Principal Commissioner of Income-tax v. Kusum Health Care (P.) Ltd.

JUDGMENT

CM No. 40894 of 2016 (exemption)

1. Allowed, subject to all just exceptions.

CM No. 40895 of 2016 (for condonation of 309 days' delay in re-filing the appeal)

2. For the reasons stated in the application, the delay of 309 days in re-filing the appeal is condoned.

I.T. A. No. 765 of 2016

3. This appeal, under section 260A of the Income-tax Act, 1961 ("the Act"), by the Revenue is directed against the order dated March 31, 2015 passed by the Income-tax Appellate Tribunal, Delhi Bench "1", New Delhi ("ITAT") in Kusum Health Care (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 79 (Delhi - Trib.) .

4. The facts in brief are that the assessee is engaged in the business of exporting pharmaceutical products to its overseas associated enterprises ("AEs") as well as to third parties. The assessee filed its return for the assessment year in question on October 13, 2010 declaring a total income of Rs. 2,06,64,960. The return was picked up for scrutiny and notices under section 143(2)/142(1) of the Act were issued by the Assessing Officer ("AO"). Since the assessee had, during the assessment year in question, entered into international transactions with its associated enterprises, the case was referred to the Transfer Pricing Officer ("TPO") under section 92CA of the Act.

5. As far as the assessee was concerned, it declared the following inter national transactions i.e. export of manufactured medicines and export of traded medicines. Both the transactions were benchmarked applying transactional net margin method. The profitability of the assessee from its manufacturing and trading segments was benchmarked with the average operating profit margin earned by comparable companies performing similar manufacturing and trading functions. In both sets of transactions, the profit level indicators (PLIs) showed the operating profit margin of the assessee to be higher than that of the comparable companies. Accordingly, the international transactions were projected by the assessee as having been undertaken at the arm's length price ("ALP").

6. The Transfer Pricing Officer, however, in his order dated January 29, 2014 proposed an adjustment by way of addition of Rs. 1,57,54,943 to the income of the assessee. The Transfer Pricing Officer noted that the credit period for the debtors as mentioned in the sale contract with unrelated entities was 180 days. However, in the case of the associated enterprises they were "allowed to linger for long". The said receivables qua the associated enterprises was treated as a separate international transaction.

7. The aforementioned transfer price adjustment as proposed by the Transfer Pricing Officer was incorporated by the Assessing Officer in the draft assessment order. The respondent/assessee filed its objections to the said draft assessment order, before the Dispute Resolution Panel ("DRP") which, by the order dated September 24, 2014, rejected the objections. The Transfer Pricing Officer gave effect to the aforementioned directions of Dispute Resolution Panel on November 13, 2014. On November 14, 2014 the Assessing Officer passed the final assessment order by making an addition of Rs. 93,69,275 to the income of the assessee.

8. Aggrieved by the said order, the assessee filed an appeal before the Income-tax Appellate Tribunal. By the impugned order dated March 31, 2015, the Income-tax Appellate Tribunal set aside the assessment order. The Income-tax Appellate Tribunal noted that the assessee had undertaken working capital adjustment for the comparable companies selected in its transfer pricing report. It was further noted that "the differential impact of working capital of the assessee vis-a-vis its comparables had already been factored in the pricing/profitability" which was more than the working capital adjusted margin of the comparables and, therefore, "any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified".

9. Mr. Raghvendra Singh, learned counsel appearing for the Revenue sub mitted that the Income-tax Appellate Tribunal overlooked the fact that the expression "international transaction" as defined in Explanation (i)(c) to section 92B of the Act included "payments or deferred payment or receivable or any other debt arising during the course of business", and therefore, the outstanding receivables could by themselves constitute an international transaction. He further referred to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Paras 3.48 and 3.49 under Chapter III para A.6.1 of the said guidelines titled "Different types of comparability adjustments" spoke of the need to eliminate differences that may arise from different accounting practices between controlled and uncontrolled transactions. In particular, it was noted under para 3.49 that "a significantly different level of relative working capital between the controlled and uncontrolled parties may result in further investigation of the comparability characteristics of the potential comparable". Mr. Singh submitted that the Income-tax Appellate Tribunal erred in disagreeing with the Transfer Pricing Officer, who had characterised the outstanding receivables as an international transaction by itself which required benchmarking.

10. The court is unable to agree with the above submissions. The inclusion in the Explanation to section 92B of the Act of the expression "receivables" does not mean that dehors the context every item of "receivables" appearing in the accounts of an entity, which may have dealings with foreign associated enterprises would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee will have to be studied. In other words, there has to be a proper inquiry by the Transfer Pricing Officer by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an associated enterprise, the arrangement reflects an international transaction intended to benefit the associated enterprise in some way.

11. The court finds that the entire focus of the Assessing Officer was on just one assessment year and the figure of receivables in relation to that assessment year can hardly reflect a pattern that would justify a Transfer Pricing Officer concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction. This was clearly impermissible in law as explained by this court in Cit v. Ekl Appliances Ltd…. [2012] 209 Taxman 200/345 ITR 241/345 ITR 241(Delhi) .

12. Consequently, the court is unable to find any error in the impugned order of the Income-tax Appellate Tribunal giving rise to any substantial question of law for determination. The appeal is, accordingly, dismissed.