SHAKTI HORMANN PRIVATE LIMITED,HYDERABAD V. DCIT CIRCLE -3(1), HYDERABAD

ITA 452/HYD/2022

AI Insights

The case involves Shakti Hormann Private Limited appealing against the assessment orders for the years 2017-18 and 2018-19, which included transfer pricing adjustments related to interest on ECB and royalty payments. The Tribunal examined whether the adjustments made by the Transfer Pricing Officer (TPO) and confirmed by the Dispute Resolution Panel (DRP) were in accordance with the arm's length principle and relevant RBI guidelines. The Tribunal found that the interest rates applied by the assessee on ECB were within the permissible limits set by the RBI for similar maturities and risks, and that the royalty payments were made as per a valid agreement which had been accepted in previous years without adjustments. Consequently, the Tribunal deleted the adjustments. Additionally, the Tribunal directed a re-examination of non-transfer pricing related disallowances to avoid double taxation and ensure correct application of the law.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 126178 (ITAT-HYDERABAD)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB-A
• Assessment Year: 2018-2019
• Other Referred Cases: DCIT Vs. Devgen Seeds & Crop Technology (P.) Ltd., CIT Vs. GE India Technology Centre (P.) Ltd., M/s Four Soft Ltd., Vs. DCIT, Aurobindo Pharma Ltd. Vs. ACIT, Siva Industries & Holdings Ltd., Tata Auto comp Systems Limited vs. ACIT, Dr. Reddy's Laboratories Ltd. Vs. Addl. CIT, M/s Aban Offshore Ltd. Vs. DCIT, CIT Vs. Tech Mahindra Ltd., Checkmate Services Pvt. Ltd. Vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B.BALAKRISHNA
• Assessee Lawyers: P. MURALI MOHAN RAO
• Keywords: Set aside; Transfer pricing; International transaction; Question of law; Corroborative evidences; Commercial expediency; TDS; Earning of tax free income; Notional interest
• Section: 143(3); 143(2); 250; 143(1); 48; 153; 43; 22; 13; 92CA; 145; 40A(3); 43B; 144C; 40(a)(ia); 92B; 92C; 20

Judgement Text

" आयकर अपीलीय अधिकरण, हैदराबाद पीठ IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘A’ Bench, Hyderabad Before Shri Vijay Pal Rao, Vice President and Shri Manjunatha G., Accountant Member आ.अपी.सं /ITA-TP No.451/Hyd/2022 & 452/Hyd/2022 (निर्धारण वर्ा/Assessment Year: 2017-18 & 2018-19) Shakti Hormann Private Limited Hyderabad [PAN : AADCS4024Q] Vs. Asst.Commissioner of Income Tax Circle-3(1) Hyderabad (Appellant) (Respondent) निर्धाररती द्वधरध/Assessee by: Shri P.Murali Mohan Rao, AR रधजस् व द्वधरध/Revenue by: Shri B.Bala Krishna, CIT-DR सुिवधई की तधरीख/Date of Hearing: 15/04/2025 घोर्णध की तधरीख/ Date of Pronouncement: 21/04/2025 आदेश / ORDER PER VIJAY PAL RAO, VICE PRESIDENT: These appeals filed by the assessee are directed against the assessment orders dated 21.07.2022 and 28.07.2022 passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (“the Act”) in pursuant to the directions of the Dispute Resolution Panel (“the DRP”) u/s 144C(5) of the Act for the assessment year 2017-18 and 2018-19 respectively. 2 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited 2. For the assessment year 2017-18, the assessee has raised the following grounds of appeal : 1. On the facts and in the circumstances of the case, the Final assessment order (\"FAO\") dated 21.07.2022 passed by the Assistant Commissioner of Income Tax and the Ld.TPO order dated 27.01.2021 passed u/s 92CA(3) of the Act by Deputy Commissioner of Income Tax (herein after referred to as ‘TPO’) are bad both in the eye of law and on facts. 2. Erred in making adjustment of Arm’s Length Price for Rs.24,40,926/-towards international transaction of Interest on ECB given to AE’s:- 2.1. The Ld. TPO/ AO erred in not following the procedure laid down under the provisions of Section 92C of the Act relating to the ‘Computation of Arm’s Length Price. 2.2. The Ld. TPO/AO ought to have appreciated the fact that the assessee has received the funds in India from outside India for the expansion and increasing the capacity of manufacturing and acquiring the machinery in the normal course of business. 2.3. The Ld. TPO/AO ought to have appreciated the facts of case that the amount of loan has been received and used in India and same should be compared with the bank interest rates in India and not with the international rate. 2.4. The Ld. TPO/AO ought to have appreciated the fact that the rate of interest paid by assessee to its AE is lesser than the rate of interest that would have been charged by the banks i.e., base rate of SBI under uncontrolled transactions. 2.5. The Ld. TPO/AO ought to have appreciated the facts that the assessee company paid interest rate LIBOR + 5% half yearly. However, as per the base rate of SBI, bank interest rate comes out to be around 15% p.a. as against the rate of interest paid by the assessee on the ECB of LIBOR+5% half yearly paid by assessee. 3 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited 2.6. The Ld. TPO ought to have appreciated the fact that the case laws referred by the TPO are relating to amount of loan or advances given outside India on which Hon’ble court charged interest at international rates. However, in the case under consideration, the assessee has received and the utilised the funds in India and not paid or receivable in India. Hence the international interest rate not applicable. 2.7. The Ld.TPO/AO ought to have appreciated the fact that the said issue under consideration was covered in the previous year where Ld.TPO has accepted the interest payment is at arm’s length transaction and no adjustment has been proposed. 2.8. The TPO ought to have appreciated the fact that no transfer pricing adjustment can be made on hypothetical and notional basis, without there being any material on record justifying the fact that there had been under charging of such interest on real income. 2.9. Erred in directing TPO to adopt the six month average LIBOR plus 250 basis points. 3. Erred in making the upward adjustment of Arm’s Length Price for Rs. 14,04,364/-Payment of Royalty. 3.1. The Ld. TPO/ AO erred in not following the procedure laid down under the provisions of Section 92C of the Act relating to the ‘Computation of Arm’s Length Price 3.2. The Ld. TPO ought to have appreciated the fact that the licensor i.e., Hormann KG Verkaufsgesellschaft is a leading manufacturer of High-speed doors in the international market and the assessee company is manufacturing the same product by using the technics / information for which the assessee is liable to pay consideration to the licensor. 3.3. The Ld. TPO/ AO ought to have appreciated the fact that the assessee company manufacturing and selling the certain products as per the technical specifications and standards of the licensor ie, Hormann 4 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited KG Verkaufsgesellschaft and for which royalty has been paid. 3.4. The Ld. TPO/AOought to have appreciated the fact that the assessee company has paid royalty of 100 Euros for each sell of high-speed doors which are manufactured by the technical specifications and standards as per agreement. 3.5. The Ld. TPO/AO ought to have appreciated the facts of case that the assessee company has been using the trade mark, know-How, technology and man power of the Hormann KG Verkaufsgessellschaftfor making the high- speed doors and selling in local/ international market as per agreement. 3.6. The Ld.TPO/AO ought to have appreciated the fact that the assessee has provided all the necessary supporting evidence like Agreement and Invoices of payment of royalty and supporting explanation in support of the payment of Royalty paid to licensor company. 3.7. The Ld. TPO ought to have appreciated the fact the assessee company is selling the same high-speed doors in the market at the price of approx. ₹ 2 lakh per door and on the same door approx. ₹ 8,000/- has been paid as royalty to the licensor. 3.8. The Ld. TPO/AO ought to have appreciated the fact that the said issue under consideration was covered in the previous year where Ld. TPO has accepted the interest payment is at arm’s length transaction and no adjustment has been proposed. 4. Erred in upholding the addition of Rs.12,63,972/- towards Interest on receivables: 4.1. The AO/TPO erred in not following the procedure laid down under the provisions of Section 92C of the Act relating to the ‘Computation of Arm’s Length Price’. 4.2. The Ld. AO/TPO ought to have appreciated the fact that the amendment in the 2012 Finance Act does not cover outstanding receivables arising out of assessee’s sale transaction as the word ‘capital financing’ used there 5 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited is particularly refers to loans or advances during the normal course of business, whereas in Assessee’s case, these are outstanding receivables arising out of services rendered but not capital financing. 4.3. The Ld. AO/TPO ought to have appreciated the fact that the outstanding receivables relate to sale of services and not in the nature of any advance/loans and therefore it cannot come under the purview of ‘International Transaction’ as defined u/s 92B of the Act. 4.4. The Ld.AO/TPO ought to have appreciated the fact that the principal amount of outstanding receivables is at Arm’s Length Price and the assessee has adopted TNMM method for determining the ALP of its transactions and the operating margin of the assessee is much higher than its comparables, hence any adjustment with regard to ALP affecting the operating margin would be unjustifiable and against the provisions of Section 92C of the Act 4.5. The AO/TPO erred in re-characterizing the nature of transaction from ‘Receivable’ to ‘loan’ which is not permissible u/s. 145 of the Act. 4.6. The AO/TPO Ought to have appreciated the fact that the outstanding receivables are consequential/ closely linked to the sale of services to the AE during the normal course of business and the same has been held by TPO to be within arm’s length and making secondary TP adjustment by way of imputing interest on outstanding receivables is unwarranted. 4.7. The Ld. AO/TPO ought to have appreciated the fact that sales to AE includes a substantial profit element with interest aspect being embedded in it and therefore, interest on receivables cannot be coined as a separate international transaction as envisaged u/s 92B of the Act. 4.8. The AO/TPO erred in not considering the fact that working capital adjustment itself takes the impact of interest on receivables & accordingly no separate adjustment can be made for the receivables. 4.9. The AO/TPO ought to have appreciated the fact that the assessee is following a policy of not charging 6 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited interest on receivables irrespective of the fact that whether the sales are made to AE or Non-AE. 4.10. The AO/TPO ought to have appreciated that the assessee did not charge any interest on advances given to its Non-AE’s and AE. 4.11. The AO/TPO ought to have appreciated the fact that no ALP adjustment is required to be made in a case where after reducing the amount of notional interest charged on outstanding receivables from operating profit, the margin of comparable is less than the margin of the assessee. 4.12. The AO/TPO ought to have appreciated the fact that the assessee is not paying any interest on trade payables or advance from customers and it is not justified to charge interest on trade Receivables, where assessee itself not paying interest to other on trade payables 4.13. The AO/TPO ought to have appreciated the fact that allowing of extended credit period to the associated enterprises is closely linked to the determination of sale price, which is in-turn a base to arrive at the margins of the assessee. 4.14. Without appropriating the fact that the outstanding receivables are foreign currency receivable and same has to be benchmarked with the LIBOR rate and not SBI rate. 5. The appellant may add, alter or modify any other point to the Grounds of appeal at any time before or at the time of hearing of the appeal. 3. Ground No.1 is general in nature, which does not require specific adjudication. 4. Ground No.2 is regarding transfer pricing adjustment made towards interest payment on external commercial borrowing (“ECB”). The assessee company entered into three 7 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited ECB transactions vide three separate loan agreements with its Associated Enterprises(“AEs”). The details of the transactions of ECB are as under : ECB Date of Agreement entered Amount in EURO Tenure of ECB ECB-I 23.05.2013 1,420,000 8 years (96 months from last drawn) ECB-II 11.11.2014 850,000 8 years (96 months from last drawn) ECB-III 05.06.2015 1,610,462 5 years (60 months from last drawn) 5. As per the loan agreement, the assessee agreed to pay interest at the rate of LIBOR+500 basis points (LIBOR+5%) for ECB-I and ECB-II and for ECB-III, interest was paid @LIBOR+3.50%. The assessee claimed that the payment of interest was at arms length, however, the Transfer Pricing Officer (“the TPO”) has determined the Arms Length Price (“ALP”) at LIBOR+200 basis points and consequently proposed the transfer pricing adjustment in respect of the interest on ECB to the tune of Rs.34,31,724/-. The DRP has modified the ALP by 8 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited taking six months average rate of LIBOR + 250 basis points instead of 200 basis points adopted by the TPO. Consequently, the AO has passed the final assessment order, making addition on account of transfer pricing adjustment towards interest on ECB. 6. Before the Tribunal, the learned AR of the assessee has submitted that the loan under ECB was taken by the assessee from the Associated Enterprises in the year 2013, 2014 and 2015 and no adjustments were either made or proposed in any of the previous assessment years, except in these two assessment years. He has further submitted that the ECB transactions have been verified by the TPO in the preceding year i.e. 2014-15 and accepted the same at arms length, in view of the RBI Circular No.12/2013-14 dated 01.07.2013 and RBI FED Master Direction No.5/2015-16, which provides all-in-cost ceilings regarding interest on ECB over 6 months LIBOR+500 basis points for the loan having maturity period of more than 5 years and LIBOR+350 basis points on the loans having maturity period of 3 to 5 years. The Ld.AR submitted that when both the transactions of ECB-I and ECB-II are the loan taken by the assessee from its AE for more than 5 years, then the ceiling of interest payment as prescribed by the RBI as LIBOR+500 basis is ALP. The assessee has paid and agreed to pay interest at the same rate of LIBOR+500 basis points and therefore, the same is at arms length and no adjustment is called for or warranted. In support of his contentions, he has relied upon the decision of 9 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited this Tribunal in the case of DCIT Vs. Devgen Seeds & Crop Technology (P.) Ltd. in ITA No.399/Hyd/2016 dated 24.03.2017. He has also relied upon the judgement of Hon’ble High Court of Karnataka in the case of CIT Vs. GE India Technology Centre (P.) Ltd. Bangalore [2021] 125 Taxmann.com 168. Thus, the learned AR has submitted that even otherwise, the interest paid by the assessee on ECB is at arms length, in pursuance with Safe Harbour Rules provided under Income Tax Rules. The TPO has applied the case law, involving the issue of loan given by the assessee for an AE, which is not applicable in case of ECB loan taken by the assessee from AE. Thus, he has contended that when the transaction of payment of loan on ECB was already accepted by the TPO in the preceding years and there is no change in respect of the transactions of payment of interest, then taking a different view on the part of the TPO for the year under consideration is not permissible. 7. On the other hand, the Ld.DR has submitted that it is not clear from the record, whether the assessee has foreclosed the loan before the tenure of 5 years or not and therefore, the arms length interest rate applied by the TPO and the DRP is appropriate and justified, in view of the various judgements on this issue. He has relied upon the directions of DRP in para 2.2.6. 8. We have considered the rival submissions as well as the material on record. For the assessment year 2017-18, the 10 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited TPO has determined the ALP of interest on ECB by adopting LIBOR+200 basis points for bench marking the interest paid by the assessee at LIBOR+500 basis and consequently proposed adjustment of Rs.34,31,724/-. The DRP, though agreed in principle, that in case loan is taken for more than 5 years, then the rate provided by the RBI in Circular as LIBOR+500 basis is applicable. However, the DRP has taken the tenure of the loan from the date of agreement to the assessment year under consideration in para 2.2.6 as under : “2.2.6. Since the external commercial borrowing loan is taken from the AE located abroad the interest payments are made in foreign currency. In our considered view, the loans are categorized as long term and short term i.e. working capital loan. We observe that the banks are adopting the 200 bps on working capital loans as spread and higher rates beyond 500 bps on the long term loans such as term loans. The RBI in its prudential norms has given windows for the pricing of interest and the spread. Based on the RBI guidelines, the term upto 5 years can have spread of 300 bps and beyond 5 years, it can be 500 bps. In this case as per the agreement the effective date of loan was considered 11 October 2014. Considering the fact that the term of assessee’s loan is less than 5 years, the rating should be below 300 basis points. Further, in the case of DCIT Vs. Devgen Seeds and Crop Technology Private Limited (ITA No.399/Hyd/2016) the Hon’ble ITAT observed that “in our considered view, the relevant issue is to change the interest on international transaction based on the LIBOR or any other rates which are the basis for negotiation between the contracting parties and the rates of interest or spread cannot be the same for all the international loans irrespective of their terms, risk etc.” In view of the above going by the RBI guidelines the rate should be below 300 bps. Therefore, the TPO is directed to adopt the Six month average LIBOR plus 250 basis points.” 11 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited 9. Once the tenure of the loan as per the agreement between the assessee and the AE is more than 5 years, then this view of the DRP, considering the tenure of the loan from the effective date of agreement till the assessment year under consideration is highly arbitrary and unjustified. The tenure of the loan as agreed between the parties is clearly manifested from the agreement itself and therefore, there is no reason to alter the tenure of the loan, when there is no payment or foreclosure of the loan during the year under consideration. We further note that for the assessment year 2014-15, the TPO vide order dated 31.10.2017 passed u/s 92CA(3) of the Act has accepted the interest paid on ECB at arms length in para 11 as under : “11.With regard to interest on External Commercial Borrowings the tax payer has paid interest @LIBOR +5% half yearly. As per RBI Master Circular No.12/2013-14 (Updated till June 16, 2014) dated July 01, 2013, the existing all-in-cost ceilings for ECB are as under : Average Maturity Period All-in-cost ceilings over 6 month LIBOR* Three years and upto five years 350 basis points More than five years 500 basis points Here, as the maturity period of the tax-payer is 96 months, and as the tax payer adopted 6 month LIBOR+500 points 12 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited on the interest payment towards ECB, the transaction is considered to be at arm’s length.” 10. Thus, it was found by the TPO that maturity period of loan is 96 months and therefore, as per the rate provided by the RBI Master Circular 12/2013-14 dated 01.07.2013, the same is considered at arms length. For the year under consideration, there is no change either in the transaction of loan (ECB) or payment of interest as provided in the loan agreement, therefore, the TPO was not justified to apply a different rate of interest as arms length price from the view taken for the A.Y.2014-15. Even otherwise, this issue has been considered by the coordinate bench of this Tribunal in the case of DCIT Vs. Devgen Seeds & Crop Technology (P) Ltd. (supra) in para 9 and 10 as under : “9. Considered the rival submissions and perused the material facts on record as well as the decisions cited. While passing the order, the AO/TPO relied on the following decisions of the ITAT, Hyderabad. 9.1 M/s Four Soft Ltd., Vs. DCIT, ITA No. 1495/Hyd/2010 for AY 2006-07, order dated 9th September, 2011. The coordinate bench in this case has held as under: “19. We have considered the rival submissions and perused the materials available on record. We do not find any merit in the arguments of the learned departmental representative as we find that the ALP is to be determined for the international transaction, that is, on international loan and not for the domestic loan. Hence, the comparable, in respect of foreign currency loan in the international market, is to be LIBOR based which is internationally recognised and adopted. In our considered view, the DRP rightly directed the 13 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited assessing officer to adopt the LIBOR plus for the purpose of TP adjustment. Our view is fortified by the decision of the Madras Bench in the case of Siva Industries [supra]. We do not find any merit in the arguments of the learned counsel for the assessee that the DRP should have adopted the EURIBOR for the purpose of the TP adjustments, as we find that the mostly used and recognised benchmark rate for international loan is LIBOR based. Hence, the DRP rightly directed the assessing officer to adopt the LIBOR rates. We confirm the directions of the DRP.” 9.2 Aurobindo Pharma Ltd. Vs. ACIT, [2014] 42 Taxmann.com 556 (Hyd. In this case, the coordinate bench has held as under: 4.3 We have considered the issue and examined the facts. With reference to principle that LIBOR + specific percentage points is to be considered as ALP, there is no dispute as this issue was decided by various coordinate benches of Tribunal in various cases. Few of them are as under: 4.4 In the case of Siva Industries & Holdings Ltd. 46 SOT 112 (Chennai) held that \"A perusal of the order of the TPO clearly shows that the assessee had raised the funds by way of issuance of 0 per cent optional convertible preferential shares. Thus it is noticed that the funds raised by the assessee company for giving the loan to India Telecom Holdings Ltd., Mauritius, which is its Associated Enterprises and which is the subsidiary company, is out of the funds of the assessee company. It is not borrowed funds. The assessee has given the loan to the Associated Enterprises in US dollars. The assessee is also receiving interest from the Associated Enterprises in Indian rupees. Once the transaction between the assessee and the Associated Enterprises is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to 14 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIB OR would come into play. In the circumstances, we are of the view that it LIB OR rate which has to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the Associated Enterprises. As it is noticed that the average of the LIB OR rate for 1- 4-2005 to 31-3-2006 is 4.42 per cent and the assessee has charged interest at 6 per cent which is higher than the LlBOR rate, we are of the view that no addition on this count is liable to be made in the hands of the assessee. In the circumstances, the addition as made by the Assessing Officer on this count is deleted\". 4.5 In the case of CIT Vs. Tech Mahindra Ltd. 46 SOT 141 (Mum) tribunal held that \" When there is a choice between the interest rate of a currency other than the currency in which transaction has taken place and the interest rate in respect of the currency in which transaction has taken place, in our considered view, the latter should be adopted. In Siva Industries & Holdings Ltd.'s case ( supra ), co-ordinate Bench was making a choice between the PLR (Prime Lending Rate in India) and the LIB OR (London Inter Bank Offered Rate). The co- ordinate Bench held that \"once the transaction between the assessee and the Associated Enterprises is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transactions\", and accordingly proceeded to take into account interest rate in terms of LIBOR basis. We have adopted the same approach by taking into account the commercial principles and practices with regard to a US Dollar denominated extended credit for arriving at the benchmark rate, and take LIB OR as the base. Accordingly, the LIBOR (US Dollar) has to be as benchmark for US Dollar transactions - rather than 15 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited the rate of interest on domestic borrowings, even which is lower than the interest rate of 10 per cent taken as ALP by the TPO, or, for that purpose, rate of interest on any other currency loans.\" 4.6 In the case of M/s Four Soft Ltd Vs DCIT Circle- l(3), Hyderabad, ITA No. 1495/Hyd/2010 tribunal held that \"We have considered the rival submissions and perused the materials available on record. We do not find any merit in the arguments of the learned departmental representative as we find that the ALP is to be determined for the international transaction, that is, on international loan and not for the domestic loan. Hence, the comparable, in respect of foreign currency loan in the international market, is to be LIBOR based which is internationally recognized and adopted. In our considered view, the DRP rightly directed the assessing officer to adopt the LIB OR plus for the purpose of TP adjustment. Our view is fortified by the decision of the Madras Bench in the case of Siva Industries\". 4.7. Similar view has been taken in the case of Tata Auto comp Systems Limited vs. ACIT, ITAT Mumbai, ITA NO. 7354/MUM/11(A. Y. 2007-08). 4.8. On the legal principles there is no dispute that LIBOR specific percentage points has to be considered as ALP. There is also no basis, as rightly observed by the DRP, to adopt corporate bonds rate at 17.26%. Therefore, in principle we agree with Assessee’s contentions that libor + percentage points is to be accepted. However, it is seen from the details furnished at page 91 of paper book, few of loans provided in AY 2003-04 and 2004-05 in the case of Arubindo and Arubindo Farmo industria Farmaceutica Ldta and loans obtained from Axis bank and Federal Bank where the rate of interest paid was LIBOR +2.1% and LIBOR +3.25%. On these loans Assessee seems to have advanced at LIBOR +3% to Aurbindo whereas rate of interest received in Aurobindo Farmo 16 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited industria Farmaceutica LTDA is 13.06%. Therefore, to the extent of advances which were given at a rate lesser than the rate at which those are obtained, the AO is directed to examine and if so, the rate of interest paid should be considered as ALP in order to determine the interest received. With these directions, this ground considered partly allowed. 9.3. In the case of Dr. Reddy’s Laboratories Ltd. Vs. Addl. CIT, [2014] 48 Taxmann.com 374 (Hyd.), the coordinate bench has held as under: “11. We have considered the rival contentions. Since the assessee has accepted 7 per cent. in the earlier years. The Tribunal felt that 7 per cent is reasonable and accordingly LIBOR linked interest was not considered. The issue in Four Soft Ltd. (supra) relied upon by the assessee is not about bank interest rate or fixed deposit interest rate. The issue contested was rate of LIBOR, the actual LIBOR rate as per the assessee was 4-l2 per cent whereas the Dispute Resolution Panel has taken LIBOR at 5.7 per cent. The Tribunal has directed the Assessing Officer to examine the correct rate of LIBOR and adopt LIBOR + rate in that case. There are other judgments also where 6 per cent. interest received was considered as LIBOR + 157 base points, so, 7 per cent interest rate approved would be about LIBOR + 257 base points. The co-ordinate Benches are approving on different factual situation, LIBOR + I per cent to 3 per cent and considering that, we also feel that 7 per cent rate is reasonable which is equivalent to LIBOR + 2 per cent. Be that as it may, since the assessee has accepted 7 per cent in the earlier year and that is the basis for directing to adopt 7 per cent by the Tribunal, we do not see any reason to modify the directions of the Tribunal in this regard. Accordingly, this contention of the assessee is rejected.” 17 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited 9.4. From the above judicial pronouncements, the coordinate bench has adjudicated that in respect of foreign currency loan in the international market, the LIBOR based interest has to be adopted. In the case of Four Soft and Aurobindo (supra), the coordinate bench has only adjudicated that LIBOR based interest alone are to be considered for “ALP adjustment not the domestic PLR. In the case of Dr. Reddy Labs (supra), the coordinate bench has only confirmed the interest rate already accepted by the assessee at 7%, which was considered to be reasonable. Nowhere, it was adjudicated that the bench marking of interest at LIBOR + 200 bps. Moreover, all the interest rates were received by the assessee for making investment in AEs, in the given case, assessee had borrowed the loan and paid the interest. The bench marking has to be done keeping in mind the internal as well as external “CUP”. 9.5. After careful analysis of the judicial pronouncements and RBI guidelines, we are of the view that the assessee has borrowed the loan from its AEs in terms of FCD and ECB. For the purpose of “FCD”, the bench marking has to be done considering the internal as well as external “CUP”. Obviously, the interest charged is better than internal “CUP”. The external “CUP” are the rates available in the international market. The assessee has already submitted that the LIBOR rate at that point of time was 1.24% with the spread of 500 bps, it comes to 5.24%, which is less than 4% charged by the assessee. With regard to ECB, the bench marking has to be done on External “CUP” at the rate available in the international market. The assessee has already considered this aspect and compared the LIBOR and SIBOR rates at that point of time and considered the SIBOR based rate with 500 bps is favourable to the assessee. Accordingly, the assessee has adopted SIBOR + 500 bps as the ALP. 9.6. The ld. DR has vehemently put forth his argument for adopting 500 bps instead of adopting 200 bps as adopted by TPO. We found that there is no basis for adopting one spread of 200 bps in the judicial pronouncement nor it is prudent in the banking sector. 18 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited In our considered view, we cannot adopt the 200 bps as universal rate for all types of loan. The loans are categorized as long term and short term i.e. working capital loan. We observe that the banks are adopting the 200 bps on working capital loans as spread and higher rates beyond 500 bps on the long term loans such as term loans. The Pricing of Interest on term loans are determined based on the security, net worth, ratings, term of loan etc. The more risk involved, the pricing decision of the banks will change. The RBI in its prudential norms has given windows for the pricing of interest and the spread. Based on the RBI guidelines, the term up to 5 years, can have spread of 300 bps and beyond 5 years, it can be 500 bps. Taking the clue from this guideline, we can come to understand that the assessee has properly allowed its AEs to adopt the spread of 500 bps. In our considered view, the relevant issue is to charge the interest on international transaction based on the LIBOR or any other rates which are the basis for negotiation between the contracting parties and the rates of interest or spread cannot be the same for all the international loans irrespective of their terms, risk etc. 10. In view of the above discussion, we find no infirmity in the order of the DRP in deleting the adjustment made on interest on ECB/FRD and accordingly, we uphold the order of the DRP and dismiss the grounds raised by the revenue. 11. Thus, it is apparent from various decisions relied upon by the coordinate bench of this Tribunal that this Tribunal has taken a consistent view on this issue. Accordingly, in the facts and circumstances of the case and by following the earlier decisions of this Tribunal in the case of DCIT Vs. Devgen Seeds & Crop Technology (P) Ltd. (supra), we hold that the interest payment of ECB @ LIBOR+500 basis is at arms length and consequently no adjustment is warranted. 19 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited Hence, the TP adjustment made and confirmed by the DRP on this account is deleted. 12. Ground No.3 is regarding TP adjustment on account of royalty payment. The AE of the assessee owned and developed engineering and technical know-how and information, experience and expertise in respect of manufacture, marketing and sale of different kinds of high speed doors. This technology and know-how is provided to the assessee against payment of royalty as per the agreement entered into between the parties. For the year under consideration the TPO has determined the ALP of transactions of payment of royalty at Nil, on the ground that the assessee failed to prove that any direct and tangible benefit is received by the assessee on account of know-how and payment of royalty. The DRP has confirmed the order of the TPO on the reasoning that the assessee has failed to establish the benefit availed by the assessee. 13. Before us, the Ld.AR has submitted that the payment is made as per the agreement between the parties, which provides to pay EUR 100 per product sold as a royalty. The assessee produced all the supporting evidences, comprising of agreement placed at page 294 to 313 of the paper book, copy of ledger account placed at page 338 and 339 of the paper book. He has further submitted that the assessee has made a similar payment of royalty in the previous years i.e. in the 20 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited F.Y.2014-15 and 2015-16 and no adjustment was made by the TPO as the transaction was accepted at arms length price. He has further contended that the TPO is not justified in determining the ALP at Nil, when there is agreement between the parties for transfer of know-how and licence as well as trademark, against which the assessee has paid the royalty as per the terms of the agreement. In support of his contentions, he has relied upon the decision of this Tribunal in the case of Air Liquid Engineering India P.Ltd. in ITA No.1040 & 1159/Hyd/2011 and 1408/Hyd/2010. He has also relied upon the decision of Hon’ble Supreme Court in the case of Radhasaomi Satsang reported in 60 Taxmann 248 (SC) as well as decision of Chennai Bench in the case of Aban Offshore Ltd. Vs. DCIT in ITA No.585/Mds/2015 & 267/Mds/16 and 927/Mds/2015 & 688/Mds/2016. Thus the Ld.AR has submitted that the adjustment made by the TPO and confirmed by the DRP is not justified and liable to be deleted. 14. On the other hand, the Ld.DR has submitted that the TPO has given a finding that the assessee failed to show any tangible and direct benefit derived by the assessee from the payment of royalty. He has also referred to para 2.3.4 of the order of the DRP and submitted that the DR has also called for remand report, wherein, the assessee has again failed to substantiate his claim with any documentary evidence for the need of such service. 21 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited 15. We have considered the rival submissions as well as material on record. The TPO has proposed adjustment on account of royalty payment in para 5 of the order as under : “5. Payment of Royalty The taxpayer vide its TP study report stated that an amount of Rs.14,34,364/- was paid towards royalty for Technology & know-how and Trademark for the manufacturing to M/s Hormann KG Venkaufsgesellschaft. The taxpayer furnished a copy of Technology & Know-how and Trademark & Name License Agreement basis which it was stated that the amount was calculated at € 100 for each high-speed door sold. It was further stated that the licensor company provides all the technical know-how and expertise for manufacturing and marketing of these high-speed doors, therefore, the payment made is within arms’ length. However, the taxpayer failed to show any tangible and direct benefit derived by it for such payment. Further, the taxpayer failed to establish that the payment made is commensurate with the benefit that is derived or expected to be derived when parties deal with each other at arm’s length under controlled and un-controlled circumstances.” 16. Thus the only reason given by the TPO for determining the ALP at Nil is that the assessee failed to substantiate with any documentary evidence, the benefit derived by it in quantifiable terms. The TPO held that the services claimed by the assessee failed the benefit test. It is pertinent to note that there was an agreement between the parties, regarding transfer of know-how and royalty payment, which was also subject matter of the earlier assessment years, but, no addition or adjustment was either made or proposed by the TPO/AO. Even otherwise, payment of royalty was subjected to 22 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited TDS and therefore, the question of shifting the profit does not arise. The payment of royalty is not in dispute as it was made as per the terms of the agreement between the parties. The Chennai Bench of this Tribunal in the case of Aban Offshore Ltd. Vs.DCIT (supra) has considered identical issue in para 6 to 6.5 as under : “6. We have heard both the parties and perused the material on record. Admittedly, this expenditure was incurred in terms of agreement entered into by the assessee and India Offshore Inc. vide agreement dated 15.12.1986, which was extended upto 15.12.2014. This agreement was subject to scrutiny before the authorities and the Tribunal in earlier years and there was no addition on this count. The payment has been made originally, vide agreement dated 15.12.1986 and it was further extended upto 15.12.2014. Therefore, there is no question of raising invoices for each assessment year and the payment is made in terms of approved agreement. Further, in our opinion, the genuineness agreement cannot be questioned by the assessing authorities when it is duly approved by the Central Govt., Ministry of Commerce & Industry, Department of Industrial Policy and Promotion and by the Reserve Bank of India as well. It is brought on record that Ministry of Commerce & Industry, Department of Industrial Policy and Promotion approved this payment vide their letter dated 25.4.2005. It is also brought on record that the payment made to Indian Offshore Inc was subjected to withholding taxes u/s.195 of the Act and TDS was duly deducted and deposited in the Govt. Bank as seen from Form 16A placed on paper book at page 204. When the Department has given “No Objection Certificate” for remittance made to Indian Offshore Inc for earlier years which is placed on record at page Nos.211-212 of the paper book. Further, it is brought on record that there was no addition in earlier assessment years as evident from the copies filed before us for the assessment years 2005-06 to 2008- 09 which is kept on record at pages 1 to 146 of the 23 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited paper book. Therefore, it is not possible to hold that the payment is not genuine. 6.1 Further, the Tribunal in the case of Cadbury India Ltd. V.ADCIT in ITA No.7408/Mum/2010 dated 13.11.2013 held in paragraph 39 that if the assessee has paid the payments in relation to royalty to its parent AE for use of technical know-how and trademark after getting due approval from RBI and SIA, the disallowance cannot be made. Further, if the amount paid by assessee was lesser than similar payments made by other group entities to parent AE, then, TPO should not make the TP adjustment in respect of the royalty payment to its parent AE. 6.2. It is pertinent to note that the Tribunal, Hyderabad Bench in the case of Air Liquid Engineering India P. Ltd. In ITA Nos.1040 & 1159/Hyd/2011 and 1408/Hyd/2010, vide order dated 13.2.2014 held that in transfer pricing proceedings TPO could not sit in judgment on business and commercial expediency of assessee company so as to conclude that payment of royalty made by assessee to its AE was unreasonable and thus ALP of said payment was to be taken as nil. 6.3. It is to be noted that in the case of DCIT v. Sona Okegawa Precision Forgings Ltd. in ITA No. 5386/Del/2010 dated 16.12.2011, the Tribunal held that the assessee entered into an international transaction with its overseas associates and paid royalty @ 3% which was considered as excessive by TPO did not bring any material on record which could suggest that payment of royalty as excessive order of TPO was to be dismissed and a collaboration agreement had been approved by the Ministry of Industries, Department of Industrial Policy and Promotion. 6.4. The Tribunal also held in the case of Abhishek Auto Industries Ltd. in ITA No.1433/Del/2009 dated 12.11.2010, that it is a settled proposition of the law that legally binding agreements between unrelated parties cannot be disregarded without assigning any cogent reasons thereto. In this case, it has agreements that are duly approved by RBI and other regulatory agencies. It is also a settled proposition that commercial transactions are in the domain 24 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited of the businessman and Income-tax Department cannot intervene in realm of intricacies of commercial expediencies involved in these arrangements. 6.5. In view of the above discussion, we are of the opinion that the payment is made in accordance with agreement entered into by the parties, which is evident from the record and it was subjected to TDS, disallowance is not justified. Accordingly, we allow the ground raised by the assessee.” 17. Thus, it is clear that a consistent view has been taken by the Tribunal on the point that when the payment is made as per the legally binding agreement between the parties, which is duly approved by the RBI for the purpose of remittance of royalty, then the tax authority cannot intervene in the realm of intricacies of commercial expedience involving in the arrangements between the parties. By following the order of the Chennai Benches in the case of M/s Aban Offshore Ltd. Vs. DCIT (supra), we hold that applying the benefit test by the TPO and determining the ALP of royalty at Nil is highly arbitrary and unjustified. Consequently, addition / adjustment made on this account is deleted. 18. Ground No.4 is regarding transfer pricing adjustment towards interest on receivables. The assessee has reported receivables of Rs.1,42,64,000/- from its AE. The TPO proposed adjustment on account of interest on outstanding receivables from the AE amounting to Rs.12,63,972/-. The DRP has confirmed the adjustment proposed by the TPO. Therefore, the Ld.AR of the assessee has submitted that the 25 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited assessee has outstanding receivables from AE at Rs.1,42,64,000/- and outstanding payables to the AE at Rs.4,72,66,000/-. The assessee has neither paid any interest on the payables nor received any interest on the outstanding receivables. The Ld.AR thus contended that when the payables are almost 4 times more than the receivables and the assessee is not paying any interest on the payables to the AE, then adjustment made by the TPO on account of trade receivables without considering the trade payables is not justified. He has thus contended that the adjustment on this account can be considered only on the net receivables. He has further submitted that the assessee is purchasing raw materials from the related parties and also selling the finished goods to the related parties and therefore, there is a direct inter connection between the purchase and sale from the AEs and to the AEs. He has relied upon the decision of this Tribunal dated 07.05.2021 in assessee’s own case in ITA 1954/Hyd/2018 for the A.Y.2014-15 and submitted that the Tribunal has considered an identical issue and directed the TPO to compute the ALP on notional interest towards receivables only on the net receivables, after considering the payables for the transactions with AEs. He has also relied upon the decision of this Tribunal dated 28.04.2023 in the case of GKC Projects Limited Vs. ACIT in ITA No.552/Hyd/2021 as well as the judgement of Hon’ble Bombay High Court in the case of PCIT Vs. Tecnimont P.Ltd 26 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited in ITA No.56 of 2016 and Hon’ble Delhi High Court in the case of CIT Vs. Cotton Naturals India (P) Ltd. (2015) 55 taxmann.com 523 (Delhi). Alternatively, the Ld.AR has submitted that when the main transactions of purchase and sales are found at arms length by applying the TNMM as preferable method, then no separate adjustment is required on account of trade receivables, when the margin of the assessee on the sales is substantially higher than the comparable transaction. 19. On the other hand, the Ld.DR has submitted that the trade receivables and trade payables are separate international transactions and cannot be clubbed together for the purpose of determining the ALP. He has referred to the finding of DRP and submitted that the DRP has followed the binding judgment on this issue and therefore, on the payments and receivables from the same assessee can be made against each other. He has relied upon the orders of the authorities below. 20. We have considered the rival submissions and carefully perused the orders of the authorities below. There is no dispute that for the year under consideration, the assessee has borrowed outstanding receivables from the AE as well as outstanding payables to the AE as under : 27 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited Particulars Receivable Hormann Middle East FEZ 1,42,64,000 Total 1,42,64,000 Particulars Payable Hormann Beteiligungs GMBH 58,17,000 Hormann KG Verkaufsgesellschaft 4,14,49,000 Total 4,72,66,000 21. The outstanding receivables and payables are not in dispute though the receivables and payables are from different AEs. The assessee has stated that the payables are in respect of the purchases made by the assessee from AEs, which was subsequently sold to another AE and therefore, the transactions are inter connected and when the assessee is not paying any interest on the payables to the AEs, which are more than the receivables from the AEs, then the adjustment made on this account is uncalled for. At the outset, we note that for the A.Y.2014-15, this Tribunal, in assessee’s own case, vide order dated 07.05.2021 (supra) considered an identical issue in para 6 as under : “6. We have heard the rival submissions and carefully perused the materials on record, and we find merit in the arguments advanced by the Ld. AR. Since, the 28 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited transactions are cross-border, it would be appropriate to adopt LIBOR rate of interest while computing the notional interest on receivables from the AEs. This Bench of the Tribunal has held so on various earlier occasions with respect to the same issue. Further, it will also be appropriate for netting off the notional interest with respect to the debit and credit transaction with the assessee’s AEs because when notional interest is charged on receivables the same should also be charged on payables. Therefore, in the case of the assessee we hereby hold that LIBOR rate of interest shall be adopted while computing the notional interest on receivables and payables for the transaction with AEs. Further, on considering the nature of trade of the assessee, we find it appropriate to fix the grace period of 30 days while computing the notional interest towards the debit and credit transaction with the AEs. It is ordered accordingly.” 22. Thus, it is clear that the Tribunal has held that it will be appropriate for netting off the notional interest with respect to debit and credit transaction with the assessee’s AEs and only on the net receivables, the notional interest can be benchmarked for transfer pricing purpose. We further note that when the assessee is purchasing raw material from the AEs and selling the goods to the AEs, then the transactions of purchase and sale are directly connected with each other. Therefore, it will be appropriate to consider both the trade receivables as well as payables from the AEs, while bench marking the transactions of notional interest on the receivables. By following the earlier order of this Tribunal, adjustment made by the TPO/AO on this account is deleted as the payable for the year under consideration is substantially higher than the receivables. 29 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited 23. For the A.Y.2018-19, the assessee has raised the following grounds : 1. On the facts and circumstances of the case, the Final assessment order (\"FAO\") dated 28.07.2022 passed by the Assistant Commissioner of Income Tax and the Ld. TPO order dated 05.08.2021 passed u/s 92CA(3) of the Act by Asst. Commissioner of Income Tax (herein after referred to as ‘TPO’) are bad both in the eye of law and on facts. 2. Erred in making adjustment of Arm’s Length Price for Rs.28,81,279/- towards international transaction of Interest on ECB given to AE’s:- 2.1. The Ld. TPO/ AO erred in not following the procedure laid down under the provisions of Section 92C of the Act relating to the ‘Computation of Arm’s Length Price. 2.2. The Ld. TPO/AO ought to appreciate the fact that the assessee has received the funds in India from outside India for the expansion and increasing the capacity of manufacturing and acquiring the machinery in the normal course of business. 2.3. The Ld. TPO/AO ought to have appreciated the facts of case that the amount of loan has been received and used in India and same should be compare with the bank interest rates in India and not with the international rate. 2.4. The Ld. TPO/AO ought to have appreciated the facts that the rate of interest paid by assessee to its AE is lesser than the rate of interest that would have been charged by the banks i.e., base rate of SBI under uncontrolled transactions. 30 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited 2.5. The Ld. TPO/AO ought to have appreciated the facts that the assessee company paid interest rate LIBOR + 5% half yearly. However as per the base rate of SBI, bank interest rate comes out to be around 15% p.a. as against the rate of interest paid by the assessee on the ECB of LIBOR+5% half yearly paid by assessee. 2.6. The Ld. TPO ought to appreciate the fact that case laws referred by the TPO are relating to amount of loan or advances given outside India on which Hon'ble court charged interest at international rates. However, in case under consideration the assessee has received and utilized the funds in India and not paid or receivables in India. Hence the international interest rate not applicable. 2.7. The Ld. TPO/AO ought to appreciate the fact that the said issue under consideration has covered in the previous year where Ld. TPO has accepted the interest payment is at arm’s length transaction and no adjustment has been proposed. 2.8. The TPO ought to have appreciated the fact that no transfer pricing adjustment can be made on hypothetical and notional basis without there being any material on record justifying the fact that there had been under charging of such interest on real income. 2.9. Erred in directing TPO to adopt the six month average LIBOR plus 250 basis points. 3. Erred in upholding the upward adjustment of Arm’s Length Price for Rs.32,73,726/-Payment of Royalty. 31 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited 3.1. The Ld. TPO/AO erred in not following the procedure laid down under the provisions of Section 92C of the Act relating to the ‘Computation of Arm’s Length Price’ 3.2. The Ld. TPO ought to appreciate the fact that the licensor ie, Hormann KG Verkaufsgesellschaft is leading manufacture of High-speed doors in the international market and the assessee company is manufacturing the same product by using the techniques/ information for which the assessee liable to pay consideration to the licensor. 3.3. The Ld. TPO/ AO ought to appreciate the fact that the assessee company manufacturing and selling the certain products as per the technical specifications and standards of the licensor i.e., Hormann KG Verkufsgesellschaft and for which royalty has been paid. 3.4. The Ld. TPO/AO ought to have appreciated the fact that the assessee company has paid royalty of 100 Euros for each sell of high-speed doors which are manufactured by the technical specifications and standards as per agreement. 3.5. The Ld. TPO/AO ought to have appreciated the facts of case that the assessee company has using the trade mark, know-How, technology and man power of the Hormann KG Verkaufsgessellschaftfor making the high-speed doors and selling in local/ international market as per agreement. 3.6. The Ld.TPO/AO ought to have appreciated the fact that assessee has provided all the necessary supporting evidence like Agreement and Invoices of payment of royalty and supporting explanation in support of the payment of Royalty paid to Licensor Company. 32 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited 3.7. The Ld. TPO ought to appreciate the fact the assessee company is selling the same high-speed doors in the market at the price of approx. ₹2 lakh per door and on the same door approx. ₹ 8,000/- has been paid as royalty to the licensor. 3.8. The Ld. TPO/AO ought to appreciate the fact the said issue under consideration has covered in the previous year where Ld. TPO has accepted the interest payment is at arm’s length transaction and no adjustment has been proposed. 4. Erred in upheld the addition of Rs.13,58,312/- towards Interest on receivables: 4.1. The AO/TPO erred in not following the procedure laid down under the provisions of Section 92C of the Act relating to the ‘Computation of Arm’s Length Price’. 4.2. The Ld. AO/TPO ought to have appreciated the fact that the amendment in the 2012 Finance Act does not cover outstanding receivables arising out of a assessee’s sale transaction as the word ‘capital financing’ used there is particularly refers to loans or advances during the normal course of business, whereas in Assessee’s case, these are outstanding receivables arising out of services rendered but not capital financing. 4.3. The Ld. AO/TPO ought to have appreciated the fact that the outstanding receivables relate to sale of services and not in the nature of any advance/loans and therefore it cannot come under the purview of ‘International Transaction’ as defined u/s 92B of the Act. 33 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited 4.4. The Ld.AO/TPO ought to have appreciated the fact that the principal amount of outstanding receivables is at Arm’s Length Price and the assessee has adopted TNMM method for determining the ALP of its transactions and the operating margin of the assessee is much higher than its comparables, hence any adjustment with regard to ALP affecting the operating margin would be unjustifiable and against the provisions of Section 92C of the Act. 4.5. The AO/TPO erred in re-characterizing the nature of transaction from ‘Receivable’ to ‘loan’ which is not permissible u/s. 145 of the Act. 4.6. The AO/TPO Ought to have appreciated the fact that the outstanding receivables are consequential/ closely linked to the sale of services to the AE during the normal course of business and the same has been held by TPO to be within arm’s length and making secondary TP adjustment by way of imputing interest on outstanding receivables is unwarranted. 4.7. The Ld. AO/TPO ought to have appreciated the fact that sales to AE includes a substantial profit element with interest aspect being embedded in it and therefore, interest on receivables cannot be coined as a separate international transaction as envisaged u/s 92B of the Act. 4.8. The AO/TPO erred in not considering the fact that working capital adjustment itself takes the impact of interest on receivables & accordingly no separate adjustment can be made for the receivables. 4.9. The AO/TPO ought to have appreciated the fact that the assessee is following a policy of not charging 34 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited interest on receivables irrespective of the fact that whether the sales are made to AE or Non-AE. 4.10. The AO/TPO ought to have appreciated that the assessee did not charge any interest on advances given to its Non-AE’s and AE. 4.11. The AO/TPO ought to have appreciated the fact that no ALP adjustment is required to be made in a case where after reducing the amount of notional interest charged on outstanding receivables from operating profit, the margin of comparable is less than the margin of the assessee. 4.12. The AO/TPO ought to have appreciated the fact that the assessee is not paying any interest on trade payables or advance from customers and it is not justified to charge interest on trade Receivables, where assessee itself not paying to interest to other on trade payables. 4.13. The AO/TPO ought to have appreciated the fact that allowing of extended credit period to the associated enterprises is closely linked to the determination of sale price, which is in-turn base to arrive at the margins of the assessee. 4.14. Without appropriating the fact that the outstanding receivables are foreign currency receivable and same has to be benchmark with the LIBOR rate and not SBI rate. 5. Erred in upheld the addition of relating to disallowance of Rs.6,10,401/- towards Income credited to Profit and Loss account which is exempt shown in ITR. 5.1. The Ld. AO has erred in not following the directions of the Disputed Resolution Panel (‘DRP’) while passing the final assessment order; is a clear 35 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited violation of provisions of section 144C(10) and (13) of the Income Tax Act, 1961(‘Act’). 5.2. The Ld. AO ought to have appreciated the fact that the directions issued by the DRP are binding on AO, irrespective of fact whether the same are acceptable or not to the Department. 5.3. The Ld. A.O erred in Disallowing amount of Rs. 6,10,401/- towards Income credited to Profit and Loss account which is exempt. Without appreciating the fact the assessee has shown correctly the total exempt income in the respective Schedule in the return of income filed the Ld. CPC, Bangalore has made addition. 5.4. The Ld. A.O ought to have appreciated the fact that the amount of Rs. 6,10,401/- is an exempt income of deferred government grant which is already mentioned in the respective schedule in Return of Income filed by the assessee and adding the same leads to double taxation. 6. Erred in upheld the addition of relating to variance of Rs. 80,64,589/- towards total amount of disallowance u/s 37: 6.1. The Ld. AO has erred in not following the directions of the Disputed Resolution Panel (‘DRP’) while passing the final assessment order; is a clear violation of provisions of section 144C(10) and (13) of the Income Tax Act, 1961(‘Act’). 6.2. The Ld. AO ought to have appreciated the fact that the directions issued by the DRP are binding on AO, irrespective of fact whether the same are acceptable or not to the Department. 36 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited 6.3. The Ld. A.O ought to have appreciated the fact that the assessee has himself disallowed the whole amount of Rs.1,09,50,218/- in the computation of income and return of income. 6.4. The Ld. A.O erred in considering amount only to the extent of Rs. 28,56,370/- and not the whole amount of Rs.1,09,50,218/- which is incorrect and bad in law. 7. Erred in upheld the addition of relating to variance of Rs.27,150/- towards Amount in excess of twenty thousand rupees to a person in a day otherwise than by account payee cheque/account payee bank draft under section 40A(3). 7.1. The Ld. AO has erred in not following the directions of the Disputed Resolution Panel (‘DRP’) while passing the final assessment order; is a clear violation of provisions of section 144C(10) and (13) of the Income Tax Act, 1961(‘Act’). 7.2. The Ld. AO ought to have appreciated the fact that the directions issued by the DRP are binding on AO, irrespective of fact whether the same are acceptable or not to the Department. 7.3. The Ld. A.O ought to have appreciated the fact that the assessee company has itself disallowed the amount of Rs.27,150/- in the return of income. 7.4. The Ld. A.O ought to have appreciated the fact that the amount disallowed by the assessee can be seen from point 9 of Part - A of other information of the return of Income. 8. Erred in upheld the addition of relating to variance of Rs.34,30,323/- towards amount debited to profit and 37 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited loss account of the previous year but disallowable under section 43B and the assessee company has itself disallowed the whole amount of Rs.87,79,789/- in the return of income. 8.1. The Ld. AO has erred in not following the directions of the Disputed Resolution Panel (‘(DRP’) while passing the final assessment order; is a clear violation of provisions of section 144C(10) and (13) of the Income Tax Act, 1961(‘Act’). 8.2. The Ld. AO ought to have appreciated the fact that the directions issued by the DRP are binding on AO, irrespective of fact whether the same are acceptable or not to the Department. 8.3. The Ld. A.O erred in considering amount only to the extent of Rs. 53,49,466/- and not the whole amount of Rs.87,79,789/- which is incorrect and bad in law. 8.4. The Ld. A.O ought to have appreciated the fact that the amount disallowed by the assessee can be seen from point 9 and point 6 of Part - A of other information of the return of Income. 9. Erred in upheld the addition of relating to variance of Rs.57,600/- towards Amount disallowable under section 40(a)(ia) on account of non-compliance with the provisions of Chapter XVII-B 9.1. The Ld. AO has erred in not following the directions of the Disputed Resolution Panel (‘(DRP’) while passing the final assessment order; is a clear violation of provisions of section 144C(10) and (13) of the Income Tax Act,1961(‘Act’). 38 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited 9.2. The Ld. AO ought to have appreciated the fact that the directions issued by the DRP are binding on AO, irrespective of fact whether the same are acceptable or not to the Department. 9.3. The Ld. A.O erred in adding the variance of Rs.57,600/- towards Amount disallowable under section 40(a)(ia) on account of non- compliance with the provisions of Chapter XVII-B and the assessee company has itself disallowed the amount of Rs. 57,600/- in the return of income. 9.4. The Ld. A.O ought to have appreciated the fact that the amount disallowed by the assessee can be seen from point 9 of Part - A of other information of the return of Income. 10. Erred in upheld the addition of relating to disallowance of Rs.4,60,963/- towards Provident Fund and Employee State Insurance. 10.1. The Ld. AO has erred in not following the directions of the Disputed Resolution Panel (‘DRP’) while passing the final assessment order; is a clear violation of provisions of section 144C(10) and (13) of the Income Tax Act, 1961(‘ Act’). 10.2. The Ld. AO ought to have appreciated the fact that the directions issued by the DRP are binding on AO, irrespective of fact whether the same are acceptable or not to the Department. 10.3. The Ld. A.O has wrongfully made an addition of Rs.4,60,963/-towards Provident fund payment without considering the facts of the case. 10.2. The Ld. A.O erred in not appreciating the fact that all the payments in relation to the 39 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited Provident fund were made within the time limits prescribed in the Act. 10.3. The Ld. A.O erred in making the additions not considering section 36(1)(va) r.w.s 43B of the Act, that expenditure is allowable if paid within due date of filing return of income. 10.4. The Ld. A.O ought to consider the fact that all the payments of Provident fund of employees and employer share are paid on or before due date of filing return of income. 11. The appellant may add, alter or modify any other point to the Grounds of appeal at any time before or at the time of hearing of the appeal. 24. Ground No.1 is general in nature and does not require specific adjudication. 25. Ground No.2 is regarding TP adjustment on account of interest on ECB. This issue is common to the issue of interest on ECB for the A.Y.2017-18, which has been considered and decided by us in the preceding para of this order. In view of our finding for A.Y.2017-18, this issue stands adjudicated on the same terms and the addition made by the TPO/AO on this account is deleted. 26. Ground No.3 is regarding TP adjustment made towards royalty payment. This issue is common to the issue of royalty payment for the A.Y.2017-18, which has been considered and decided by us in the preceding para of this order. In view of our finding on this issue for the A.Y.2017-18, this issue stands 40 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited adjudicated on the same terms / reasoning and the addition made by the TPO/AO on this account is deleted. 27. Ground No.4 is regarding TP adjustment on account of trade receivables for the year under consideration. The assessee has reported trade receivables and payable as under : Particulars Receivable Hormann Middle East FEZ 1,07,44,000 Total 1,07,44,000 Particulars Payable Hormann Beijing Trading Co Ltd 1,13,718 Hormann KG Verkaufsgesellschaft 7,77,11,505 Total 7,78,25,223 28. Thus, it is clear that the trade payable in the year under consideration is 7 times more than the trade receivables from the AEs. This issue is common as raised the for the A.Y.2017-18 and in view of our finding on this issue for A.Y.2017-18, the addition made by the TPO/AO on this account is deleted. 41 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited 29. Ground No.5 to 10 are regarding various additions / disallowances made by the AO/CPC. The brief details of the same are as under : Particulars Amount in Rs.(ROI) Amount in Rs.(3CD) Amount in Rs. computed 143(1) Proposed adjustment 1. Income credited to Profit and Loss account which is exempt 6,10,401 6,10,401 6,10,401 2. Variance in disallowance u/s 37 28,85,629 1,09,72,298 80,86,669 (i)Penalty 9,188 9,188 (ii) CSR 20,071 20,071 (iii) Loss on sale of F/A 1,03,01,792 1,03,01,792 (iv) interest on short of Advance tax 4,11,065 4,11,065 (v) interest on delayed TDS 6,039 6,039 (vi) Provision For sales commission 24,37,666 24,37,666 (vii) Donation 1,600 3.Disallowance u/s 40A(3) 27,150 27,150 27,150 4. Disallowance u/s 43B 53,49,466 87,79,789 34,30,323 5. Disallowable u/s 40(a)(ia) 57,600 57,600 57,600 42 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited 6. Disallowance for PF & ESI 0 4,60,963 4,60,963 30. We have heard the Ld.AR as well as the Ld.DR and considered the relevant material on record. These adjustments were made by the CPC, while processing the return u/s 143(1) vide order dated 02.12.2019. It is pertinent to note that at the time of issue of intimation u/s 143(1), the assessment proceedings were already undertaken for scrutiny vide notice u/s 143(2) issued on 23.09.2019. Therefore, the adjustment made by the CPC while processing the return u/s 143(1) merges with the assessment proceedings already taken up by the assessing officer and all these issues were required to be verified after considering the explanations as well as the relevant records available before AO. The Ld.AR has submitted that the CPC as well as the AO has not considered the suo-moto disallowance made by the assessee in respect of these items, which were disallowed by the CPC while processing the return u/s 143(1) of the Act. He has thus, pleaded that the AO may be directed to verify the record and determine the correct amount of disallowance if any on this account. 31. On the other hand, the Ld.DR has submitted that the DRP has already directed the AO to verify the claim and suo-moto disallowance made by the assessee to avoid double addition on this account. He has further submitted that since these adjustments were made by the CPC while processing the return u/s 143(1) and the assessee has not challenged the said order 43 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited of the CPC, consequently, the assessee missed the opportunity and cannot challenge the same in the assessment proceedings. 32. We have considered the rival submissions and perused the material on record. The assessment was taken up for scrutiny by issue of notice u/s 143(2) on 23.09.2019, whereas, the CPC has processed the return u/s 143(1) vide order dated 02.12.2019 and therefore, once the assessment proceedings were already pending, the assessee was not supposed to challenge the intimation u/s 143(1) separately. Even otherwise, processing of return merges with the assessment proceedings and therefore, once the assessee has objected to the adjustments made by the CPC, the AO ought to have examined and verified the same from the relevant record. It is the duty of the AO to ensure that there should not be any double addition, even on account of adjustment made by the CPC. Therefore, in the facts and circumstances of the case and in the interest of justice, we set aside these non TP issues, where the CPC has made adjustment, to the record of the AO to verify about suo- moto disallowance made by the assessee and determine the correct amount of disallowance if any. As regards, the disallowance made on account of belated payment towards employees contribution, though this issue is decided by the DRP in favour of the assessee, however, the AO has not given effect to the directions of the DRP. Now this issue is covered by the judgement of Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. Vs. CIT [2022] 143 taxmann.com 278 (SC) and 44 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited therefore, the AO is directed to verify and decide this issue as per law. 33. Ground No. 5 to 10 are set aside to the AO for fresh adjudication after verification and examination of the relevant record. 34. Before parting with the matter, it is noted that the assessee has also raised additional grounds in both the assessment years, which reads as under : 6. As per the ratio laid down by the Honourable Supreme Court of India in the case of National Therma Power Co. Ltd. V. CIT (1998) 229 ITR 383 (SC), the Hon’ble ITAT has jurisdiction to examine the question of law which has been taken before the Hon’ble ITAT for the first time though not taken before the first appellate authority. 7. The Ld.AO erred in passing the assessment order without considering the fact that time limit for completion of assessment u/s 153 has been lapsed, therefore, the order passed / to be passed is erroneous and bad-in-law. 8. The Ld.AO erred in not considering the fact that the time limit prescribed u/s 153 would prevail over and above the time limit prescribed u/s 144C. Therefore, the assessment order u/s 144C(1) is void and bad in law. 9. The Ld.AO ought to have appreciated the fact that, the assessment has to be completed within 18 months (shall be extended by twelve months, if any reference u/s 92CA is made) as per the section 153 of the Income Tax Act. 45 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited 10. The Ld.AO ought to have appreciated the fact that the time limit for completion of assessment u/s 153 has lapsed on 31.12.2020 and hence the order u/s 143(3) rws 144C is invalid and bad-in-law. 11. The appellant may add or alter or amend or modify or substitute or delete and / or rescind all or any of the grounds of appeal at any time before or at the time of appeal. 35. The issue of limitation as raised in the additional common grounds is now pending adjudication before the Hon’ble Supreme Court in the case of Roca Bathroom Products Pvt.Ltd. Both the parties have agreed that at this stage this issue may be left open and the AO may be directed to take a call as per the outcome of the issue pending before the Hon’ble Supreme Court. Accordingly, the issue raised in the additional grounds for both the appeals is kept open and the AO is directed to decide the same as per the outcome of the matter pending before the Hon’ble Supreme Court on this issue. 36. In the result, appeals filed by the assessee for both the assessment years 2017-18 and 2018-19 are partly allowed. Order pronounced in the Open Court on 21st April, 2025. Sd/- Sd/- (MANJUNATHA G.) ACCOUNTANT MEMBER (VIJAY PAL RAO) VICE PRESIDENT Hyderabad, Dated 21st April, 2025 L.Rama, SPS 46 ITA No.451/Hyd/2022 & 452/Hyd/2022 Shakti Hormann Private Limited Copy to: S.No Addresses 1 M/s Shakti Hormann Private Limited. C/o P.Murali & Co., Chartered Accountants, 6-3-655/2/3, Somajiguda, Hyderabad 2 The DCIT/ACIT, Circle-3(1), Hyderabad 3 The Pr.CIT, Hyderabad 4 The DR, ITAT Hyderabad Benches 5 Guard File By Order "