PFA
| Tranfer Pricing: While an adjustment for working capital investment is required, the transaction of sale of goods and receivables arising therefrom can be aggregated. If the differential impact of working capital has been factored in the pricing of the transaction of sale, no further adjustment can be made |
The Tribunal had to consider whether the AO/DRP is justified in enhancing the income of the assessee on account of notional interest charged on receivables outstanding beyond 180 days. HELD by the Tribunal:
(i) An uncontrolled entity will expect to earn a market rate of return on its working capital investment independent of the functions it performs or products it provides. However, the amount of capital required to support these functions varies greatly, because the level of inventories, debtors and creditors varies. High levels of working capital create costs either in the form of incurred interest or in the form of opportunity costs. Working capital yields a return resulting from a) higher sales price or b) lower cost of goods sold which would have a positive impact on the operational result. Higher sales prices acts as a return for the longer credit period granted to customers. Similarly in return for longer credit period granted, a firm should be willing to pay higher purchase price which adds to the cost of goods sold. Therefore, high levels accounts receivable and inventory tend to overstate the operating results while high levels of accounts payable tend to understate them thereby necessitating appropriate adjustment. The appropriate adjustments need to be considered to bring parity in the working capital investment of the assessee and the comparables rather than looking at the receivable independently. Such working capital adjustment takes into account the impact of outstanding receivables on the profitability.
(ii) The principle of aggregation is a well-established rule in the transfer pricing analysis. This principle seeks to combine all functionally similar transactions wherein arm's length price can be determined for a number of transactions taken together. The said principle is enshrined in the transfer pricing regulation itself and has also been advocated by the OECD Guidelines. As the assessee had earned significantly higher margin than the comparable companies (which have been accepted by the TPO) which more than compensates for the credit period extended to the AEs. Thus, the approach by the assessee of aggregating the international transactions pertaining to sale of goods to AE and receivables arising from such transactions which is undoubtedly inextricable connected is in accordance with established TP principles as well as ratio laid down by the Hon'ble jurisdictional High Court in the case of Sony Ericson Mobile Communication India Pvt. Ltd.
(iii) Any separate adjustment on the pretext of outstanding receivables while accepting the comparables and transfer price of underlying transaction i.e. sale of goods by application of TNMM is unjustified. The differential impact of working capital of the assessee vis-a-vis its comparables has already been factored in the pricing/ profitability of the assessee and therefore, any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified.
Related Judgements
- Logix Micro Systems Ltd vs. ACIT (ITAT Bangalore) The fact that the international transactions are at ALP does not mean that no addition can be made on the funds kept by the assessee with the AE. If the assessee had received funds within the normal period, it could have earned interest on the same. The potential…
- Micro Inks Ltd vs. ACIT (ITAT Ahmedabad) Transfer Pricing: Law on adjustment for notional interest on interest-free loan & excess credit period to AE explainedThe question which really needs to be adjudicated is whether, in the context of s. 92A, but for the management, capital or control being in the same hands, the AE would have…
- Demag Cranes & Components (India) vs. DCIT (ITAT Pune) Rule 10B(e)(iii) provides that "the profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net
HC upholds ITAT's order refusing condonation of 1100 days delay in filing appeal since assessee failed to explain each and every day's delay; Rejects assessee's plea of illness, observes medical reports do not reveal any serious illness, but only a routine/periodical check-up; Affirms ITAT's findings that the Nursing Home Certificate appears to be an afterthought exercise; Applies principles laid down in SC ruling in Esha Bhattacharjee propounding on condonation of delay; Assessee's approach lackadaisical and nonchalant : Madras HC
PFA
ITO vs. Neelkanth Finbuild Ltd (ITAT Delhi)
S. 68: Even if the issue share capital is bogus, no addition can be made in assessee's hands if identity of shareholder is established. Assessee is not required to show source of shareholder's funds
Once the identity of the share holder have been established, even if there is a case of bogus share capital, it cannot be added in the hands of company unless any adverse evidence is not on record. It is a certain law that the assessee is to prove the genuineness of transaction as well as the creditworthiness of the creditor must remain confined to the transactions which have taken place between the assessee and the creditor. It is not the business of assessee to find out the source of money of creditors
Govt. may liberalize legal services; 2,000 One Person Cos. registered; IFSC operationalisation in a year |
Govt. may liberalize legal services; 2,000 One Person Cos. registered; IFSC operationalisation in a year |
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Rushi Builders and Developers vs. ACIT (ITAT Mumbai), I.T.A. No. 6684/Mum/2012, Date of Pronouncement- 04.03.2015 In this case, the penalty has been levied for disallowance of expenditure u/s.40(a)(ia) of the It is not a case of furnishing of inaccurate particulars of income or concealment of income. The failure to deduct the TDS on the part of the assessee has resulted in disallowance of expenditure. The assessee had not furnished any inaccurate particulars of income or expenditure. The assessee has already faced the consequences by way of disallowance of expenditure for non-deduction of TDS as per the provisions of section 194C of the Act. It is not the case of the Revenue that the assessee had not incurred the expenditure claimed or that the claim of expenditure was bogus or incorrect. The disallowance of expenditure was attracted due to non-deduction of TDS and it cannot be said to be a case of concealment of income or furnishing of inaccurate particulars of income. The levy of penalty u/s.271(1)(c) of the Act is not attracted in this case and the same is accordingly ordered to be deleted. -
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