Income Tax Appellate Tribunal - Delhi
Li & Fung (India) P.Ltd, New Delhi vs Dcit, Circle-16(1), New Delhi on 24 August, 2022
1
SA no. 262/Del/2022
Li & Fung (India) P. Ltd. Vs. DCIT
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "I": NEW DELHI
BEFORE SHRI NARENDRA KUMAR BILLAIYA, ACCOUNTANT MEMBER
AND
SHRI KUL BHARAT, JUDICIAL MEMBER
S.A. No. 262/Del/2022
( In ITA No. 1820/DEL/2022)
[Assessment Year: 2018-19
Li & Fung (India) P. ltd., Vs DCIT, Circle-16(1),
New Delhi. New Delhi
PAN- AAACL1663M
APPLICANT RESPONDENT
Applicant by Sh. Neeraj Jain, Adv. &
Sh. Ramit Katyal, CA
Respondent by Sh. Sanjay Kumar, Sr. DR
Date of hearing 18.08.2022
Date of pronouncement 24.08.2022
ORDER
PER KUL BHARAT, JM:
The present application, seeking stay of the impugned outstanding demand of Rs. 6,78,78,803/-, including interest of Rs. 2,29,84,342/-, has been filed by the assessee company in ITA no. 1820/Del/2022 for assessment year 2018-19.
2. The assessee is a company incorporated under the Companies Act, 1956 and is engaged in the business of providing support services to the Associated Enterprises (in short 'AEs"),in relation to the sourcing business of its AEs. It is stated that the assessee is paid service charges for such services at cost plus markup of 8%. 2
SA no. 262/Del/2022 Li & Fung (India) P. Ltd. Vs. DCIT
3. For the assessment year 2018-19 the assessee filed its return of income declaring income of Rs. 9,69,79,930/-. The case was taken up for scrutiny assessment and draft assessment order u/s 144C was passed on 13.09.2021. Thereby the Assessing Officer assessed income at Rs. 22,24,83,205/- after making transfer pricing adjustment of Rs. 12,54,88,995/-. The assessee filed objections before the learned DRP. The learned DRP directed the AO/TPO to exclude certain companies from the set of comparable companies selected by the TPO and also to allow working capital adjustment to the applicant. However, the AO without giving effect to the directions of the learned DRP, passed order dated 15.07.2022 u/s 143(3) read with Section 144C(13) of the Act. The AO made transfer pricing adjustment of Rs. 12,28,05,439/- on account of international transaction of provision of support services to the associated enterprises and transfer pricing adjustment of Rs. 26,83,556/- on account of notional interest on outstanding receivables. Thus, the AO computed income at Rs. 22,24,83,205/-. Thereby raising the impugned demand of Rs. 6,78,,78,803/- including interest of Rs. 2,29,84,342/-. Aggrieved by this, the assessee is in appeal before this Tribunal by way of appeal bearing ITA no. 1820/Del/2022, which is yet to be listed. Hence, it is prayed that the disputed demand be stayed.
4. Learned counsel for the assessee reiterated the submissions as made in the stay application. He vehemently argued that the Assessing officer was not justified in making TP adjustment and also grossly erred in not giving effect to the directions of the learned DRP. He submitted that the learned DRP vide directions dated 7.6.2022 directed the AO 3 SA no. 262/Del/2022 Li & Fung (India) P. Ltd. Vs. DCIT to exclude certain comparable companies from the final set of comparables for the purpose of benchmarking the international transaction of provision of support services undertaken by the assessee. The comparables which were directed to be excluded were-
a) Indian Tourism Development Corporation
b) Just Dial ltd.
c) Pressman Advertising ltd.
d) BVG India Ltd.
e) EDCIL Ltd.
f) Overseas Manpower Consulting Services Pvt. Ltd.
g) Lintas India Pvt. Ltd.
h) Majestic Research 7 Solutions Ltd.
i) Cheil India Pvt. Ltd.
j) Crystal Hues Ltd.
5. However, while passing the final assessment order, the AO included the aforementioned companies in the final set of comparables. Further, he submitted that the learned DRP had directed the AO/TPO to allow working capital adjustment while computing benchmarking the international transaction of provision of support services undertaken by the assessee. However, the AO did not allow the benefit of working capital adjustment while passing the final order. It was submitted that had the AO given benefit of the aforesaid direction of the learned DRP, transfer pricing adjustment on account of provision of support services would have reduced to Rs. 2,59,93,969/- as computed by the TPO vide order dated 21.7.2022 while giving effect to the directions of the learned DRP as against the adjustment of Rs. 12,28,05,439/-.
4
SA no. 262/Del/2022 Li & Fung (India) P. Ltd. Vs. DCIT
6. Learned counsel for the assessee took us through the contents of the stay application wherein it has been stated that the final set of comparables would be as under
after giving effect to the directions of the learned DRP S No Name of the Company OP/OC 9%) 1 Killick Agencies and Marketing ltd -5.48% 2 Adhaan Solutions Pvt. Ltd. 2.05% 3 Aristotle Solutions Pvt. Ltd. 4.63% 4 Keystone integrated Marketing Services Ltd. 8.42% 5 Russell Reynolds Associates India Pvt. Ltd. 10.37% 6 Concepts Public Relations India Ltd. 12.83% 7 PR Pundit Relations Pvt. Ltd. 18.03% 8 UBM India Pvt. Ltd. 24.94% 9 Interactive Manpower Solutions Pvt. Ltd. 27.98% 35th Percentile 8.42% Median 10.37% 65th Percentile 12.38% The transfer pricing adjustment on account of international transaction of provision of support services reduces to Rs. 2,59,93,969 as under:
Particulars Amount (in INR) Operating Cost (A) 1,28,56,76,903.00 OP/OC of Comparables (B) 10.37% Arm's Length margin 13,33,24,69,484 (C=A*B)% Arm's Length Price (D) 141,91,30,165 Price charged by Assessee (E) 139,31,36,197 Adjustment (D-E0 2,59,93,969
7. It was submitted that after giving effect to the directions of the learned DRP the TP adjustment is reduced to Rs. 2,59,93,969/-. It was further submitted that the learned DRP had also directed the TPO to consider foreign exchange gain/loss as operating in nature if the said gain/loss is revenue in nature. The TPO, however, without making any 5 SA no. 262/Del/2022 Li & Fung (India) P. Ltd. Vs. DCIT enquiry in this regard, computed the foreign exchange gain/loss as non-operating in nature. It was submitted that the gain on account of foreign exchange fluctuation in the case of the assessee related to items appearing in the profit and loss account and none of the items is of capital nature. Accordingly, he submitted that the AO/TPO ought to have considered gain/loss on account of foreign exchange fluctuation as operating in nature.
He submitted that if the aforesaid amount is considered in that event the impugned demand would be reduced to Rs. 2,43,72,870/- as against the demand of Rs. 6,78,78,803/-. It was further submitted that the adjustment made by the TPO and sustained by the learned DRP is not sustainable for the reason that the order passed by the AO is barred by time. It was submitted that looking to the provisions of Section 153(1), final assessment order was required to be passed on or before 31.12.2021. However, the same was passed on 15.7.2022 i.e. beyond the time limit. Learned counsel for the assessee placed reliance on the decision of the Hon'ble Madras High Court rendered in the case of CIT vs. Roca Bathroom products Pvt. Ltd. (WA no. 1609 & 1610 of 2021).
8. Further, it was also submitted that the order passed by the AO, without giving effect to the directions of the learned DRP is bad in law and is liable to be quashed. It was stated that if the final set of comparables had been taken correctly the operating margins would have reduced to 2.05%. It was submitted that since the operating margin of the assessee as computed by the TPO at 8.35% was higher than the 35th percentile of the margins of the aforementioned comparables, the adjustment made by the TPO is liable to be deleted.
6
SA no. 262/Del/2022 Li & Fung (India) P. Ltd. Vs. DCIT
9. Further, learned counsel for the assessee submitted that in respect of TP adjustment of Rs. 26,83,556/- on account of alleged international transaction of interest on receivables, the TPO has re-characterized the alleged delay in receipt of receivables from the associated enterprises as unsecured loans advanced to the associated enterprise, hence sought to impute notional interest on the delay in receipt of receivable, at the rate of LIBOR + 400 basis points. He submitted that the said delay of remittances could not be re-characterized as unsecured loans advanced to the associated enterprise and imputing of the notional interest thereon, considering it to be in the nature of unsecured loan, is not in accordance with law and is not sustainable for the reason that the interest cost had already been suitably factored on the sale price - operating margins of the assessee being higher than working capital adjusted margins of comparables. Reliance was placed on the decision of the Tribunal in the case of Kusum Healthcare Pvt. Ltd. Vs. ACIT (ITA no. 6814/Del/2014). Thereafter the learned counsel for the assessee submitted that what is relevant to be seen is the price for the main transaction of the provision of services is at arm's length or not. Any delay in payment of receivable/ payable may further be looked as being closely linked to the arm's length price determined of the main transactions. Reliance was placed on the decision of the Tribunal rendered in the case of Samsung India Electronics (P) ltd. v. ACIT [2020] 114 Taxmann.com 697 (Delhi).
10. Further, it was stated that the assessee is a debt free company there are no long term or short term loans in the balance sheet of the assessee. Reliance was placed on the decision of the coordinate Bench of the Tribunal in the case of Bechtel India Pvt. Ltd. vs. 7 SA no. 262/Del/2022 Li & Fung (India) P. Ltd. Vs. DCIT DCIT (ITA no. 1478/Del/2015). It was stated that in view of the fact that the assessee had not availed any loan and being a debt free company, there could not be any inference of providing benefit to the associated enterprise by not charging interest on delayed receivables. Therefore, no adjustment was required to be made in the case of the assessee on account of the alleged delay in realization of receivables. He, therefore, prayed that in view of the submissions and the factual matrix , application seeking stay of impugned demand may be allowed and impugned demand be stayed till disposal of assessee's appeal.
11. On the contrary, learned Sr. DR opposed the submissions and submitted that the assessee company be directed to make payment of the entire outstanding demand. He contended that the issue regarding incorrect selection of comparables and erroneous TP adjustment, cannot be examined at this stage as the appeal is not fixed for hearing on merit. He submitted that considering the financial health of the assessee the outstanding demand may not be stayed and the assessee company be directed to deposit the outstanding demand.
12. In rejoinder, learned counsel for the assessee submitted that the assessee has a very good prima facie case and there is every likelihood of success. The AO illegally did not give effect to the directions of the learned DRP, which he is duty bound to do so.
13. We have heard the contentions of the parties and perused the material available on record. The Revenue could not rebut the contention of the assessee that the AO/TPO failed to give effect to the directions of the learned DRP. In our considered view the 8 SA no. 262/Del/2022 Li & Fung (India) P. Ltd. Vs. DCIT AO/TPO are under legal obligation to give effect to the directions issued by the higher forum, in this case the learned DRP. Therefore, looking to the totality of the facts and the material placed before us, we hereby direct the stay of demand subject to payment of 20% of the reduced demand of Rs. 2,43,72,870/- as per the directions of the learned DRP by 30.09.2022, for a period of 180 days or the disposal of the appeal, whichever is earlier.
14. Stay application stands allowed accordingly.
Order pronounced in open court on 24.08.2022.
Sd/- Sd/-
(NARENDRA KUMAR BILLAIYA) (KUL BHARAT)
ACCOUNTANT MEMBER JUDICIAL MEMBER
*MP*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT, NEW DELHI