ITAT Hyderabad has held in the case of DCIT Vs. M/s. Lanco Infratech Limited held that Mobilisation/ trade advance has been wrongly treated as trade receivable. It is not to be subjected to TP. It cannot be re-characterised as receivables. Moreover, advances given as part of contract work does not require any special addition, when the TPO was already examined and held that the transaction relating to ‘work contract expenses’ are within the ALP during the year. Thus, when the whole work contract is considered within the ALP, we are of the opinion that the advances given in the course of contract does not call for special adjustment.Moreover, industry practice is to be seen and treatment to non-AEs is to be appreciated.
Relevant Extract of the Judgment
8. Grounds 11 a to 11f: regarding TP adjustment of Rs. 1,45,21,83,968/- related to Interest on Mobilization advance. It was submitted that LITL has not done any export of goods or services to its foreign AEs and hence, there are no trade receivables outstanding in its books from foreign AEs. LITL sub-contracted EPC contracts to its AE namely Lanco International Pte. Ltd (LIPL) (Formerly known as Lanco Enterprises Pte Ltd) in respect of which mobilization/ material advance was paid by LITL to Lanco International Pte. Ltd (LIPL) for the execution of the projects. As the EPC contracts for power plant are long term contracts with involvement of huge capital base, it is submitted that it is an accepted practice in industry to release advances for mobilization of resources like man, material and machinery for execution of contract which are given as non-interest bearing advances and the same will be adjusted against supplies made or work executed by contractor over the period of contact. As an EPC contractor, LITL has also received as well as given mobilization/material advance. Since LITL had placed some of the contracts amongst AEs, it had paid advances as per the terms of contract, which were being adjusted from supplies or works made on regular basis. The outstanding mobilization advance amount receivable from AEs as on March 31, 2011, was Rs. 11,85,45,63,000/- on which the AO has made an adjustment of Rs. 1,45,21,83,968/-. Further, the amount payable by LITL to its AEs as on March 31st 2011 was Rs. 52,92,82,68,321/-. The TPO considered mobilization advances as loans and advances / receivables and made an adjustment @ 12.25% treating them as international transaction. The DRP upheld the transfer pricing adjustment made by the TPO. DRP further observed that the assessee had significant loans outstanding on which it has paid interest cost. The DRP relied on the ruling provided by Hon’ble Tribunal in case of M/s. Logix Micro Systems Limited ITA No. 524/Bang/2009.
8.1. It was the submission that the nature of the transaction is “Mobilization advances”. The nature has been re-characterised to “Loans & Advances” instead of treating it as ‘mobilization advance’ given in due course of business. Ld counsel relied on the decision of CIT vs. EKL Appliances Ltd. (ITA No. 1068/2011), Hon’ble Delhi High Court that transaction can not be re-characterised. Further submissions can be summarized as under:
I) Mobilisation advance has been wrongly treated as trade receivable. Moreover, interest on receivables is not an ‘international transaction’ as per the provision of Section 92B of the Act.
Relevant case laws :
i. M/s. Tally Solutions Pvt. Ltd. Vs ACIT (I.T.(T.P)A. No.1364/Bang/2011)
ii. Wipro Ltd Vs DCIT, Bangalore ITAT [ITA Nos .624, 817 and 1178 (Bang)/2007]
iii. Pega Systems Worldwide India Pvt Ltd vs. ACIT, Hyderabad ITAT [ITA No. 1758/Hyd/2014]
iv. Det Norske Veritas A/S Vs. ADIT (ITA No. 200/Mum/2014)
v. Evonik Degussa P. Ltd. V ACIT – OSD, Circle 3(1), Mumbai (ITA No.7653/Mum12011).
vi. Excellence data research Vs. ACIT, ITA No. 292/Hyd/2015 vii. Essar Steel Orissa Ltd. – [2016] 74 taxmann.com 70 (Mumbai – Trib.)/ I.T.A. No. 2289/Mum/2014
Relevant case law – No interest on trade advances :
i. Mascon Global Ltd Vs. DCIT (ITA No. 2205/MDS/2010
ii. GSS Infotech Ltd. Vs. ACIT (ITA No.497/Hyd/2015
iii. Lintas India P. Ltd. Vs. ACIT (ITA No. 2024 (Mu) of 2007)
II) LITL has received advance from both AEs and non-AEs without giving any interest. Further, LITL has also given advance to both AEs and non-AEs during the year and has not charged any interest from both AE and non-AE. Hence, even if Internal CUP is applied, and the AE and non-AE transactions are compared, no adjustment can be called for.
Relevant case laws :
i. Indo American Jewellery Ltd. Vs. CIT, Hon’ble Bombay High Court (ITA No. 1053 of 2012)
ii. Mastek Ltd. Vs. ACIT (I.T.A. No.3120)
iii. Nimbus Communications Ltd. Vs ACIT (ITA No. 6597/Mum/09) iv. Sony Ericsson Mobile Communications India Pvt. Ltd. (ITA No. 16/2014)
The outstanding mobilization/ material advances from AEs and Non-AEs are as below:
