUM HEALTHCARE PRIVATE LIMITED (SUPRA) WAS UPHELD BY TH E HONBLE DELHI HIGH COURT IN THE CASE OF PRINCIPAL COMMISSIO NER OF INCOME TAX VERSUS KUSUM HEALTHCARE PRIVATE LIMITED IN ITA NO. 765/2016. 5.5 THE LD. CIT DR WAS SPECIFICALLY ASKED BY THE BE NCH TO POINT OUT TO US IF THERE WAS ANY DISTINGUISHABLE FACT IN THE CASE OF THE ASSESSEE AS COMPARED TO THE FACTS IN THE CASES OF B C MANAGEMENT SERVICES (P) LTD (SUPRA) AND KUSUM HEALTH CARE PVT. LTD (SUPRA) ITA NO. 404/DEL/2017 ASSESSMENT YEAR 2012-13 19 WITH RESPECT TO THE ISSUE OF INTEREST ON RECEIVABLE S. HOWEVER, THE LD. CIT DR ONLY PLACED RELIANCE ON THE GENERAL PRIN CIPLES OF INTERNATIONAL TAXATION AND COULD NOT DEMONSTRATE WI TH EVIDENCE THAT THE CASE OF THE ASSESSEE WAS ON A DIFFERENT FO OTING AS COMPARED TO THE FACTS IN THE CASES OF BC MANAGEMENT SERVICES (P) LTD (SUPRA) AND KUSUM HEALTH CARE PVT. LTD (SUPRA). THEREFORE, AFTER CONSIDERING THE RIVAL SUBMISSIONS AND ALSO TH E RELEVANT MATERIAL, WE FIND FORCE IN THE CONTENTION OF THE AS SESSEE THAT SINCE THE ASSESSEE IS A DEBT FREE COMPANY AND SINCE IT HA S NEITHER RECEIVED ANY INTEREST FROM ITS CREDITORS NOR PAID A NY INTEREST TO ANY OF ITS DEBTORS, IT CANNOT BE INFERRED THAT INTE REST-BEARING BORROWED FUNDS WERE UTILISED FOR EXTENDING ANY KIND OF LOAN TO ITS AE AND IT CANNOT BE RECKONED THAT ASSESSEE HAS GIVE N ANY BENEFIT TO THE AE BY BLOCKING ITS INTEREST-BEARING FUNDS TO THE AE BY EXTENDING THE CREDIT PERIOD. ACCORDINGLY, THE TRANS FER PRICING ADJUSTMENT, AS MADE BY THE TPO, BY IMPUTING THE INT EREST ON DELAY IN RECEIPT OF PAYMENT IS UNCALLED FOR ON THE FACTS OF THE PRESENT CASE AND WE DIRECT THAT THE SAME TO BE DELE TED. 6. IN THE FINAL RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ITA NO. 404/DEL/2017 ASSESSMENT YEAR 2012-13 20 ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH NOVEMBER, 2017. SD/- SD/- (B.P. JAIN) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL ME MBER DT. 13 TH NOVEMBER, 2017 GS COPY FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR BY ORDER ASSTT. REGISTRAR