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Income Tax Appellate Tribunal - Delhi

Kusum Healthcare Pvt.Ltd.,, New Delhi vs Dcit, New Delhi on 23 January, 2018

                                                            ITA No.1440/Del/2016




           IN THE INCOME TAX APPELLATE TRIBUNAL
                DELHI BENCH: 'I-1' NEW DELHI

      BEFORE SHRI N.K.SAINI, ACCOUNTANT MEMBER
                              &
        SHRI K. NARSIMHA CHARY, JUDICIAL MEMBER

                      ITA No.-1440/Del/2016
                    (Assessment Year: 2011-12)

Kusum Healthcare Pvt.      vs     DCIT
Ltd.,                             Circle 14(2),
D-158A, Okhla Indl.               New Delhi
Area,
Phase-I
New Delhi
PAN: AABCK7043B

        Assessee by             Sh Vishal Kalra, Adv., Ms.
                                Reema Malika, CA
        Revenue by              Miss Namita Panday, Sr. DR

                 Date of Hearing              22.01.2018
              Date of Pronouncement              .01.2018

                                  ORDER

PER K. NARSIMHA CHARY, J.M.

Challenging the Assessment order dated 29.01.2014 passed under section 143(3)/92CA of the Income Tax Act, 1961 (for short hereinafter called 'the Act'), for the assessment year 2011-12, assessee preferred this appeal.

2. Facts in brief are that the assessee is manufacturing, marketing and exporting pharmaceutical products to its overseas associated enterprise ("AE") as well as non-group companies. During the assessment year 2011-12, the assessee exported 1 ITA No.1440/Del/2016 finished pharmaceutical products worth Rs. 96,26,51,291/- to its Associated Enterprises (AEs) and benchmarked the said international transaction with Transactional Net Margin Method ("TNMM") as the Most Appropriate Method ("MAM"). For the purposes of undertaking economic analysis, the AE of the assessee i.e. Glad Pharm Ltd., Ukraine ("Gladpharm") was selected as the tested party. The profitability of the tested party was compared with margin earned by comparable companies engaged in performing similar functions respectively and the result of the benchmarking analysis undertaken by the Assessee is as follows :-

Internatonal Profit level Gladpharm's Comparable's Transactions indicator Margin Margin Exportof Operating 0.63% 4.15% medicines Profit/Sales ('OP/Sales')

3. Since the operating profit margin of the tested party (namely Gladpharm) was lower than the comparable companies selected for benchmarking analysis, the international transactions were considered to be undertaken at ALP. The TPO accepted this transaction of the assessee to be at arm's length. However, during the course of proceedings the TPO noticed certain trade receivables were outstanding for more than 180 days and proposed to charge notional interest on the trade receivables for the period exceeding 180 days. TPO re-characterized the receivables outstanding for the period exceeding 180 days as unsecured loans advanced by the assessee to its AE and imputed notional interest based on SBI Prime lending rate + 300 basis 2 ITA No.1440/Del/2016 points (resulting in interest rate of 11.69%). Thus, the TPO made a TP adjustment of Rs. 3,38,19,514 in the TP order dated December 10, 2014. The TPO thereby proposed an adjustment of Rs. 33,845,234 consisting of addition of Rs. 33,819,514/- in conformity with the TP order.

4. Ld. DRP having considered the objections of the assessee, but declined to interfere with the stand taken by the TPO and confirmed the same. Hence, the assessee is in appeal.

5. Though many grounds are enumerated by the assessee in appeal, Ld. AR submitted that the issue could be boiled down to the question - whether the TPO is justified in treating the outstanding receivables from the overseas AEs as unsecured loans and to impute interest thereon. He submitted that the working capital adjustment undertaken by them took into account the trade receivables outstanding as such no additional imputation of interest on the outstanding receivables is warranted. Nextly, he also submitted that the assessee is not charging any interest on the outstanding receivables from non- AEs also as such it is at arm's length not to impute such interest in respect of receivables from AEs. He further submitted that for an earlier year i.e. assessment year 2010-11 such an issue was considered by the Tribunal in ITA no. 6814/Del/2014 and by order dated 31.5.2015, a coordinate bench of this Tribunal decided the issue in favour of the assessee. He further submitted that the Hon'ble Jurisdictional High Court by order dated 25.4.2017 in ITA No. 765/2016 refused to interfere with the order of the ITAT holding that no substantial question of law arises out of the order of the ITAT for determination by Hon'ble High Court.

6. Ld. DR relied upon the assessment order pursuant to the directions of the Ld. DRP. She submitted that when compared to the volume of transactions with the AEs at 88%, volume transactions of the assessee with the non-AEs is miniscule at 12% only, as such the argument that the assessee did not charge any interest on the outstanding receivable from the non-AEs. Insofar as the contention of the assessee that in the working capital adjustment, the outstanding receivables have also been considered, she submitted that the order of the Ld. TPO does not reflect the same as such the authorities below are justified in imputing interest on the trade receivables outstanding for more than 180 days.

7. Perused the material available on the record. We find that the assessee's own case for the assessment year 2010-11 a co- ordinate bench of this Tribunal reached a conclusion that if the working capital adjustment takes into account the outstanding receivables, additional imputation of interest on the outstanding receivables is not warranted. This decision of the Tribunal is upheld by the Hon'ble Jurisdictional High Court in assessee's own case for this same assessment year by holding that no error was found in the order of ITAT giving rise to any substantial question of law for a determination.

8. Relevant findings have been given by the Hon'ble High Court in the aforesaid order dated 25/04/2017 in para No. 10 and 11 read as under:-

"10.The Court is unable to agree with the above submissions. The conclusion in the explanation to section 92B of the Act of the expiration receivables does not mean that de hors the context every item of receivables appearing in the accounts of an entity, 4 ITA No.1440/Del/2016 which may have dealings with the foreign AEs would be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of facts which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee will have to be studied. In other words, there has to be a proper enquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an 80AE, the arrangement reflects an international transaction intended to benefit the AE in some way.

11.The Court finds that the entire focus of the AO was on just one AY and the figures of receivables in relation to AY can hardly reflect a pattern that would justify a TPO concluding that the figures of receivables beyond 180 days constitutes an international transaction by itself. With the assessee having already factored in the impact of the receivables in the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re- characterised the transaction. This was clearly impermissible in law as explained by this court in CIT V. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi)."

We, therefore, hold that in case the working capital adjustment properly takes into account the outstanding receivables, no additional imputation of interest on the same is warranted.

9. Ld. AR submitted that the working capital adjustment is worked out by properly taking into account the outstanding receivables. However from the order of the TPO, we do not find any mention of the Ld. TPO considering the same. We are, therefore, of the opinion that this fact needs verification at the end of the TPO. With this view of the matter, we set aside the issue to the file of TPO for verification of the fact, whether while making the working capital adjustment the outstanding receivables are taken into account or not. Issue is answered accordingly.

10. In the result, appeal of the assessee is allowed for statistical purposes.

Order pronounced in the open court on 23rd January, 2018.

       Sd/-                                             Sd/-
        (N.K.SAINI)                                (K. NARSIMHA CHARY)
      ACCOUNTANT MEMBER                              JUDICIAL MEMBER
Dated: 23.01.2018
*BINITA*
Copy forwarded to:
1.     Appellant
2.     Respondent
3.     CIT
4.     CIT(Appeals)
5.     DR: ITAT
                           TRUE COPY
                                                               ASSISTANT REGISTRAR
                                                                 ITAT, NEW DELHI


Draft dictated on                                        22.01.2018
Draft placed before author                               23.01.2018

Draft proposed & placed before the second member Draft discussed/approved by Second Member.

Approved Draft comes to the Sr.PS/PS                       .01.2018
Kept for pronouncement on                                  .01.2018
File sent to the Bench Clerk
Date on which file goes to the AR
Date on which file goes to the Head Clerk.
Date of dispatch of Order.




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