M/s. Barco Electronic Systems (P.) Ltd. Vs. DCIT (ITAT Delhi)
Facts of the Case
♣ Barco Electronic Systems Pvt. Ltd. ( taxpayer) is engaged in business of manufacturing of projectors and parts, trading in visual display products and provision of software development services.
♣ During the year under consideration, the taxpayer entered into various international transactions with its AEs namely, import of raw material, export of goods, import of goods, purchase of fixed assets and rendering of services. Consequently, the case was referred to the TPO by AO.
♣ During assessment proceedings, the TPO observed that the according to the inter-company agreement between the taxpayer and its AE, the taxpayer agreed to earn a cost plus markup of 25% on total cost whereas in actual the taxpayer earned a markup of 23.3% on total cost which is higher than the comparables margin but not as per the inter-company agreement with the AEs.
♣ Accordingly, the TPO computed the Arm’s Length Price (“ALP”) with the higher markup as stated in the agreement i.e. 25% on total cost and accordingly proposed an upward adjustment.
♣ Further, the TPO also propose an upward adjustment on outstanding receivables from AEs by charging interest on the same by adopting average prime lending rate of SBI as a benchmark for the interest instead of LIBOR basis as adopted by the taxpayer.
♣ Aggrieved by the same, the taxpayer filed an appeal before Commissioner of Income Tax (Appeal) [“CIT(A)”] wherein CIT(A) deleted the adjustment towards the mark-up on supply of services but held outstanding receivables as a separate international transaction and confirmed the bench marking for interest by taking SBI PLR and confirmed an upward adjustment
♣ Aggrieved,the taxpayer filed an appeal before Delhi Income Tax Appellant Tribunal (“ITAT”/ “the Tribunal”).
ITAT’s Ruling
ITAT made the following observations:
♣ ITAT noted that the taxpayer was a debt free company, neither paying any interest on funds utilized in business nor charging interest on overdue debts from the third parties and the credit period allowed by taxpayer was lesser than that allowed by the comparable companies.
♣ ITAT also notes that the taxpayer had margin of 23.3% on Software Development segment as compared to the margin of 11.42% of the comparable companies and the working capital adjustment margin already factored into account the delay in receivables.
♣ ITAT further relied on the decision of the “Hon’ble Delhi High Court in the case of CIT v. EKL Appliances Ltd wherein it was held that since the impact of the delayed receivables had already been factored in the working capital adjusted margin of the taxpayer, no separate adjustment on the outstanding receivables was required”.
Accordingly, the Hon’ble Tribunal directed the AO to delete the adjustment made on account of the outstanding receivables.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal by the assessee is directed against order dated 25/01/2016 passed by the Ld. Commissioner of Income-tax (Appeals)-42, New Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2010-11 raising following grounds:
1. That the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in upholding addition of Rs. 12,74,485/- by bench marking the receivables on transactions of sales/services of the appellant company by adopting the prime lending rate of SB1 plus markup of 300 basis points.
1.1 That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that after having determined the ALP in a sale/service transaction, it cannot be assumed that separate adjustment is required in respect of interest therefrom, since outstanding net receivables emanate from the service sales transaction itself.
1.2 That furthermore the learned Commissioner of Income Tax (Appeals) has also failed to appreciate that since appellant is also not charging any interest on overdue debts from third parties, therefore notional interest on outstanding receivables with AE is neither factually and nor legally sustainable, particularly when appellant is a debt free company and is not paying interest on funds utilized in business activities or on credit from suppliers.
1.3 That the learned Commissioner of Income Tax (Appeals) has also failed to appreciate that while determining the margin appellant had not made any adjustment for working capital and since appellant had earned higher margin of 23.33% as compare to the margin of 11.42% of comparable companies, no further adjustment was warranted.
2. That in any case and without prejudice the learned Commissioner of Income Tax (Appeals) has also erred both in law and on facts in not applying the LIBOR rate for computation of interest in view of the judgment of jurisdictional High Court in the case of CIT vs. Cotton Naturals (I) (P) Ltd. reported in 276 CTR 445.
It is therefore prayed that, adjustment and addition so upheld by the learned Commissioner of Income Tax (Appeals) be deleted and appeal of the appellant company be allowed.
2. Briefly stated facts of the case are that the assessee is A 100% subsidiary of “Barco NV Belgium” and was engaged in the business of manufacturing of projectors and parts in trading in visual display products as well as provision of software development services to its Associated Enterprises (AEs). For the year under consideration, the assessee filed return of income on 06/10/2010 declaring total income of Rs.4,66,13,010/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short ‘the Act’) was issued and complied with. The Assessing Officer observed International transaction carried out by the assessee and referred the matter of determination of arm’s-length price of the International transaction to the Ld. Transfer Pricing Officer (in short “TPO”. The Ld. TPO noted following international transactions carried out by the assessee and method used for determining the arm’s-length price by the assessee as under:
