ALCATEL LUCENT INDIA LIMITED ,DELHI vs. ACIT CENTRAL CIRCLE 15, DELHI

ASSESSEE BY : Shri Ankul Goyal, Advocate REVENUE BY : Shri Rajesh Kumar, CIT DR Date of Hearing : 08.12.2022 Date of Order : 19.01.2023

ORDER PER SHAMIM YAHYA, ACCOUNTANT MEMBER : This appeal by the assessee is directed against the order of the Assessing Officer dated 25.01.2022 passed under section 143(3) r.w.s. directions of the Dispute Resolution Panel (DRP).

2. Grounds of appeal taken by the assessee read as under :-

“1. That on the facts and circumstances of the case and in law, the Ld. AO, has erred in determining the taxable income of the Appellant for the subject assessment year at INR 145,50,52,7601- as against the returned income of INR 133,26,80,602/-.

1.1 That on the facts and circumstances of the case and in law, the Ld. AO has erred in making additions based on mere conjunctures and surmises, ignoring the factual matrix of the Appellant as well as the nature of the transactions undertaken by the Appellant.

1.2 That the Ld. AO failed to appreciate the submissions made/ contentions raised by the Appellant and .further erred in making several observations and inferences in the impugned assessment order which are factually incorrect and legally untenable.

Transfer Pricing Grounds

./2022 3.1 That on the facts and circumstances of the case and in law, the Ld. TPO/ Ld. AO/ the Hon'ble DRP have erred by de- linking the inter-company receivables arising from the international transactions and re-characterization of inter- company receivables as a separate international transaction of advancing of money (in the nature of unsecured loan) to AEs.

3.2 That on the facts and circumstances of the case and in law, the Ld. TPO/ Ld. AO/ the Hon'ble DRP have erred in not considering the benchmarking analysis undertaken by the Assessee in accordance with Indian TP regulations, wherein the Assessee had treated the account receivables/ account payables as closely linked to the other international transactions and compared the working capital adjusted margins of comparable companies with the Assessee's margin.

3.3 That on the facts and circumstances of the case and in law, the Ld. TPO/ Ld. AO/ the Hon'ble DRP have erred in disregarding that Indian TP regulations permit aggregation of closely linked transactions for the purpose of benchmarking under TNMM analysis. Rule 10A(d) of the Income Tax Rules, 1962 ("the Rules") define the term transaction for the purpose of 'international transaction' as "Transaction includes a number of closely linked transactions."

3.4 That on the facts and circumstances of the case and in law, the Ld. TPO/ the Ld. AO/ the Hon'ble DRP have erred in not considering the fact that working capital adjustment factors the impact of receivables on the pricing/ profitability of the Appellant vis-a-vis that of comparable companies.

3.5 That on the facts and circumstances of the case and in law, the Ld. TPO/ the Ld. AO/ the Hon'ble DRP have erred in completely disregarding the fact that the AEs do not charge any interest from the Appellant on outstanding payable due to such AEs.

3.6 That on the facts and circumstances of the case and in law, the Ld. TPO/ Ld. AO have erred in using an SBI Prime Lending Rate ("PLR") based interest rate for computing interest on outstanding receivables without considering the fact that the Assessee has raised invoices to its AEs in foreign currency.

3.6.1 That on the facts and circumstances of the case and in law, the Ld. TPO/ Ld. AO have erred in applying the SBI PLR based interest rate for computing interest on receivables in complete disregard to the directions of Hon'ble DRP which directed the Ld. TPO to verify the fact if invoices were being raised in foreign currency and apply 6-month LIBOR + appropriate basis points.

3.7 That on the facts and circumstances of the case and in law, the Ld. TPO/ the Ld. AO/ Hon'ble DRP have erred in arbitrarily adding 300 basis point to the SBI PLR for computing interest on outstanding receivables, without giving any cogent reason

3.8 That on the on the facts and circumstances of the case and in law, the Ld. TPO and Ld. AO have erred by not restricting the amount of adjustment to net outstanding receivables which is also in line with directions issued by the Hon'ble DRP in Assessee's own cases for AY 2010-11 to AY 2012-13.

Corporate Tax Grounds

4. That on the facts and circumstances of the case and in law, the Ld. AO erred in not granting the complete credit of tax deducted at source.

5. That on the facts and circumstances of the case and in law, the Ld. AO has erred in charging interest under section 234A of the Act without appreciating that return of income was filed within the time limit specified under section 139(1) of the Act.

6. That on the facts and circumstances of the case and in law, the Ld. AO has erred in charging interest under section 234B of the Act.

7. That on the facts and circumstances of the case and in law, the Ld. AO has erred in incorrectly computing interest under section 234C of the Act.”

assessee wishes to press only the ground relating to transfer pricing adjustment with respect to receivables from the Associated Enterprises (AE).

4.1 Adjustment recommended by TPO u/s 92CA of the Income Tax Act, 1961 : During the year under consideration, the assessee company entered into International Transactions 'with Associated Enterprises' within the meaning of Section 92B of the I.T. Act, 1961. The details of said transactions are mentioned in Form 3CEB by the assessee. The case was referred to the TPO as per the provision of Section 92CA(1) of the Act for computation of Arms Length Price in relation to the International Transaction.

4.2 Subsequently, an order u/s 92CA(3) of the Act was passed by the TPO, DC IT, IT&TP-1(1)(1), New Delhi on 29.01.2021 wherein an adjustment of Rs.147,38,75,440/- attributable to difference in Arms Length Price of International Transactions entered by the assessee company with its associated enterprises has been made. The details of TP under:-

S. Nature of international transaction Adjustment u/s No. 92CA (Rs.) 1 Software Development Services 106,88,84,280 2 Technical Support Services 28,26,19,000 3 Interest on receivable 12,23,72,160 Total adjustment 147,38,75,440/- 4.3 In view of the above, an addition of Rs. 147,38,75,440/- was made to the income of the assessee on account of the TP Adjustment in the draft assessment order u/s 143(3) r.w.s. 144C dated 26.03.2021.

"(i) The assessment order dated 26.03.2021 shall be treated as a draft assessment order.

./2022 (ii) The petitioner will have 30 days' time to file its objections with the DRP. The aforementioned timeframe will commence from the date of the receipt of a copy of this order.

(iii) The notice of demand and the notice for initiation of penalty proceedings shall stand withdrawn."

S. Nature of international transaction Adjustment u/s No. 92CA (Rs.) 1 Software Development Services Nil 2 Technical Support Services Nil 3 Interest on receivable 12,23,72,160 Total adjustment 12,23,72,160

“ It is submitted by the assessee that outstanding receivables are already a part of the main transaction of provision of support services (under service segment). The assessee further submits that in relation to the service segment, the assessee earns approximately 90% of its total revenue from its AEs and keeping in view the strong presence and volume of business with AEs, no third party would be willing to charge interest on amount receivable from such key customers and would rather invest in relationship by allowing better credit terms in expectation of more business and profits. Based on the aforesaid, non-charging of interest by the assessee on outstanding receivable from its AE is said to be prudent from a businessmen's perspective and does not warrant any adjustment.

./2022 It is also submitted that the assessee is a debt free company and, therefore, no adjustment towards interest on delayed receivables is warranted. Reliance is placed on Bechtel India Pvt. Ltd. vs. DCIT [I.T.A .No. 1478/Del/2015], Global Logic India Ltd vs DCIT (1104/Del/2015) and Kadimi Tool Manufacturing Co (P) Ltd vs DCIT [2017] 187 taxmann.com 42 (Del-Trib.). It is further submitted that no interest is charged by the assessee from AEs as well as from non-AEs. Further, the impact of working capital policy in terms of credit days/ credit period (i.e. outstanding receivables) is said to have been subsumed in the working capital adjustment analysis. Hence, it is pleaded that separate imputation of interest on the outstanding receivables was not warranted. Reliance in this regard is placed on PCIT- V vs. Kusum Healthcare Pvt. Ltd. [2017] 398 ITR 66 (Delhi)/ [2018] 300 CTR 343 (Delhi). The assessee further contests application of SBI PLR rate +300 basis points.

“ Thus, post-amendment, respectfully following the judgment of the Hon'ble Bombay High Court in Patni Computer Systems cited supra and the decisions of ITAT in Bechtel India, Ameriprise India (P) Ltd, Mckinsey Knowledge Centre (P) Ltd and KBACE Technologies (P) Ltd cited supra, the Panel upholds the action of the AO of treating delayed payment on receivables as a separate international transactions which cannot be said to be subsumed or factored in, in the working capital adjustments.”

Kusum Healthcare Pvt. Ltd. (supra). He submitted that the Tribunal has relied upon the decision in several cases to decide the issue in favour of assessee. He referred to following case laws :- (i) Principal Commissioner of Income-tax v. Kusum Healthcare Pvt. Ltd. (2018) 99 taxmann.com 431 (Delhi); (ii) ERM India (P.) Ltd. v. National e-assessment Centre, New Delhi – [2021] 132 taxmann.com 220 (Delhi-Trib.); (iii) Orange Business Services India Solutions )P.) Ltd. v. Deputy Commissioner of Income-tax – (2022) 141 taxmann.com 167 (Delhi-Trib.); (iv) Deputy Commissioner of Income Tax v. IQOR India Services (P.) Ltd. (2022) 140 taxmann.com 629 (Delhi-Trib.)

11. Per contra ld. DR for the Revenue relied upon the order of DRP and further referred to ITAT decision in the case of Bechtel India Ltd. (supra).

12. We find that ITAT in its recent decision in Orange Business Services India Solutions )P.) Ltd. has elaborately noted similar facts and has held as under :-

“10. The Id. DRP held that the assessee's reliance on the Delhi High Court's decision in Kusum Health Care (P) Ltd. (supra) is quite misplaced as in that case an important aspect of the matter was not brought to the notice of their lordships of the High Court that this new explanation to section 92B was specifically inserted to reiterate the fact that the items enumerated in the explanation will ipso facto partake the character of an ./2022 international transaction and will be subjected to transfer pricing provisions irrespective of whether they have any bearing on profit/loss of the relevant year or their impact on profit/loss account is determinable under normal computation procedures other than the transfer pricing regulations. The ld. DRP quoted legislative intent which has been elucidated in the Explanatory Memorandum to the Finance Bill 2012.

13. The Hon'ble Delhi Tribunal in case of Ameriprise India (P) Ltd. (supra) considered the decision of coordinate bench in the case of Kusum Hea1thcare and held that the allowing working capital adjustment in the international transaction of rendering services can have no impact on the determination of ALP of the international transaction of interest on receivables from AEs.

14. The Delhi Tribunal in the case of McKinsey Knowledge Centre (P) Ltd. (supra) followed their finding in the case of Ameriprise India (supra).

"9. As far as the first argument by the review petitioner, i.e., the answer to the question of bringing to tax the interest amounts goes, this Court is of the opinion that the fact that the order of 7 -2-2018 referred to Kusum Health Care had expressly remitted the matter for consideration to the ITAT supports the assessee's submission. All that the court had stated on 7-2-2018 was that the matter required re-examination by the ITAT in the light of the Kusum Health Care (supra). For these reasons, the judgment to the extent it deals with adjustments made by the TPO, and regarding interest on delayed receipt of receivables, is a clear error. The court also furthermore notes the submissions made with respect ./2022 to inapplicability to Explanation of Section 92B and its prospective operation. As the order of 7-2-2018 reserved by-contentions, this Court does not propose to disturb the effect of that matter. The matter will be considered by the ITAT on its own merits."