prpri For Similar Transactions with Related and Unrelated Parties if Price is Comparable, It is taken to be at ALP For Similar Transactions with Related and Unrelated Parties if Price is Comparable, It is taken to be at ALP

Case Law Details

Case Name : Axis Risk Consulting Services Private Limited.Vs DCIT (ITAT Delhi)
Appeal Number : I.T.A. No.3693/DEL/2014
Date of Judgement/Order : 22/02/2018
Related Assessment Year : 2009-10

Axis Risk Consulting Services Private Limited. Vs DCIT (ITAT Delhi)

the only dispute before us is with regard to the adjustment by way of imputing interest @ 17.22% by the TPO on account of receivables from the AE. Here in this case, it is an undisputed fact that the assessee has also rendered similar services to non AEs/unrelated parties and on receivables from the non AEs also, there have been delays on receivables on which no interest has been charged by the assessee. Before us, invoice wise details have been furnished highlighting the details of amount of the invoice date; date of receipt and the number of outstanding days for the payment has been given. From such details, it is seen that in the case of unrelated party transaction, there are huge delays and in some cases it has gone up more than 1700 days. The period of outstanding receivables is ranging between 38 days to 1718 days and in most of the invoices, average delay is more that 300 days. If there are similar nature of transaction with comparable uncontrolled transactions and also with related parties, then there is an internal CUP to bench mark the controlled transaction with comparable uncontrolled transaction. Under CUP price charged or paid for the services provided in a comparable uncontrolled transaction is taken into consideration and it is the adjusted price paid for availing services which constitutes the benchmark for comparison with the price paid for availing of any services in an international transaction. If there are similar transactions of services with related parties as well as unrelated parties and the price charged or paid are comparable, then it is taken to be at arm’s length price. Thus, if under both the scenarios, no interest has been charged on similar nature of receivables, then it has to be reckoned that the transaction with the related party meets the arm’s length requirement vis-à-vis, the transactions with the unrelated third parties. Accordingly, we hold that no interest can be imputed on receivables with the AE and accordingly, the addition made by the TPO is directed to be deleted.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

The aforesaid appeal has been filed by the assessee against impugned order dated 06.01.2014, passed by Ld. Assessing Officer u/s 143(3)/ 144C(13) in pursuance of the directions given by the DRP u/s. 144C(5) dated 27.11.2013.

2. The only issue raised by the assessee in various grounds of appeal relates to Transfer Pricing Adjustment of Rs.79,89,255/- on account of re-characterizing of the outstanding receivables from overseas AEs as loan facility and thereby imputing interest at the rate equal to annual average yield of 5 year ‘BB’ rated bond by considering all the receivables to be outstanding for over 365 days.

3. The assessee is a wholly owned subsidiary of ‘Genpact India Holdings, Mauritius’, which in turn is held by ‘Genpact Bermuda’. The assessee is engaged in the business of providing risk consulting, advisory and risk assurance solutions. The company’s services are in the nature of risk assurance, business improvement, business risk assessment, corporate governance, business system controls, enterprise risk management, cost management solutions etc. It serves ITES, BOP telecom, travel, hospitality, manufacturing, biosciences, retail and consumer products, and financial services industries. In a nutshell it can be said that the company operates as an information technology enabled consultancy solutions provider rendering integrated risk and technology solutions in India and internationally.

4. The only disputed transaction before us is on account of receivables due to the assessee from its assessee for the services The TPO on the perusal of the balance-sheet noted that there were receivables from which he pointed out that the payment for the invoices raised by the assessee have not been received within the stipulated time. The TPO opined that in such circumstances the delayed payment has to be treated as unsecured loans advanced to the AEs on which he proposed to charge a normal rate of interest for the period of delay in receipt of the payment beyond the time stipulated in the services agreement. The assessee in response to the show cause notice submitted that the bench marking of receivables cannot be done as it is not an international transaction which warranted any kind of bench marking. However, the TPO after detailed discussion and relying upon by provision of section 92B(1) read with Section 92F(v), held that it is an international transaction and after detailed discussion, held that interest rate of 17.22% based on yield rate of ‘BB’ rated bond for five year should be applied; and accordingly, made the adjustment after detailed calculation which worked out to Rs.79,89,255/-. The DRP has confirmed the said action of the TPO.

5. Before us, the ld. counsel for the assessee, at the outset, submitted that the assessee has rendered similar services to non AEs/ unrelated parties and from unrelated parties it has also not charged any interest from the receivables and thus, there is an internal CUP for benchmarking the transactions, i.e., both for the controlled and uncontrolled transactions assessee has not been charging interest, and therefore, no adjustment should be made. In support, he has given the following tabulation showing that no interest has been charged from AEs and non AEs.

Tabulation showing no interest charged from AE/Non AE
Particulars AEs (NR)(in INR) AES (Domestic in INR) Non-AEs (in INR) Total (in INR)
Revenue from consultancy services 10,41,30,757 70,23,200 12,73,70,180 23,85,24,137
Interest received Nil Nil Nil Nil
Receivables/sundry debtors 4,63,95,206 1,45,42,531 2,68,64,973 8,78,02,710

6. From the above, he pointed out that the transactions with the non AEs were far more than the AEs and on similar delayed payments of the receivables; no interest has been charged from non AEs also. In view of our direction to the Ld. Counsel to give invoice wise details of receivables from the third party customers, he had filed the same before us; and from there he pointed out that in the case of non AEs also there have been huge delay in the outstanding receivables and thus, under similar circumstances on similar nature of transaction with the AE no interest can be imputed. Alternatively, he submitted that if that interest has to be imputed then LIBOR rate should be applied instead of BB bond yielding rate of five years.

7. On the other hand, learned Sr. DR submitted that the average working of the delay in receivables in the case of AEs and non AEs has to be seen and if there is an overall delay in the average delay of payment, then interest needs to be charged on the receivables from the AEs and for the rate of interest, he admitted that LIBOR rate can be applied in view of the settled proposition laid down by the Hon’ble Jurisdictional High Court in Cotton Naturals and in many other cases.

8. After considering the rival submissions and on perusal of the relevant findings and material placed on record, the only dispute before us is with regard to the adjustment by way of imputing interest @ 17.22% by the TPO on account of receivables from the AE. Here in this case, it is an undisputed fact that the assessee has also rendered similar services to non AEs/unrelated parties and on receivables from the non AEs also, there have been delays on receivables on which no interest has been charged by the assessee. Before us, invoice wise details have been furnished highlighting the details of amount of the invoice date; date of receipt and the number of outstanding days for the payment has been given. From such details, it is seen that in the case of unrelated party transaction, there are huge delays and in some cases it has gone up more than 1700 days. The period of outstanding receivables is ranging between 38 days to 1718 days and in most of the invoices, average delay is more that 300 days. If there are similar nature of transaction with comparable uncontrolled transactions and also with related parties, then there is an internal CUP to bench mark the controlled transaction with comparable uncontrolled transaction. Under CUP price charged or paid for the services provided in a comparable uncontrolled transaction is taken into consideration and it is the adjusted price paid for availing services which constitutes the benchmark for comparison with the price paid for availing of any services in an international transaction. If there are similar transactions of services with related parties as well as unrelated parties and the price charged or paid are comparable, then it is taken to be at arm’s length price. Thus, if under both the scenarios, no interest has been charged on similar nature of receivables, then it has to be reckoned that the transaction with the related party meets the arm’s length requirement vis-à-vis, the transactions with the unrelated third parties. Accordingly, we hold that no interest can be imputed on receivables with the AE and accordingly, the addition made by the TPO is directed to be deleted.

Order pronounced in the open Court on 22nd February, 2018.

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