Tecnhnimont Icb P.Ltd, Mumbai vs Assessee

सर्वश्री डी.भनभोहन, उऩाध्मऺ एवुं श्री आय.सी.शभाव, रेखा सदस्म BEFORE SHRI D. MANMOHAN, VP & SHRI R.C.SHARMA, AM आमकय अऩीर सं./ITA No.487/Mum/2014 ( नििाारण वषा / Assessment Year :2009-10) Tecnimont ICB House, Vs. DCIT-9(3), Mumbai-20 Chincholi Bunder, 504 Link Road, Malad (W), Mumbai-

400064 स्थामी रेखा सं ./ जीआइआय सं ./ PAN/GIR No. : AAACI 2628 B (अऩीराथी /Appellant) .. (प्रत्मथी / Respondent)

ननधावरयती की ओर से /Assessee by : Shri R.R.Vora & Shri Nikhil Tiwari याजस्र् की ओर से /Revenue by : Shri N.K.Chand

सुनर्ाई की तायीख / Date of Hearing : 16th April, 2015 घोषणा की तायीख/Date of Pronouncement 08-07-2015

आदे श / O R D E R

PER R.C.SHARMA (A.M):

This is an appeal filed by the assessee against the direction passed

u/s.144C(5) of the IT Act by DRP-II, Mumbai, in the matter of order

passed u/s.143(3) r.w.s.144C of the Act for the A.Y.2009-10.

2. The rival contentions have been heard and record perused. Facts in

brief are that assessee Tecnimont ICB Private Limited (hereinafter

referred to as 'TICB is engaged in the business of execution of turnkey

project services particularly in the field of petrochemicals, oil and gas,

fertilizers and instrumentation and electrical erection. It is also engaged in

activities like EPC lump sum turnkey contracts, engineering design 2 ITA No.487/14

services, supervision services, translation services and feasibility studies.

It also renders onshore/ offshore design and engineering services and

field construction supervision services. During AY 2009-10, TICB has

entered into the following international transactions with its associated

enterprises ('AEs'):

Sr. Associated International Amount Method Margin Arithmetic No Enterprises Transactions (INR) applied of mean of Appell single year ant updated margins of the comparables Transaction with AEs 1 Tecnimont project services 20,35,37,560 TNMM* 17.03 7.02%(As per SpA Electrical & 34,41,48,917 % assessee's instrumentation OP/OC comparables work as PLI -Annexure-1) 2 Tecnimont Electrical & 139,43,12,06 (6.12% As Arabia Ltd Instrumentation 3 per comparable work set identified 3 TWS SA Project Services 11,92,62,993 by TPO for 4 Sofregaz Project services 1,74,404 AY 2008-09) SA 5 Tecnimont Project services 4,09,28,739 ICB Qatar WLL PO Transaction with AE's PE in India 6 Tecnimont Execution of 156,69,36,279 SpA India EPC Project Project office Reimbursement of expenses to AEs Recovery of expenses from AEs

*All transactions were aggregated and benchmarked using TNMM at segment level TNMM- Transactional Net Margin Method.

The TPO accepted all the transactions to be at arm's length price (ÁLP').

However, the learned TPO made an adjustment of Rs.10,36,49,646/- by

charging notional interest for delayed recovery of export receivables and

delayed recovery of expenses from AE's till the date of transfer pricing

order (i.e. 25th January, 2013). The assessment was completed by the AO 3 ITA No.487/14

under Section 143(3) read with Section 144C (13) of the Act. An order

dated 24 December 2013 was issued assessing the assessee at total

income of Rs.67,96,55,391, thereby confirming the transfer pricing

adjustment of Rs.10,36,49,646 on account of notional interest for delayed

recovery of export receivables and delayed recovery of expenses from

AEs by applying interest rate of 12.25% (i.e. SBI PLR). Assessee is

aggrieved by this addition of notional interest.

3. It was contended by ld. AR that assessee company does not

charge any interest on outstanding advances to AE's as well as Non AE's.

The Learned AO/ TPO considered 60 days credit period for receipt of

outstanding receivables and outstanding recovery of expenses from its

AEs in the normal course of business activities which is not disputed by

the assessee. He further submitted that delay in recovery of outstanding

receivables from debtors does not fall within the purview of "international

transaction" under the provisions of section 92B of the Act read with Rule

80IB of the Income-tax Rules as prevailing at that point of time and

therefore the transfer pricing regulations do not apply to the same. Further

contention of ld. AR was that while transacting with group entities/ third

parties, it is a common practice to extend certain credit period. Assessee

provides services to AEs and hence inter-company balances (debit! credit

receivables) are unavoidable. AO/TPO failed to appreciate that AEs were

facing financial difficulties in the relevant assessment year, which has

resulted in delay in payment to assessee. Such circumstances happen in 4 ITA No.487/14

business cycle and therefore interest cannot be charged for such delays.

Ld. AR placed reliance on the decisions, wherein the Hon'ble Courts have

held that transfer pricing addition to levy interest cannot be made on

account of extra credit period to AEs in this regard. Further the contention

of ld. AR was that amendment in the definition of international transaction

cannot be applied in the absence of corresponding amendment in the

Income Tax Rules. As per the ld. AR similar proposition was also upheld

by Delhi Tribunal, specifically dealing in transfer pricing scenario. In this

regard, reliance is placed on the Delhi Tribunal ruling in the case of Bharti

Airtel Ltd (ITA No.5816/DeI/2012) dated 11 March 2014 (Del) (PB pg 389-

445) wherein the following has been observed:

"(34). There is more than one aspect of the matter. The Explanation to section 928 has been brought on the statute by the Finance Act 2012. If one is to proceed on the basis that the provisions of Explanation to section 928 enlarge the scope of section 92B itself, even as it is modestly described as 'clarificatory' in nature, it is an issue to be examined whether an enhancement of scope of this anti avoidance provision can be implemented with retrospective effect.

Undoubtedly, the scope of a charging provision can be enlarged with retrospective effect, but an anti-avoidance measure, that the transfer pricing legislation inherently is, is not primarily a source of revenue as it mainly seeks compliant behavior from the assessee vis-a-vis certain norms and these norms cannot be given effect from a date earlier than the date norms are being introduced. However as we have decided the issue in favour of the assessee on merits and even after taking into account the amendments brought by the Finance Act 2012 we need not deal with this as aspect of the matter in greater detail."

4. It was also the contention of ld. AR that since the margin earned

from its AE transactions is higher as compared to similarly placed

comparable companies, the element of interest for delayed payment is

subsumed in the higher mark-up charged. In view of the same, 5 ITA No.487/14

adjustment on account of notional interest on outstanding balances of

AEs is not warranted. Even if one assumes that deemed interest income

on account receivables is already included as a part of the total profit of

the assessee as per the audited financials for AY 2009-10 and the same

is reduced from such total profit so as to exclude such notional interest

income from the total income, the margin earned by the assessee even

after reducing such amount is still much higher than the margin earned by

the comparable companies.

5. It was also contended by ld. AR that AO/TPO failed to consider that

transaction between TICB and Tecnimont SpA India Project Office

('TIPO') (PE of foreign AE in India) is a transaction between two resident

entities and therefore such transaction does not come under the purview

of Indian transfer pricing regulations since there was no possibility of

shifting of profits outside India or erosion of country's tax base. As per ld.

AR the PE (ie TIPO) of the company is located in India and carrying on its

business with an Indian company(ie TICB). Hence, irrespective of the fact

that TIPO is a part of an AE, for the purpose of proceedings under the

Income-tax Act, and particularly in the transfer pricing proceedings, has to

be treated as a separate business entity, similar to any other corporate

entity doing business in India. In the present case, the business activities

of TIPO are conducted in India and the establishment is maintained in

India. As a separate business unit, TIPO has its own audited accounts

prepared in terms of Indian accounting standards for submitting to the 6 ITA No.487/14

Indian Tax Authorities for the purpose of tax proceedings in India.

Therefore, the legal status of the PE being an extension of a foreign

company, should not come in the way of treating the PE as a separate

Indian business unit on par with any other business entities carrying out

their business in India during the year under consideration. However, the

DRP has rejected assessee's contention relying on P&H High Court

decision in case of Coca Cola (supra), without considering the facts

before P&H High Court in that case. In the above mentioned case, there

was transaction between resident (located in India) and non- resident AE

(located outside India) and the argument taken by the assessee was that

its entire profit is exempt from tax (due to tax deduction) and hence, there

is no intention of base erosion and hence transfer pricing is not

applicable. As against, in the facts of the present case, the transaction

entered by the assessee (located in India) is with PE or its AE (located in

India) and hence, it was held by Hyderabad Tribunal in the case of IJM

(India) Infrastructure Ltd., 28 ITR (trib) 176 that any transaction of Indian

enterprise with PE of foreign company in India would be treated as

transaction between two residents and hence, the transfer pricing

provisions would not apply in such situation.

6. On the other hand, ld. DR relied on the order of the lower

authorities and contended that in respect of export to associate enterprise

the amount was recovered after a period of 60 days, therefore, the TPO

was justified in directing to charge interest at SBI PLR rate of 12.25% as 7 ITA No.487/14

the benchmarked rate for delay in recovery of export receivable beyond

the normal credit period of 60 days.

7. We have considered rival contentions, carefully gone through the

orders of the authorities below. We have also deliberated on the judicial

pronouncements cited at bar by ld. AR and ld. DR in the factual matrix of

instant case. From the record we found that the assessee company had

provided EPC services to its AEs, and as the concerned AEs were going

through financial difficulties certain payments by the AEs to the assessee

company were delayed beyond the normal credit period. Similarly, the

assessee company had incurred certain expenses on behalf of its AEs.

These were recovered from the AEs. Some such expenses were

recovered beyond the normal credit period. The TPO, on these facts,

computed the interest chargeable by adopting the SBI PLR rate of

12.25% as the bench mark rate for delay in receipt of export receivables

beyond the normal credit period of 60 days and the similar interest was

charged on delayed recovery of expenses. Thus, a total adjustment of

Rs.10,36,49,646/- was proposed by the TPO and incorporated in the

assessment order.

8. From the record we found that assessee has not charged interest in

respect of services rendered to non-AEs, payment of which was received

beyond normal credit period of 60days. We also found that assessee was

having advances from AE. Charging of interest by TPO in respect of

amount received beyond 60 days is correct as per the amendment 8 ITA No.487/14

brought in by the Finance Act, 2012 in Section 92B(2) retrospectively.

However, we found that the AE was having advances with the assessee,

therefore, while computing interest on realized amount beyond 60 days,

the AO should reduce the proportionate advance relating to the

transaction under consideration. We also found that the TPO has directed

for charging of interest even beyond the end of the financial year i.e.

31.3.2009. Accordingly, we direct the AO to charge interest only uptil the

end of the financial year insofar as Section 92(1) of the Act specifically

provides to tax not income arising from any international transaction which

is to be computed with regard to the arms length price for the year under

consideration. Accordingly, we restore the matter back to the file of AO to

recompute the interest in terms of the above direction.

9. It was also brought to our notice that while fixing the sale price the

assessee has already considered the delay, if any, in recovery of the

price. Accordingly, while recomputing the interest, the AO should also

take into account the price fixed by the assessee with respect to the

transaction entered with non-AE vis-à-vis AE and if he finds that price so

charged has already taken care of the delayed period of payment, the

same should be taken into account while computing the interest

chargeable.

10. We also found that operating margin earned by the assessee on

provision of EPC services (17.03% OP/ OC) from its AEs transactions is

higher than the margin earned on its non-AE transactions. Since the 9 ITA No.487/14

transactions are intrinsically linked and the assessee under the TNMM fits

within the arm's length, the assessee should be given due credit for the

same while computing chargeable interest for delayed payment.

11. The Mumbai Tribunal in the case of Goldstar Jewellery Limited Vs

JCIT (ITA No 6570/Mum/2012) held that since sale price of the product or

service was always influenced by the credit period allowed by the seller,

the transaction of sale to the AE and credit period allowed in realization of

sale proceeds are closely linked and the price determined for such sale is

after consideration of the credit period provided by the seller. Further, it

was also held that for the purpose of determining the ALP of sale

transaction, the transaction of excess credit period provided by the seller

to the AE is required to be aggregated with the sale transaction by the

seller to the AE and cannot be benchmarked separately. The Delhi

Tribunal has pronounced a ruling dated 31 March 2015, in the case of

Kusum Hea care Pvt Ltd (ITA No 6814/DeI/2014) (Delhi Tribunal), on

similar facts. The Tribunal therein followed the ratio laid down by Sony

Ericsson (supra) and held as under:

"(14) .... the differential impact of the working capital of the assessee vis-a-vis its comparables has already been factored in the pricing! profitability of the assessee and therefore, any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified. (17) ... it is clear that assessee had earned significantly higher margin than the comparable companies (which have been accepted by the TPO) which more than compensates for the credit period extended to the AEs. Thus, the approach by the assessee of aggregating the international transactions pertaining to sale of goods to AE and receivables arising from such transactions which is undoubtedly inextricable connected is in accordance with established transfer pricing principles ... "

10 ITA No.487/14 12. The addition on account of interest should be computed only till the

end of financial year (i.e. till 31 march 2009 and not till the date of passing

of transfer pricing order (i.e. 28 January 2013). It is trite law that income

tax has to be computed with reference to previous year and as per

Section 5 of the Act explains the scope of total income to be considered

earned by any person during the previous year. In the present case, the

TPO has made addition of notional interest till the date of passing of order

(i.e. 28 January 2013) which is incorrect and against the basic principle of

taxation as laid down by Income Tax Act. Hence, interest adjustment on

delayed accounts receivables, if any, should be computed only upto 31

March 2009.

13. We also found that during the year under consideration, the

assessee has received advances from AE's for the purpose of export,

therefore computation of interest, if any, on delayed recovery of export

receivables should be after reducing the advances received from AE's for

the purpose of export. Reliance is placed on the Mumbai Tribunal ruling in

the case of Boston Scientific International BV India (40 SOT 11) (2010)

wherein it has been held that interest income on accounts receivables of

an assessee from its AE should be examined after considering the

outstanding payables from that AE.

14. From the record, we found that so called delay repatriation from

foreign AE's, TPO/ AO, while working out deemed notional interest has

considered interest rate of 12.25% p.a. (SBI PLR). As per our considered 11 ITA No.487/14

view the notional interest has to be worked out for so called amount

receivable from AE, by applying LIBOR interest rate for the purpose of

computation of transfer pricing adjustment, if any. In this regard, reliance

is placed on the following decisions, wherein the Hon'ble Tribunals has

upheld use of LIBOR for the purpose of benchmarking loan/advance

given to foreign AE's:

i. Everest Kanto Cylinder Ltd Vs ACIT (L TU) (ITA No 7073/Mum/2012) (Mumbai Tribunal) ii. M/s PMP Auto Components P. Ltd, (ITA NO.1484/Mum/2014) dated 22 August 2014 iii. Hinduja Global Solutions Ltd Vs ACIT (145 ITD 361) (2013) (Mumbai Tribunal) iv. Tata Autocomp Systems Ltd Vs ACIT (52 SOT 48) (2012) (Mumbai Tribunal) v. Tata Autocomp Systems Ltd Vs ACIT (ITA No 1320 of 2012) (Approved by Bombay High Court) vi. Four Soft Ltd Vs DClT (142 TT J 358) (2011) (Hyderabad Tribunal) vii. Everest Kanto Cylinder Ltd Vs ACIT (L TU) (ITA No 550/Mum/2014) (Mumbai Tribunal)

15. In view of above discussion, computation of interest is restored

back to the file of AO for recomputing the interest on delayed payment of

receivables, keeping in view our above observation.

16. In respect of the expenditure incurred on behalf of the AEs and

which was reimbursed by the AE, the AO also levied interest thereon. We

found that the recovery of expenses was beyond the normal period of 60

days. Recovery of expenses beyond the normal period was in the nature

of deemed loan in the hands of AEs and require transfer pricing

adjustment. Accordingly, we do not find any infirmity in the transfer pricing 12 ITA No.487/14

adjustment made. However, we direct the AO to charge interest by

applying LIBOR rate.

17. The ground taken by assessee with regard to levy of interest

u/s.234B & 234C is consequential in nature, accordingly, the AO is

directed to recompute the same after giving effect to our above order.

18. In the result, appeal of the assessee is allowed in part for statistical

purposes.

Order pronounced in the open court on this 08/ 07/2015.

Sd/- Sd/- (डी.भनभोहन) (आय.सी.शभाव) (D.MANMOHAN) (R.C.SHARMA) उऩाध्मऺ / VICE PRESIDENT ऱेखा सदस्य / ACCOUNTANT MEMBER

भंफ ु ई Mumbai; ददनांक Dated 08/07/2015 प्र.कु.मभ/pkm, नन.स/ PS

आदे श की प्रनिलऱपप अग्रेपषि/Copy of the Order forwarded to :

1. अऩीराथी / The Appellant

2. प्रत्मथी / The Respondent.

3. आमकय आमुक्त(अऩीर) / The CIT(A), Mumbai.

आदे शािसार/ BY ORDER,

4. आमकय आमुक्त / CIT

5. वर्बागीम प्रनतननधध, आमकय अऩीरीम अधधकयण, भंफ ु ई / DR, ITAT, Mumbai

6. गाडव पाईर / Guard file.

उप/सहायक पुंजीकार सत्मावऩत प्रनत //True Copy// (Asstt. Registrar) यकर अपीऱीय अधिकरण, भुंफई / ITAT, Mumbai