Citation Codes

Equivalent Citations

citation codes

Case Number

ITA 75/VIZ/2022

Disposition

allowed

Attorney(S)

Acts

FINANCE ACT 2012
section 143(3) r.w.s 144C(13) r.w.s 144B of the Income Tax Act 1961, (the Act)

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Smart Summary

Structured Summary — Income Tax Appellate Tribunal (Visakhapatnam Bench)

Factual and Procedural Background

(Narrative constrained to facts expressly stated in the provided opinion)

This appeal (I.T.A. No.75/Viz/2022) arises from a final assessment order for Assessment Year 2017-18 dated 26.02.2022 issued under section 143(3) read with sections 144C(13) and 144B of the Income Tax Act, 1961. The assessment followed directions of the Dispute Resolution Panel‑1 (DRP‑1), Bengaluru (F.No.73/DRP‑1/BNG/2021‑22) dated 28.01.2022 passed under section 144C(5).

The appellant, M/s Devi Sea Foods Limited (an exporter of processed/frozen shrimp, shrimp feed and a wind mill power business), had filed a revised return admitting total income of Rs. 132,15,54,810 on 21.11.2018. The case was referred to the Transfer Pricing Officer (TPO) to determine Arm's Length Price (ALP) under section 92CA(3). The TPO initially computed an ALP adjustment of Rs. 50,57,43,750 (comprising adjustments for sale of frozen shrimp, corporate guarantee and trade receivables). The Assessing Officer (AO) issued a draft assessment under section 143(3) read with section 144C (20.04.2021) making upward transfer pricing adjustments and a disallowance under section 14A for Rs. 13,20,907.

The assessee filed objections before the DRP. The TPO passed a rectification order under section 154 which revised the total TP adjustment down to Rs. 11,11,53,715 (corporate guarantee and revised trade receivable adjustment). The DRP, however, in its detailed order confirmed the additions in the draft assessment. Aggrieved, the assessee appealed to the ITAT.

Legal Issues Presented

Whether the Transfer Pricing Officer/AO/DRP was justified in imputing notional interest on overdue trade receivables from Associated Enterprises (i.e., whether a separate upward adjustment is required on export receivables when TNMM is applied).
Whether the corporate guarantee extended by the assessee to its Associated Enterprise constitutes an international transaction and, if so, what is the appropriate arm's length rate and the base on which it should be applied (gross guarantee vs. amount actually utilized).
Whether a disallowance under section 14A of the Income Tax Act is maintainable where the assessee earned no exempt income in the relevant assessment year.

Arguments of the Parties

Appellant's (Assessee's) Arguments

The assessee adopted the Transaction Net Margin Method (TNMM); the notional interest on overdue receivables is subsumed in the ALP arrived at under TNMM and therefore no separate imputation of notional interest is warranted.
The delay in realization of receivables cannot be treated as an international transaction in the sense that requires a separate interest imputation beyond the TNMM; in any event, transfer pricing adjustments should not be made on a hypothetical/notional basis without material showing under‑charging of real income.
The assessee's operating margin was shown to be higher than comparables (various margin computations presented), indicating that working capital/late receipt impacts were captured by the net margin.
The assessee did not charge interest on overdue receivables to either AEs or non‑AEs and contended that internal CUP comparisons supported an arm's length treatment without separate interest imputation.
Regarding corporate guarantee: the assessee contended (relying on authorities and OECD commentary) that corporate guarantee may be a shareholder function, and if treated as an international transaction the appropriate rate should be 0.50% and ought to be applied only on the amount actually utilized by the AE (not on the gross guaranteed amount).
On section 14A: no exempt income arose in the year, so section 14A and Rule 8D should not result in a disallowance.
The assessee relied upon numerous precedents (listed in the record) to support the above contentions.

Respondent's (Revenue's) Arguments

The Revenue (Ld. DR) argued that deferred receivables are covered by the definition of "international transaction" (citing Explanation (i)(c) to section 92B and tribunal decisions) and large delays justified charging notional interest on a notional basis.
The Revenue contended notional interest cannot be treated as subsumed in TNMM without specific justification and that non‑charging of interest to non‑AEs is irrelevant to the comparability with AEs.
Regarding corporate guarantee, the Revenue relied on a CBDT notification (7/6/2017) and supported the TPO/DRP adoption of a 1.9% rate (median from bank data) for guarantees above specified thresholds and therefore urged upholding the TPO/DRP adjustment.
On section 14A, the Revenue supported the AO's decision to make a disallowance under the statutory provisions.

Table of Precedents Cited

The table below catalogues every case-law reference that appears in the opinion and records how each was described or applied in the opinion text. Where the opinion lists a case but does not state the particular rule drawn from it, the table so notes.

Precedent	Rule or Principle Cited For (as stated in the opinion)	Application by the Court (as stated in the opinion)
PCIT vs. Kusum Health Care (P) Ltd [2018] 99 taxmann.com 431 (Delhi HC)	The opinion states: "The Ld. AR heavily relied on the ratio laid down in PCIT vs. Kusum Health Care (P) Ltd." The specific ratio is not reproduced in the opinion text.	The AR's reliance was considered by the Tribunal among other submissions when addressing whether notional interest is subsumed under TNMM; the Tribunal's conclusion supported the position that TNMM obviated a separate interest adjustment.
PCIT vs. Amadeus India (P) Ltd [2020] 113 taxmann.com 393 (Delhi HC)	Listed by the assessee as relied upon; the opinion does not specify the precise rule invoked from this case.	The case was included among precedents relied upon by the appellant; the opinion does not record a distinct application beyond noting reliance.
Pegasystems Worldwide India Pvt Ltd vs. ACIT [2015] 64 taxmann.com 470 (Hyd. Trib.)	Listed by the assessee; the opinion does not detail the principle taken from this decision.	The opinion records the precedent as relied upon by the assessee; no specific application is described in the text.
DCIT vs. CCL Products (India) (P) Ltd [2019] 106 taxmann.com 11 (Visakhapatnam - Trib.)	Listed by the assessee; the opinion does not state a specific rule excerpted from it.	Recorded as one of the precedents relied upon by the appellant; no separate treatment recorded in the reasoning beyond listing.
Vestas Technology R & D Chennai Pvt Ltd vs. ACIT (ITA No.3081/Chny/2016) (Chennai Trib.)	Listed by the assessee; the opinion does not describe the rule cited.	Included in the list of precedents relied upon by the appellant; not otherwise applied or discussed in detail in the opinion text.
Gimpex (P) Limited vs. ACIT [2019] 105 taxmann.com 365 (Chennai Trib.)	Listed by the assessee; the opinion does not set out the specific principle from this decision.	Named among cases relied upon by the appellant; the opinion does not show direct reliance in the reasoning beyond listing.
Det Norske Veritas vs. ADIT [2016] 67 taxmann.com 16 (Mumbai Trib.)	Listed by the assessee; no explicit principle from this decision is quoted in the opinion.	Recorded among precedents relied upon; no distinct application is stated in the opinion.
Hackett Group (India) Ltd vs. DCIT [2020] 116 taxmann.com 631 (Hyd. Trib.)	Listed by the assessee; the opinion does not specify the rule cited.	Included in the list of precedents relied upon by the AR; not specifically applied in the Tribunal's reasoning as recorded.
ERM India (P) Ltd. vs. NEC [2021] 132 taxmann.com 220 (Delhi Trib.)	Listed by the assessee; the opinion does not specify the particular principle cited.	Mentioned among precedents relied upon by the appellant; no discrete application described.
Turner International India (P.) Ltd vs. ACIT [2020] 115 taxmann.com 334 (Delhi Trib.)	Listed by the assessee; the opinion does not extract a specific rule from this decision.	Recorded as relied upon by the AR; not otherwise applied specifically in the written reasoning.
Agilent Technologies India (P.) Ltd vs. DCIT [2021] 124 taxmann.com 561 (Delhi Trib.)	Listed by the assessee; no specific rule is quoted in the opinion.	Mentioned among the appellant's relied authorities; the opinion does not indicate a separate application.
Indo American Jewellery Ltd vs. CIT [2014] 44 taxmann.com 310 (Bombay HC)	Listed by the assessee; the opinion does not specify the rule cited from this decision.	Included in the appellant's list of relied cases; no targeted application recorded in the opinion text.
Sharda Spuntex vs. PCIT - 93 taxmann.com 498 (Rajasthan HC)	Listed by the assessee; the opinion does not reproduce the principle relied upon.	Recorded among precedents cited by the AR; the Tribunal's reasoning does not separately analyze it in the text.
CIT vs. Vaibhav Gems Ltd - 99 taxmann.com 2 (Supreme Court)	Listed by the assessee; the opinion does not state the exact proposition taken from the Supreme Court decision.	Named among authorities relied upon by the appellant; no separate treatment is recited in the reasoning.
CIT vs. Vaibhav Gems Ltd [2017] 88 taxmann.com 12 (Rajasthan HC)	Listed by the assessee; the opinion does not explain the specific rule relied upon from this High Court decision.	Included in the list of precedents the appellant placed reliance on; not expressly applied in the Tribunal's text beyond listing.
Bechtel India Pvt Ltd (ITA No.6530/Del/2016) dated 16 May 2017 (Delhi Trib.)	The Ld. DR referred to this tribunal decision to support that deferred receivables constitute an international transaction (as per the opinion text).	The Tribunal recorded the DR's reliance and, separately, acknowledged that receivables are covered as "international transaction" after the Finance Act, 2012 amendment; the Tribunal nevertheless considered whether separate adjustment was required.
Prolifics Corporation Ltd (ITA No.237/Hyd/2014) dated 31/12/2014 (Hyderabad Trib.)	Described in the opinion as explaining the concept of bank guarantees versus corporate guarantees, observing that corporate guarantees involve risk and provide a service to AEs.	The Tribunal noted this explanation and the Tribunal's conclusion in Prolifics that upheld adjustments on guarantee commissions; the ITAT observed that guarantees carry risk and so a charge is justified in principle.
CIT vs. Everest Kanto Ltd — 378 ITR 57 (Bombay HC)	The opinion states that the Bombay High Court considered corporate guarantee commission as an international transaction and restricted the rate to 0.50% of the corporate guarantee.	The Tribunal expressly followed the ratio of the Bombay High Court and held that corporate guarantee commission is an international transaction but should be charged at 0.50% on the amount of guarantee actually utilized by the AE (not on the gross guaranteed amount).
CIT vs. Redington India Ltd [2021] 430 ITR 298 (Madras HC)	Referred to by the assessee as holding that corporate guarantee given to an AE is covered by the retrospective amendment made by the Finance Act, 2012 (as stated in the opinion).	The opinion records the assessee's reliance on this authority in support of the proposition that corporate guarantees fall within the scope of section 92B after the amendment; the Tribunal accepted that corporate guarantee is an international transaction (subject to its qualified remedy on rate and base).
DCIT vs. EIH Ltd [2018] 89 taxmann.com 417 (Kolkata Trib.)	Listed by the assessee; the opinion does not set out the precise principle drawn from it.	The case is recorded among the precedents relied upon by the appellant; the Tribunal does not detail a separate application in the body of the opinion.
GVK Power & Infrastructure Ltd vs. ACIT [2018] 94 taxmann.com 415 (Visakhapatnam Trib.)	Listed by the assessee; the opinion does not explain the specific rule cited from this decision.	Named among cases cited by the AR; not separately applied in discussion aside from listing.
PCIT vs. Thomas Cook Ltd (ITA Nos.712 & 713/2017) dated 26/08/2019	Listed by the assessee; the opinion does not specify the principle quoted.	Recorded among precedents relied upon by the appellant; not otherwise elaborated in the Tribunal's reasoning.
Bechtel India Pvt Ltd (referred earlier by DR)	(duplicate reference: see above row) The DR cited it to support that deferred receivables can be international transactions.	See above; Tribunal recognizes receivables fall within definition post amendment but assessed whether separate adjustment was needed.
CIT vs. Chettinad Logistics P. Ltd [2018] 95 taxmann.com 250 (Supreme Court)	The Supreme Court held that section 14A can only be triggered if the assessee claims expenditure against income which does not form part of total income; Rule 8D provides a method to determine such expenditure.	The Tribunal followed the Supreme Court's ratio and allowed the assessee's ground on section 14A: as no exempt income was earned, section 14A could not be invoked to sustain the disallowance.
CIT vs. Chettinad Logistics P. Ltd [2017] 80 taxmann.com 221 (Madras HC)	Listed by the assessee; the opinion notes reliance but does not recite the Madras HC ratio separately from the Supreme Court pronouncement.	Recorded among authorities relied upon by the AR in relation to section 14A; the Tribunal expressly followed the Supreme Court decision in its reasoning.
Marg Ltd vs. CIT - 120 taxmann.com 84 (Madras)	Listed by the assessee in relation to section 14A argument; the opinion does not quote a rule from it.	Included among cases cited by the AR; not expressly analyzed in the Tribunal's rationale beyond listing.

Court's Reasoning and Analysis

(Step‑by‑step synthesis following the language and sequence of the opinion)

The Tribunal first observed that, as a matter of admitted law and fact, receivables are covered by the definition of "international transaction" consequent to the retrospective amendment effected by the Finance Act, 2012 (w.e.f. 01.04.2002). Thus, the primary contention that receivables are not international transactions was rejected.
Having accepted that receivables qualify as international transactions, the Tribunal turned to whether a separate upward adjustment (notional interest) on overdue receivables is required when the parties have adopted Transaction Net Margin Method (TNMM) as the most appropriate method (which Revenue did not dispute as the method chosen).
The Tribunal examined the assessee's working (submitted by the Ld. AR) showing that the assessee's operating margins were substantially higher than comparable companies under multiple computations (with and without export incentives). The Tribunal accepted that delays in collection may affect working capital and that working capital adjustments affect profitability.
Crucially, the Tribunal reasoned that when TNMM is applied as the most appropriate method, the net margin inherently takes into account the impact of working capital and notional interest costs. The Tribunal found that working capital adjustments to ALP had already been factored in the assessee's pricing/profitability relative to comparables.
On that basis, the Tribunal concluded that any further separate notional interest adjustment on outstanding export receivables was unjustified. Consequently, it directed the AO to delete the upward adjustment made towards overdue receivables from AEs and allowed the assessee's ground on this point.
Turning to the corporate guarantee issue, the Tribunal recited the TPO's approach: the TPO gathered bank guarantee fee rates, computed a median ALP (1.9%) for corporate guarantees above Rs.10 crores, and applied section 92B's expansive language ("any other transaction having a bearing on the profits, income, losses or assets") to treat corporate guarantees as international transactions.
The Tribunal noted prior tribunal decisions (Prolifics) recognizing that corporate guarantees involve risk and constitute a service to the AE, and observed that a minimum charge in the profit & loss account is justified in principle. However, the Tribunal found merit in the assessee's contention that any guarantee commission should be restricted to the loan amount actually utilized by the AE rather than the gross corporate guarantee amount.
Applying and respectfully following the ratio in CIT vs. Everest Kanto Ltd (Bombay HC), the Tribunal held that corporate guarantee commission is an international transaction but the appropriate benchmark is 0.50% and it should be applied on the corporate guarantee amount actually utilized by the AE. The Tribunal accordingly allowed the assessee's grounds on this matter (i.e., limited the rate and the base).
On section 14A disallowance, the Tribunal noted the assessee's submission (and its reliance on precedent) that no exempt income arose in the year. The Tribunal followed the Supreme Court decision in CIT vs. Chettinad Logistics P. Ltd that section 14A is triggered only where the assessee claims expenditure against income which does not form part of total income, and that Rule 8D is a methodology to quantify such expenditure.
As the assessee had not received/excluded any exempt income during the relevant AY, the Tribunal held section 14A was not applicable and allowed the appeal on this ground.

Holding and Implications

HOLDING: The appeal of the assessee is ALLOWED.

Direct consequences for the parties (as stated in the opinion):

The Tribunal set aside and directed deletion of the Transfer Pricing upward adjustment made in respect of notional interest on overdue export receivables from Associated Enterprises — i.e., no separate notional interest adjustment is to be made where TNMM (properly applied) subsumes the working capital/interest impact.
The Tribunal held that corporate guarantee commission is an international transaction but, following the Bombay High Court in CIT vs. Everest Kanto Ltd, limited the arm's length rate to 0.50% and directed that the rate is to be applied only on the amount of the corporate guarantee actually utilized by the Associated Enterprise (not on the gross guaranteed amount).
The Tribunal deleted the disallowance made under section 14A because the assessee did not earn exempt income in the impugned assessment year, in line with the Supreme Court decision in CIT vs. Chettinad Logistics P. Ltd.
Result: Appeal allowed; assessment adjustments challenged by the assessee were either deleted or moderated as above.

Broader implications (as reflected in the opinion):

The Tribunal's decision emphasizes that (i) classification of receivables as "international transaction" does not automatically mandate a separate notional interest adjustment where the TNMM — accepted as the most appropriate method — already reflects working capital and margin effects; and (ii) corporate guarantees, though treated as international transactions post‑amendment, may attract a limited arm's length commission rate and should be applied with regard to the realistic exposure (amount utilized). The Tribunal expressly followed earlier judicial authorities (including the Bombay High Court and the Supreme Court) rather than laying down a novel principle.

Disposition

The ITAT (Visakhapatnam Bench) pronounced the order on 09.09.2022 and allowed the assessee's appeal in the terms summarized above.

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Devi Sea Foods Limited, Visakhapatnam v. DCIT, Circle-3(1), Visakhapatnam

आयकरअपील यअ धकरण, वशाखापटणमपीठ, वशाखापटणम

IN THE INCOME TAX APPELLATE TRIBUNAL,

VISAKHAPATNAM BENCH, VISAKHAPATNAM

ीद ु वू आरएलरे डी, या यकसद यएवं ीएसबालाकृ णन, लेखासद यकेसम

BEFORE SHRI DUVVURU RL REDDY, HON'BLE JUDICIAL MEMBER & SHRI S BALAKRISHNAN, HON'BLE ACCOUNTANT MEMBER आयकरअपीलस.ं/ I.T.A. No.75/Viz/2022

( नधारणवष/ Assessment Year: 2017-18)

M/s. Devi Sea Foods Limited, Vs. Deputy Commissioner of Visakhapatnam. Income Tax,

PAN: AABCD 0248 B Circle-3(1),

Visakhapatnam.

(अपीलाथ / Appellant) ( यथ / Respondent) अपीलाथ कओरसे/ Appellant by : Sri D. Anand, Advocate याथ कओरसे/ Respondent by : Sri MN Murthy Naik, CIT-DR सुनवाईक तार ख/ Date of Hearing : 18/08/2022 घोषणाक तार ख/Date of : 09/09/2022

Pronouncement

O R D E R

PER Sri S. BALAKRISHNAN, Accountant Member :

This appeal filed by the assessee is directed against the final assessment order passed under section 143(3) r.w.s 144C(13) r.w.s 144B of the Income Tax Act 1961, (the Act) dated 26.02.2022 arising out of the directions of the Learned Dispute Resolution Panel-1, Bengaluru in F.No. 73/DRP-1/BNG/2021-22,

dated 28/01/2022 passed U/s. 144C(5) of the Act dated 28.01.2022 for the AY 2017-18.

2. Brief facts of the case are that the assessee is in the business of export of processed and frozen shrimp, shrimp feed and wind mill power. The assessee entered into various international transactions with its Associated Enterprises (AE) and bench marked its international transactions under Transaction Net Margin Method (TNMM). The assessee filed its revised return of income for the assessment year 2017-18 on 21.11.2018 admitting a total income of Rs 132,15,54,810/-. The case was referred to the Transfer Pricing Officer [TPO] for determining Arms LengthPrice (ALP) u/s 92CA(3) in respect of its international transaction entered into with AE, after approval from the Principal Commissioner of Income Tax-1, Visakhapatnam on 1/4/2019. In response to the notices of the Ld. TPO, the assessee filed various submissions and requested for personal hearing which was allowed on 20/1/2021. Considering the submissions made by the assessee's representative, the Ld. TPO determined the ALP of the international transactions of the assessee with its AE, at Rs. 50,57,43,750/- and directed the AO to enhance the total income

of Rs. 50,57,43,750/- u/s. 92CA(3) of the Act. The TPO gave the below summary of the adjustments u/s. 92CA(3) of the Act:

Sl No.	Description	Adjustment u/s. 92CA(3) (Rs.)
1.	Sale of frozen shrimp	26,23,99,832
2.	Corporate Guarantee-given	2,46,43,000
3.	Trade receivable	21,87,00,918
4.	Total adjustment u/s. 92CA(3)	50,57,43,750

3. Pursuant to the order of the Ld. TPO, the AO has passed a draft assessment order u/s 143(3) r.w.s 144C of the Act on 20.04.2021. and made an upward TP adjustment to the total income to the tune of Rs. 50,57,43,750/- and further made a disallowance u/s. 14A for Rs. 13,20,907/- in his draft assessment order U/s. 144C of the Act. Aggrieved by the order of the Ld. AO, the assessee filed objections before the Ld. DRP-1, Bengaluru and challenged the upward adjustments. In the mean time the assessee also filed a rectification application on 04.03.2021 before the TPO. The TPO considering the rectification passed an order of rectification u/s 154 revising the adjustment u/s 92CA(3) of the Act as given below:

Sl No.	Description	Adjustment u/s. 92CA(3) (Rs.)
1.	Sale of frozen shrimp	NIL
2.	Corporate Guarantee-given	2,46,43,000

3.	Trade receivable	865,10,715
4.	Revised Total adjustment u/s. 92CA(3)	11,11,53,715

The Ld. DRP in its detailed order discussed various judicial precedents confirmed the additions made in the draft assessment order by the Ld. AO. Aggrieved by the order passed by the Ld.AO, based on the directions of the Ld. DRP, the assessee is in appeal before us.

4. The assessee raised the following grounds with respect to interest on overdue export receivables:

"2.1 The Transfer Pricing Officer (TPO)/AO erred in imputing notional interest on overdue receivables from Associated Enterprise (AE) and the DRP erred in sustaining the said adjustment.

2.2. The DRP/TPO/AO failed to appreciate that the delay in the realization of outstanding receivables from AE cannot be considered as an international transaction as it does not fall within the purview of the capital f inancing as contemplated under section 92B of the Act.

2.3. The DRP/TPO/AO erred in not appreciating the fact that the Act provides for taxing only real income whether received or accrued under the normal provisions.

2.4. The DRP/TPO/AO erred in not appreciating the fact that transfer pricing adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income.

2.5. Without prejudice to the above, the DRP/TPO/AO erred in imputing notional interest on delayed receivables despite the fact that the primary transaction has already been

tested and considered to be at arms length under Transaction Net Margin Method at the entry level.

2.6. The DRP/TPO/AO ought to have appreciated that the appellant has earned a very high arms length net margin than that of the comparable companies (ie., 12.15% as against 8.07% with export incentive considered as operating income and 4.17% and 1.28% without export incentive). It impliedly demonstrates that the appellant is compensated for cost of delayed receivables through higher operating margin embedded in sales to AE.

2.7. Without prejudice to the above, the DRP/TPO/AO erred in not appreciating that the appellant has not charged interest on delayed realization of outstanding receivables from Non-AE's and as such trade receivable transactions with respect to AE are to be deemed to have been done on arm's length basis by applying internal CUP method, as resorted by the appellant.

2.8. Without prejudice to the above, the DRP/TPO/AO erred in not appreciating that the working capital adjustment would offset the impact of belated receipt of outstanding receivables and as such there is no requirement to make separate imputation of interest for belated receipt of outstanding receivables.

2.9. Without prejudice to the above, the DRP ought to have appreciated that the TPO has wrongly and arbitrarily adopted the notional and imaginary date of 20 ^thDecember, 2016 as the date of realization of all the sales to AE made and realized during the f inancial year 2016-17. The DRP ought to have considered the information on actual realization dates furnished by the appellant and directed the AO to consider it while calculating the interest on receivables.

2.10. Without prejudice to the above, the DRP/TPO/AO erred in not considering the fact that the RBI guidelines provided for a credit period of twelve months to collect the invoices raised.

2.11. Without prejudice to levy of notional interest, the DRP/TPO ought to have reckoned the LIBOR rate of interest instead considering SBI short term interest rate as the trade receivable were in foreign currency.

2.12. Without prejudice to the above, the foreign exchange gain of Rs. 11,24,33,853/- which has a direct nexus with the period of realization of the receivables from the AE should be netted off against the notional interest charged on delayed receipt of trade receivables.

2.13. Without prejudice to the above grounds, the DRP/TPO/AO erred in considering uniform credit period of 60 days without any basis in the case of sales to AE without realizing the fact that the AE derived higher credit period in view of its substantial contribution to appellant's business by way of higher sales patronage, higher sales margin, bulk and year long order continuity etc.

2.14. Without prejudice to the above, the DRP ought to have appreciated that the TPO has not adopted any of the prescribed methods while imputing interest on trade receivables.

2.15. Without prejudice to the above, the levy of interest is high and arbitrary.

5. The main issue is with respect to upward adjustment in imputing notional interest on the outstanding overdue receivables from Associated Enterprises (AEs). The Learned Authorized Representative (Ld. AR) submitted that the assessee has adopted Transaction Net Margin Method (TNMM) and therefore the interest on outstanding receivables is subsumed in the Arm's Length Price (ALP) charged to the AEs. The AR further submitted that the assessee's operating margin is 4.17% as compared to the comparable selected by the Ld. TPO where the operating margin is at 3.69%. The Ld. AR further submitted that

the assessee has made 72% of the total sales to AEs and 28% to non-AEs. The Ld. AR confirmed that no interest is charged on the outstanding receivables either to AE or Non-AE parties. The Ld. AR relied on the following case laws:

(i) PCIT vs. Kusum Health Care (P) Ltd - [2018] 99 taxmann.com 431 (Delhi HC)

(ii) PCIT vs. Amadeus India (P) Ltd [2020] 113 taxmann.com 393 (Delhi HC).

(iii) Pegasystems Worldwide India Pvt Ltd vs. ACIT - [2015] 64 taxmann.com 470 (Hyd. Trib.)

(iv) DCIT vs. CCL Products (India) (P) Ltd - [2019] 106 taxmann.com 11 (Visakhapatnam - Trib.)

(v) Vestas Technology R & D Chennai Private Limited vs. ACIT - ITA No. 3081/Chny/2016 (Chennai Trib.)

(vi) Gimpex (P) Limited vs. ACIT -[2019] 105 taxmann.com 365 (Chennai Trib.)

(vii) Det Norske Veritas vs. ADIT - [2016] 67 taxmann.com 16 (Mum. Trib.)

(viii) Hackett Group (India) Ltd vs. DCIT [2020] 116 Taxmann.com 631 (Hyd. Trib.)

(ix) ERM India (P) Ltd. Vs. NEC [2021] 132 taxmann.com 220 (Delhi Trib.)

(x) Turner International India (P.) Ltd vs. ACIT [2020]115 taxmann.com 334 (Delhi Trib.)

(xi) Agilent Technologies India (P.) Ltd vs. DCIT - [2021] 124 taxmann.com 561 (Delhi Trib.)

(xii) Indo American Jewellery Ltd vs. CIT - [2014] 44 taxmann.com 310 (Bombay HC).

(xiii) Sharda Spuntex vs. PCIT - 93 taxmann.com 498 (Raj.

HC)

(xiv) CIT vs. Vaibhav Gems Ltd - 99 taxmann.com 2 (SC)

(xv) CIT vs. Vaibhav Gems Ltd - [2017] 88 taxmann.com 12 (Raj. HC)

The Ld. AR heavily relied on the ratio laid down in PCIT vs. Kusum Health Care (P) Ltd [2018] 99 taxmann.com 431 (Delhi).

6. The Ld. Departmental Representative (Ld. DR) argued that there are huge delays in the receivables from AEs and hence interest is to be charged on the same on notional basis. The Ld. DR referred to the expression of "international transaction" as given in Explanation (i)(c) to section 92B of the Act and argued that deferred receivables would constitute international transaction. The Ld. DR further argued that the deferred payments or receivables arising during the course of business is in the nature international transaction and hence interest to be charged on the same. The Ld. DR further countered that the notional interest cannot be subsumed in the TNMM. The Ld. DR also argued that non-charging of interest to non-AEs is irrelevant. The Ld. DR referred to the decision of the Delhi Tribunal in the case of Bechtel India Pvt Ltd in ITA No.6530/Del/2016, dated 16^thMay, 2017.

7. We have heard the rival submissions and perused the material available on record and the orders of the Authorities below. Admitted facts are that the assessee sells to both the AEs non-AE where the AE being the major debtor. There is no dispute with regard to the fact that receivables is included under the definition of international transaction consequent to the

amendments made by the Finance Act, 2012 w.e.f 01.04.2002. Therefore we are of the considered view that there is no merit in the argument of Ld AR that receivables is not an international transaction. Whether separate adjustment is required to be made in respect of receivables is the subject matter. The assessee also submitted the working capital adjustment made to the operating margin of the comparable companies and the assessee. From the submissions made by Ld AR, we find that if the export incentives are considered as non-operating income, the operating profit ratio of the comparable companies is 1.28% as against the operating margin of 4.17% of the assessee. Alternatively, if the export incentives are considered as operating income, the operating margin of the comparable companies is 8.08% vis-à-vis the assessee at 12.15%. We find from the above working the assessee's margin is significantly higher than the operating margin of the comparable companies. There may be a delay in the collection of receivables even beyond the agreed time limits due to a variety of factors which has to be decided on a case to case basis. When TNM method is considered as the most appropriate method, which was also not disputed by Revenue, the net margin thereunder would take care of such notional interest cost. It was further explained by Ld.AR that the impact of the

delay in collection of receivables would have a bearing on the working capital of the assessee. We find that these working capital adjustments on the ALP has been already factored in its pricing / profitability vis-à-vis that of its comparables. We therefore are of the considered view that any further adjustment to the margin of the assessee on the outstanding receivables cannot be justified and no separate upward adjustment on outstanding export receivables is required and therefore we direct the Ld.AO to delete the upward adjustment made towards overdue receivables from AE. We therefore allow this ground raised by the assessee.

8. The assessee raised the following grounds with respect to adjustment towards corporate guarantee:

"3.1. The TPO/AO erred in imputing corporate guarantee commissioner at the rate of 1.9% of the gross loan taken by the AE and the DRP erred in sustaining the said adjustment.

3.2. The DRP/TPO/AO failed to appreciate that the extending guarantee for loan taken by AE cannot be considered as an international transaction as it does not fall within the purview of

"capital financing" as contemplated under section 92B of the Act.

3.3. The DRP/TPO/AO erred in not appreciating the fact that the Act provisions for taxing only real income whether received or accrued under the normal provisions.

3.4. The DRP/TPO/AO erred in not appreciating the fact that transfer pricing adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income.

3.5. The DRP/TPO/AO erred in not appreciating the fact that the appellant has not incurred any cost in providing corporate guarantee and as such the appellant cannot be expected to charge commission for providing corporate guarantee.

3.6. The DRP/TPO/AO failed to appreciate that the appellant has extended guarantee to its wholly owned subsidiary Devi Sea Foods Inc., USA (ie., Associated Enterprise) for furthering assessee's own business and as such it is shareholder's function, which does not warrant a commission.

3.7. The DRP/TPO/AO erred in not appreciating the fact that the loan availed by AE was secured and the AE had sufficient current assets (ie., loan util ized during the subject AY is USD 1,84,46,803 as against net current assets of USD 3,39,09,479 approximately 1.84 times the credit availed by the AE. This shows that there was no chance of the assessee being called upon by the bank to satisfy the obligation of the AE (and factually the same has nto occurred til l date as well).

3.8. The DRP/TPO/AO erred in not appreciating the fact that due to the skewed debit-equity ratio of the AE, the banks would not be willing to grant loan unless it is guaranteed by the parent (ie., assessee) and providing such guarantee is an onerous responsibility of a shareholder.

3.9. The DRP/TPO/AO ought to have appreciated that the provision of corporate guarantee has not resulted in reduction of rate of interest and the AE has not derived any benefit which has an impact on its profits or loss or assets.

3.10. The DRP/TPO/AO erred in not adopting any of the prescribed methods for benchmarcking the corporate guarantee transaction.

3.11. Without prejudice to the above, the DRP/TPO/AO erred in considering the rate prescribed under Safe Harbour Rules as arms length price without appreciating that such rate is applicable only to parties who have resorted to safe harbor provisions.

3.12. The DRP/TPO/AO erred in holding that safe harbor rules is one of the prescribed methods, which is contrary to the provisions of the Act and as such unsustainable in law.

3.13. Without prejudice to the above, the DRP/TPO/AO ought to have adopted the rate of 0.5% as the rate of guarantee commission as held in various judicial precedents.

3.14. Without prejudice to the above, the DRP/TPO/AO ought to have adopted internal CUP method by considering the guarantee commission charged by Appellant's domestic banker.

3.15. In any event, the rate of 1.9% rate of corporate guarantee determined by TPO and sustained by DRP is very high and arbitrary.

3.16. Without prejudice to the above, the DRP ought to have directed the TPO to restrict the adjustment to extent of loan util ized during the year instead of attributing guarantee commission on the total corporate guarantee amount as the risk of guarantee is restricted to actual loan util ized."

9. The issue raised in the Grounds of Appeal is with respect to adjustments made by the TPO/DRP in the corporate guarantee commission on the gross guarantee given to AE. The Ld. AR pleaded that it is not an international transaction as the assessee has not charged the AE. However, the Ld. AR submitted that in the case of CIT vs. Redington India Ltd [2021] 430 ITR 298, Hon'ble Madras High Court held that corporate guarantee given to the AE is covered by the retrospective amendment made by the Finance Act, 2012. The ld. AR relied on the following case laws:

(i) DCIT vs. EIH Ltd - [2018] 89 taxmann.com 417 (Kolkata Trib).

(ii) GVK Power & Infrastructure Ltd vs. ACIT - [2018] 94 taxmann.com 415 (Visakhapatnam Trib.)

(iii) CIT vs. Everest Kanto Ltd - 378 ITR 57 (Bombay HC)

(iv) PCIT vs. Thomas Cook Ltd - ITA Nos. 712 & 713/2017, dated 26/08/2019.

10. The Ld. AR further submitted that the Hon'ble Courts and Tribunals have held that 0.50% on an average as corporate guarantee commission on the guarantees extended to AE, should it be treated as international transaction. The Ld. AR pleaded that the AE of the assessee had utilized only $ 11.5 Million USD and hence if the Hon'ble Bench decided to uphold the corporate guarantee as an international transaction it may be charged @ 0.50% on the amount utilized by the AE. The Ld. AR also referred to the OECD guidelines wherein it is mentioned that corporate guarantee is not an international transaction and it is only a shareholder's obligation. The Ld. AR further submitted that merely relying on the information obtained U/s. 133(6) of the Act which was not shared with the assessee, the Ld. TPO has erred in determining the rate @ 1.9% of the corporate guarantee given to AEs.

Per contra, the Ld. DR referred to the Notification of the Central Board of Direct Taxes (CBDT) issued on 7/6/2017 wherein it is notified that the rate should not be less than 1% on the corporate guarantee given to AEs. The Ld. DR further submitted that the Ld. DRP has rightly considered the Notification (supra) and thereby upheld the ALP rate of 1.9%

adopted by the Ld. TPO in respect of adjustment made to the corporate guarantee given to AE. The Ld. DR therefore pleaded that the order of the Ld.DRP / Ld.AO be upheld.

11. We have heard both the parties and perused the material available on record and the orders of the Authorities below. It is observed from the order of the Ld. TPO that the Ld. TPO has obtained from various banks the rate of fees charged by them on the issuance of financial guarantees for the computation of ALP. The Ld. TPO has thus concluded that the median of the ALP works out to 1.9% for the corporate guarantee of above Rs. 10 Crs. The Ld. TPO referred to section 92B of the Act which read as "any other transaction having a bearing on the profits, income, losses or assets of such enterprises" and thus concluded that in the instant case the corporate guarantee issued on behalf of its AEs must be taxed @ 1.9% on the guaranteed amount. The Ld. TPO also observed in para 12.10 of his order that "when a default is made in making repayment by the principal debtor, the banker will be able to proceed against the guarantor/surely" and hence this being the contingent liability on the assessee, we find that the Ld. TPO made the adjustment by instances referring to the commercial banks providing financial guarantees but did not

contemplate the issue of corporate guarantee. The concept of bank guarantees and corporate guarantees was explained in the case of Prolifics Corporation Ltd in ITA No.237/Hyd/2014, dated 31/12/2014 by the Hyderabad Tribunal wherein it has observed that the provisions of corporate guarantee always involves risk and there is a service provided to the AEs in increasing its creditworthiness in obtaining loans in the market. We find that there must be a minimum charge on the P & L Account but there is an enhanced risk which cannot be ruled out in providing guarantees. Ultimately, the Hon'ble Tribunal upheld the adjustment made on guarantee commissions given to AEs. The reliance placed by the Ld. AR on the Bombay High Court decision in the case of CIT vs. Everest Kanto Ltd reported in 378 ITR 57 wherein the corporate guarantee commission was considered as an international transaction and the rate restricted to 0.50% of the corporate guarantee. We find merit in the arguments of the Ld. AR that the rate of corporate guarantee should be restricted to the amount utilized by the AE, @ $ 11.5 Million USD, but should not be applied on the gross corporate guarantee. In view of the above discussion and by respectfully following the ratio laid down by the Hon'ble Bombay High Court in the case of CIT vs. Everest Kanto Ltd (supra) we are of the considered view that

the corporate guarantee commission is an international transaction and should be charged @ 0.50% on the corporate guarantee amount utilized, by the AE. We therefore allow the grounds raised by the assessee.

12. The assessee raised the following grounds with respect to disallowance U/s. 14A of the Act.

"4.1. The AO erred in making disallowance under section 14A of the Act and the DRP erred in sustaining the said disallowance.

4.2. The AO/DRP failed to appreciate that in the absence of dividend income, the provisions of section 14A of the Act will not be applicable.

4.3. Without prejudice to the above, while computing the average value of investments under Rule 8D(ii), the AO ought to have excluded the investments which did not yield dividend income."

13. The issue raised by the assessee in the Grounds of Appeal is with respect to disallowance U/s. 14A of the Act r.w.r 8D. The Ld. AR argued that the assessee has not earned any exempt income warranting the disallowance u/s. 14A of the Act. The Ld. AR pleaded that the assessee's holding shares is merely to retain the controlling interest and no income has been received by the assessee during the impugned assessment year. The Ld. AR relied on the following decisions:

(i) CIT vs. Chettinad Logistics P. Ltd - 95 taxmann.com 250 (Supreme Court).

(ii) CIT vs. Chettinad Logistics P. Ltd - [2017] 80 taxmann.com 221 (Madras)

(iii) Marg Ltd vs. CIT - 120 taxmann.com 84 (Madras)

14. The Ld. AR placed heavy reliance on the judgment of the Hon'ble Supreme Court in the case of CIT vs. Chettinad Logistics P. Ltd., [2018] 95 taxmann.com 250 (SC).

Per contra, the Ld. DR supported the order of the Ld. AO.

15. We have heard both the sides and perused the materials available on record and the orders of the Authorities below. We find from the records submitted by the Ld. AR that the assessee has not earned any exempt income during the relevant assessment year mandating the invoking of provisions of section 14A of the Act. The Hon'ble Supreme Court in CIT vs. Chettinad Logistics (P.) Ltd (supra) has dismissed the SLP of the Revenue and held that section 14A can only be triggered if assessee claims any expenditure against an income which does not form part of the total income under the Act. The Hon'ble Supreme Court further observed that Rule 8D only provides for a method to determine the amount of expenditure incurred in relation to income which does not form part of the total income of the assessee. Respectfully following the ratio laid down by the

Hon'ble Supreme Court, we allow the appeal of the assessee on this ground.

16. In the result, appeal of the assessee is allowed. Pronounced in the open Court on the 9^thSeptember, 2022. Sd/- Sd/-

(दु वू आर.एलरे डी) (एसबालाकृ णन)

(DUVVURU RL REDDY) (S.BALAKRISHNAN)

या यकसद य/JUDICIAL MEMBER लेखासद य/ACCOUNTANT MEMBER Dated : 09.09.2022

OKK - SPS

आदेशक त ल पअ े षत/Copy of the order forwarded to:-

1. नधा रती/ The Assessee-M/s. Devi Sea Foods Limited, 50-1-51/1, ASR Nagar, Seetammadhara, Visakhapatnam-530013, Andhra Pradesh.

2. राज व/The Revenue - Deputy Commissioner of Income Tax, Circle- 3(1), Visakhapatnam.

3. The Principal Commissioner of Income Tax,

4. आयकरआयु त (अपील)/ The Commissioner of Income Tax (Appeals) National Faceless Appeal Centre, Delhi.

5. वभागीय त न ध, आयकरअपील यअ धकरण, वशाखापटणम/ DR,ITAT, Visakhapatnam

6. गाडफ़ाईल / Guard file

आदेशानुसार / BY ORDER Sr. Private Secretary ITAT, Visakhapatnam

Devi Sea Foods Limited, Visakhapatnam v. DCIT, Circle-3(1), Visakhapatnam

Structured Summary — Income Tax Appellate Tribunal (Visakhapatnam Bench)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's (Assessee's) Arguments

Respondent's (Revenue's) Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Disposition

Devi Sea Foods Limited, Visakhapatnam v. DCIT, Circle-3(1), Visakhapatnam

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