Mobilization advances cannot be treated as Loans & Advances and not subject to TP

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:

III) Domestic PLR of 12.25% cannot be applied and the transaction cannot be equated to investment in bank deposit, stocks, mutual funds or real estate.

Relevant Case law:

i. CIT Vs. Cotton Naturals India Pvt. Ltd. (2015) 276 CTR 445 (Del) / ITA No. 233 of 2014

IV) Without prejudice, the TPO/AO has not taken into consideration the fact that there are amounts payables to same AE i.e. Lanco International Pte. Limited, Singapore (AE) while making adjustment towards alleged outstanding receivables as on March 31st 2011. The total outstanding payables in respect of Lanco International Pte. Limited, Singapore is Rs. 1,25,94,03,883/-. (Additional Ground 11g)

Relevant Case laws:

i. Satyam Venture Engg. Services Pvt. Ltd. Vs ACIT (ITA No. 4318; 432/Hyd/2015)

ii. Bentley Systems India Pvt. Ltd. Vs ACIT (ITA No. 6161/De1/2013)

V) Without prejudice, the adjustment has been made wrongly for full year and not on the basis of actual number of days. (Additional Ground 11h).

8.2. It was also submitted that in the Assessment Year i.e. AY 2013-14, the TPO has himself accepted the contention of assessee that the assessee is not exporting or supplying any goods and in fact the balances appearing in the balance sheet are mobilization advance which are to be adjusted against future supply bills. Without prejudice, the outstanding balance of mobilization advance as on 31st March 2011 amounting Rs. 11,85,45,62,551/- also included an amount of Rs. 68,37,99,719/-which was the outstanding balance as on 31st March 2010. In the previous year i.e., FY. 2010-11, the TPO/AO has accepted the ALP of the same. Thus, this amount should be reduced from Rs. 11,85,45,62,551/-.

8.3. Ld.DR however, relied on the orders of the TPO/DRP and submitted that the decision taken in later year cannot be binding on this year, as each year is separate and principles of res judicata does not apply to IT matters.

9. We have considered the rival contentions. It is well accepted practice that the construction industry pay advances at a certain percentage of the contract value to mobilise various resources for the execution of contract and these advances are given in the regular course of business. As seen from the facts of assessee’s case, assessee is undertaking an EPC contract and has received mobilization advances as part of that. Like-wise, assessee has given some works to other parties on sub-contract basis and necessarily it has to provide mobilization advances to the parties. It is also noticed that assessee has advanced mobilization advances to both AEs and non-AEs and no interest has been charged from either party. Not only that assessee is also not required to pay any interest on the mobilization advances received, which are in fact more than the amounts advanced by assessee. Thus, there is complete uniformity in the act of assessee in not charging interest from both AE and non-AE and also not paying interest/ claiming interest for the advances received. Following the principles laid down by the Hon’ble Bombay High Court in the case of Indo American Jewellery Ltd. Vs. CIT, Hon’ble Bombay High Court (ITA No. 1053 of 2012), we are of the view that there is no need for charging any interest on the amounts advanced as receivables. Since this amount is part of contract work, in our view it does not attract any adjustment under TP provisions. 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, these business advances cannot be categorised as ‘loans and advances’ so as to consider them for adjustment. Relying on the various case law relied upon by the Ld. Counsel, we are of the opinion that since assessee-company is not charging any interest from the AEs and non-AEs and also not paying any interest on the amounts received by it from the main contractor, this adjustment is not warranted. Respectfully following the principles laid down in various case law relied upon by assessee above, we have no hesitation in deleting the above adjustment. As seen from the order of the TPO in the next year AY 2013-14, he has considered the same issue and has not made any adjustment by stating as under:

“7.5 Receivables: With regard to receivables it is noticed from the information filed that the company is not exporting and supplying any goods or services to AEs. The balances appearing in the Balance Sheet are mobilization advances which are to be adjusted against future supply bills and hence no adverse inference is drawn.”

Since the TPO order is in tune with the provisions of the Act and the principles laid down on this issue, we are of the opinion that no adjustment is required on the issue of mobilization advances during the impugned year also. Accordingly, grounds raised by assessee including additional grounds are allowed.