Case summary, Income Tax

Whether the CIT(A) erred in directing the AO/TPO to apply nil rate as arm’s length interest rate on outstanding receivables from Associated Enterprise?

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  • The assessee is an IT company which entered into international transactions with its Associated Enterprise.
  • The assessee used the Transactional Net Margin Method (TNMM) with Operating Cost as Profit Level Indicator as the Most Appropriate Method for benchmarking international transactions.
  • The TPO during the TP analysis observed that the assessee has reimbursed INR 4,86,42,00 to its associated enterprise without any markup, nor has the same been routed through profit and loss account of the taxpayer. Hence, the TPO treated the reimbursement as part of the total cost base and computed the operating profit margin of the assessee at 23.39%.
  • TPO, after applying various filters, rejected two comparables out of 11 comparables selected by the assessee to benchmark the international transactions. The TPO also introduced six new comparables.
  • The AO/TPO made cumulative adjustments under Section 92CA on the basis of the aforementioned and enhanced the assessee’s income by INR 2,58,05,595.
  • The Assessee appealed before the CIT(A) who deleted the addition made by the TPO/AO.
  • Aggrieved by the CIT(A)’s order deleting the addition, the Revenue filed the present appeal before the ITAT.

Revenue’s Arguments

  1. M/s R. System International Ltd. should not be included as a comparable to benchmark the international transactions as the data of this company is not available for FY 2010-11 and audited recasting of data may distort the profitability.
  2. CIT(A) has erred in directing the TPO to apply nil rate as arm’s length interest rate on outstanding receivables from the Associated Enterprise. Revenue argued that in the assessee’s own case for AY 2010-11, such adjustments were upheld. 

Assessee’s Arguments

  • The assessee filed audited financials and quarterly results which show that the financial data of R Systems was available in public domain.
  • The assessee argued that only the inclusion of R Systems will put the operating margin earned by the appellant within the arms’ length and there will then be no need to adjudicate all the other comparables.
  • On the issue of levying of interest rate, the assessee argued that, this matter has already been decided in the assessee’s own case for AY 2009-10, wherein it was held that no interest can be imputed upon receivables with Associated Enterprise. This decision was based on the ground that no such interest was charged for delay in receivables from non-associated enterprises as well.

Tribunal’s Judgement

  • On the issue of CIT(A) directing the TPO to include M/s R Systems in the list of comparables, the tribunal held that when the financial results are available in public domain and the financial result of M/s R systems has been recasted on the basis of audited quarterly result and audited financial results, the CIT(A) was right in directing the TPO/AO to include the aforesaid company in the list of comparables.
  • On the issue of the CIT(A) levying nil interest rate on outstanding receivables from the Associated Enterprise, the tribunal relied on the judgement of assessee’s own case from AY 2009-10. The tribunal, in this case, had observed that the assessee accorded similar treatment to both related and unrelated parties and hence, had held that no interest can be imputed upon receivables with Associated Enterprise.

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