Sanmina-SCI India Private Limited, Kancheepuram V. DCIT Corporate Circle 6(1), CHENNAI

ITTPA 23/CHNY/2018

• Counselvise Citation: [2024] 130 COUNSELVISE.COM (IT) 1537 (ITAT-CHENNAI)
• Duration Of Justice: 6 year(s) 2 month(s) 28 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 10-09-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 08-09-2024
• Assessment Year: 2013-2014
• Appeal Filed On: 13-06-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A. SASIKUMAR
• Assessee Lawyers: VIKRAM VIJAYARAGHAVAN
• Keywords: Transfer pricing; International transaction
• Section: 92B

Judgement Text

आयकर अपीलȣय अͬधकरण,‘ डी’ Ûयायपीठ,चेÛनई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI Įी महावीर ͧसंह, उपाÚय¢ एवं Įी एस.आर.रघ ु नाथा, लेखा सदèय के सम¢ BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENTAND SHRI S.R. RAGHUNATHA, ACCOUNTANT MEMBER आयकर अपील सं./IT(TP)A No.23/CHNY/2018 Ǔनधा[रण वष[/Assessment Year:2013-14 Sanmina-SCI India Pvt. Ltd., OZ-1, SIPCOT Hi-tech SEZ, Oragadam, Sriperumbudur Taluk, Kancheepuram Dist.-602 105. PAN: AAFCS 8737E Vs. The Deputy Commissioner of Income Tax, Corporate Circle 6(1), Chennai. (अपीलाथȸ/Appellant) (Ĥ×यथȸ/Respondent) अपीलाथȸ कȧ ओर से/Appellant by : Shri Vikram Vijayaraghavan, Advocate Ĥ×यथȸकȧ ओर से/Respondent by : Shri A. Sasikumar, CIT स ु नवाई कȧ तारȣख/Date of Hearing : 09.09.2024 घोषणा कȧ तारȣख/Date of Pronouncement : 11.09.2024 आदेश /O R D E R PER MAHAVIR SINGH, VICE PRESIDENT: This appeal by the assessee is arising out of order passed by the Commissioner of Income Tax (Appeals)-15, Chennai in ITA No.55/2017-18/CIT(A)-15 dated 27.02.2018. The assessment was framed by the DCIT, Corporate Circle6(1), Chennai u/s.143(3) r.w.s - 2 - IT(TP)A No.23/Chny/2018 92CA(4) r.w.s144C(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’) dated 28.03.2017. 2. At the outset, it is noticed that this appeal was adjudicated vide order dated 06.09.2023 and subsequently, vide Miscellaneous Application filed by assessee in MA No.141/CHNY/2023, the Tribunal’s order was recalled and appeal was fixed for fresh hearing. 3. The only issue in this appeal of the assessee is against order of the CIT(A) confirming final assessment order on the issue of treating outstanding receivables by the assessee from its Associated Enterprises as separate international transactions u/s.92B(1) of the Act and making adjustment on account of interest on the outstanding receivables and also raised, without prejudice to the above, issue of netting off payable outstanding to AEs has to be allowed against receivables outstanding. For this issue, the assessee has raised ten grounds which are argumentative and factual and hence, need not be reproduced. 4. Brief facts are that the assessee is engaged in business of providing services related to back office and filed its return of income for relevant assessment year 2013-14 on 30.11.2013. The - 3 - IT(TP)A No.23/Chny/2018 assessee’s case was selected for scrutiny assessment and accordingly, assessee’s case was referred to TPO u/s.92CA of the Act for computation of arm’s length price (ALP) in relation to international transactions. The TPO passed an order u/s.92CA(3) of the Act dated 28.10.2016, wherein an upward adjustment of Rs.19,32,09,242/- was proposed with regard to outstanding receivables amounting to Rs.4,51,91,92,969/- at the end of the year i.e.31.03.2013 and no benchmarking study was carried out by the assessee despite specific amendment introduced in the Finance Act, 2012 with retrospective effect from 01.04.2002. The receivables declared by the assessee from AEs and non-AEs was Rs.402,84,97,855/- and Rs.49,06,85,114/- respectively. The TPO therefore, made adjustment to transfer pricing study for a sum of Rs.19,32,09,242/- and proposed addition and accordingly, the Assessing Officer made addition. Aggrieved, the assessee preferred appeal before the CIT(A). The CIT(A) confirmed action of the Assessing Officer. The CIT(A) also directed the TPO/ Assessing Officer to adopt LIBOR rate and not SBI PLR rate, while giving effect to the order. Aggrieved, the assessee is in appeal before the Tribunal. - 4 - IT(TP)A No.23/Chny/2018 5. Before us, the ld.counsel for the assessee argued that the TPO while making adjustment of interest on the receivables outstanding has accepted the position that the interest is factored in the working capital adjustment and for this, he drew our attention to the relevant observations of TPO, which reads as under:- “The assessee was show caused why an adjustment should not be made on the receivables outstanding more than the credit period provided in the invoices. Further the receivable outstanding were treated as international transactions with retrospective effect from 01.04.2002 vide Finance Act 2002. It was also pointed out that  The average receivable days of the comparable selected is 77 days  Working capital adjustment is a comparability adjustment for fine tuning the margin of the comparables to provide for better comparability. It is a post margin adjustment for the money retained by the AE and hence working capital adjustment done to the margins of the comparables would not be a substitute for the receivable adjustment. In view of the above, the ld.counsel argued that although the TPO had not accepted that the margins or the interest of comparables on account of receivables outstanding are not substituted in the working capital adjustment but he admitted that the working capital adjustment is a comparability adjustment for fine tuning the margin of comparables to provide for better accountability. He also drew our attention to the discussions carried out by the TPO on comparables wherein operating margins are considered and he drew our attention to the following:- - 5 - IT(TP)A No.23/Chny/2018 “The operating margin of the assessee is 3.20% on operating cost. The assessee has requested for working capital adjustment and it has submitted details to demonstrate the working capital position of the company impacted its margin. After due consideration of facts and evidences, the working capital claim of the assessee is accepted. The adjusted margin of the comparable companies after providing working adjustment is 1.75%. Since the operating margin of the assessee is more than the comparables selected by this office, no adjustment is considered necessary for this segment.” Accordingly, the ld.counsel argued that the working capital adjustment margin subsumes the interest on delayed receivables and no separate adjustment is required. He agreed that in view of the amendment by Finance Act, 2012 amended section 92B which reads the definition of international transactions under the amendment is retrospective w.e.f. 01.04.2002. The receivables on overdues is defined as international transaction and hence, receivables arising during the course of business forms part of capital financing and the definition of international transaction, therefore includes receivables arising during the course of business. The ld.counsel for the assessee relied on the decision of Hon’ble Delhi High Court in the case of Kusum Helathcare Pvt. Ltd., in ITA No.765/2016 dated 25.04.2017,wherein the Hon’ble Delhi High Court held in paras 10 to 12 as under:- “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 - 6 - IT(TP)A No.23/Chny/2018 „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 supplies made to an 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). 12. Consequently, the Court is unable to find any error in the impugned order of the ITAT giving rise to any substantial question of law for determination. The appeal is, accordingly, dismissed.” In view of the above, the ld.counsel argued that although the receivables, in view of Explanation to Section 92B of the Act is an international transaction but as held by Hon’ble Delhi High court in case, the assessee has already factored in the impact of receivables working capital and thereby on this profitability viz-a-viz that of its comparable, no further adjustment, only on the basis of outstanding receivables would not have been made. Hence he argued that, as - 7 - IT(TP)A No.23/Chny/2018 observed by TPO that the working capital claim of assessee demonstrating the working capital position of the company impacted its margin was accepted clearly refracts that the assessee has already factored in the impact of receivables on the working capital. Hence, no adjustment on account of receivables from parties be made. 6. Another facet of argument made by ld.counsel is that the assessee is a debt free company and there is no impact on working capital adjustment as the assessee has not charged any interest on non-AE transactions or AE transactions as well. For this proposition, he relied on the decision of Co-ordinate Bench of this Tribunal in the case of Integra Software Services P Ltd., vs. DCIT in ITA No.736/CHNY/2017 dated 21.10.2022, wherein the Tribunal has considered the issue of zero debt entity and finally deleted the addition by observing in para 3.4 as under:- 3.4 From the fact, it emerges that the assessee has not charged any interest on outstanding receivables from AEs and non-AEs. Further, the loans advanced to AEs have been benchmarked separately. It also emerges that the assessee is a zero-debt entity and do not incur significant interest expenditure. Therefore, to allege that the assessee accommodated its AEs in the guise of receivables would not be a correct proposition. Therefore, this addition is not sustainable. We order so. The corresponding grounds raised by the assessee stand allowed. - 8 - IT(TP)A No.23/Chny/2018 6.1 The ld.counsel also relied on the decision of Hon’ble Delhi Court in the case of PCIT vs. Inductis India Pvt. Ltd., in ITA No.175/ 2019 dated 12.04.2023 wherein the Hon’ble Delhi Court held that “the assessee company being a debt free company the question of receiving any interest on receivables did not arise, thereby adjustment made by AO on account of interest on outstanding receivables was liable to be deleted.” The ld.counsel stated that the TPO has admitted the factum that the assessee is a debt free company and once the assessee is a debt free company, no adjustment on account of receivables can be made. 7. On the other hand, the ld.CIT-DR relied on the submissions filed by the previous CIT-DR dated 24.04.2023 and drew our attention to the receivables assessee company started realizing before 31 st March year after year as information given by assessee in audit report in Form No.3CEB. Hence, the ld.CIT-DR argued that it can be appreciated that the legislative intention of amendment in Section 92B by the Finance Act, 2012 is very clear and moreover, assessee company has signed APA’s for assessment years 2015-16 to 2019-20 on 15.03.2019, wherein the receivables was not allowed to roll back. Hence, he asked the Bench to confirm the adjustment made by TPO and confirmed by CIT(A). - 9 - IT(TP)A No.23/Chny/2018 8. We have heard rival contentions and gone through facts and circumstances of the case. We have gone through the decision of Hon’ble Delhi High Court in the case of Kusum Healthcare Pvt. Ltd., supra cited by ld.counsel for the assessee and noted that the Hon’ble High Court has clearly held that inclusion in the Explanation to Section 92B of the Act by the Finance Act, 2012 in regard to 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 characterized as an international transaction. The Hon’ble High Court held that there may be 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 case to case basis and the impact of this would have an the working capital of the assessee will have to be studied and enquired properly by the AO for analyzing the statistics over a period of time to find out the pattern which would indicate that viz-a-viz the receivables for the supplies made to its AE, the arrangement reflects an international transaction intended to benefit the AE in some way. It means that the Hon’ble High Court has recognized the concept but since there was no proper enquiry by the AO or there is no analysis of statistics and the variety of factors were not investigated, the Hon’ble High Court has not - 10 - IT(TP)A No.23/Chny/2018 confirmed the adjustment. Further, the Hon’ble High Court held that when the assessee having already factored in the impact of receivables on the working capital and thereby on its profitability viz- a-vis with that of its comparables, any further adjustment, only on the basis of outstanding receivables would have distorted the picture. Hence, it was held that it is not permissible. In this present case before us also, the TPO has not carried out basic exercise or any analysis on the facts of the case or the factors mentioned by the Hon’ble Delhi High Court. The TPO has not carried out any exercise of statistics and the pattern which would indicate that the receivables from supplies will benefit the AEs in some way. We have gone through the TPO’s order and noted that the TPO has compared the average receivable to 77 days and receivable days are 117 from AEs and from Non-AEs it is 152 days. It means that the facts noted by TPO in its order are favoring the assessee. Even otherwise, as regards to second aspect of the case that the assessee is a debt free company and there is no debt on the assessee, it will not impact the profitability of the company because the assessee is having largely its own funds and there is no debt secured by assessee on which interest is tobe paid by the assessee. Hence, the delayed receivables will not impact in any way. Hence, following the Co- ordinate Bench decision in the case of Integra Software Services Pvt. - 11 - IT(TP)A No.23/Chny/2018 Ltd., supra, we direct the AO/TPO to delete the upward adjustment made and accordingly, recomputed the income of the assessee. 9. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 11 th September, 2024 at Chennai. Sd/- Sd/- (एस.आर. रघ ु नाथा) (S.R. RAGHUNATHA) लेखा सदèय/ACCOUNTANT MEMBER (महावीर ͧसंह ) (MAHAVIR SINGH) उपाÚय¢ /VICE PRESIDENT चेÛनई/Chennai, Ǒदनांक/Dated, the 11 th September, 2024 RSR आदेश कȧ ĤǓतͧलͪप अĒेͪषत/Copy to: 1. अपीलाथȸ/Appellant 2. Ĥ×यथȸ/Respondent 3. आयकरआय ु Èत /CIT, Chennai 4. ͪवभागीय ĤǓतǓनͬध/DR 5. गाड[ फाईल/GF.