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Income Tax Appellate Tribunal, HYDERABAD BENCHES “A”, HYDERABAD
Before: SHRI RAMA KANTA PANDA & SHRI K.NARASIMHA CHARY
आदेश / ORDER PER K. NARASIMHA CHARY, JM: Aggrieved by the order dated 29/07/2022, passed by the Learned Deputy Commissioner of Income Tax, Circle-2(1), Hyderabad (“Ld. AO”) in the case of M/s. Kantar GDC India Private Limited (“the assessee”) for the AY.2018-19, under section 143(3) r.w.s. 144C (13) of the Income Tax Act, 1961 (for short “the Act”), consequent to the directions of Hon'ble Dispute Resolution Panel, Bengaluru (“DRP”), assessee filed this appeal.
ITA-TP No. 484/Hyd/2022
At the outset, though this appeal has been filed on various grounds, at the time of arguments, learned AR confined to two issues only. One is payment for global/regional management overhead allocation fee and the other is interest on trade receivables. All the other grounds are given up.
Brief facts of the case are that the assessee is a company engaged in conducting quantitative and qualitative market research and related services primarily to third-party customers. Assessee also provides related back-office data processing services primarily to its group companies. For the assessment year 2018-19, it has filed its return of income on 27/11/2018 declaring an income of Rs. 25,50,91,550/- under normal provisions. Since the assessee entered into international transactions with its Associate Enterprises (AEs), determination of the Arms Length Price (“ALP”) thereof was referred to the learned Transfer Pricing Officer (“learned TPO”). Insofar as this appeal is concerned, as stated above, only two issues are there. In respect of payment for global/regional management overhead allocation fee, the TPO suggested an adjustment to the tune of Rs. 16,06,41,569/- and in respect of interest on trade receivables a sum of Rs. 2,40,56,164/-. Learned Assessing Officer passed draft assessment order on 17/09/2021 incorporating these two adjustments also. Aggrieved, assessee filed objections before the learned DRP by order dated 21/06/2022 issued certain directions and confirmed these two TP adjustments. Consequently, learned Assessing Officer passed the order dated 29/07/2022 under section 143(3) r.w.s. 144C(13) of the Act, which is in challenge before us now.
Coming to the first adjustment on account of payment for global/regional management overhead allocation fee, learned AR
ITA-TP No. 484/Hyd/2022 submitted that this issue has arisen on earlier occasions also and by order dated 04/10/2021 in & 636/Hyd/2016 for the assessment year 2011-12 and by order dated 22/09/2022 in ITA No. 573/Hyd/2017, for the assessment year 2012-13, Co-ordinate Benches of this Tribunal considered this issue and held that the matter requires factual verification at the end of the learned Assessing Officer/learned TPO in view of the need for the assessee to file the additional documentary evidence in support of their claim. Learned AR submitted that for this year also, the same situation prevails and, therefore, this issue may be restored to the file of learned Assessing Officer/learned TPO for considering the documentary evidence to be filed by the assessee in line with the orders for the earlier assessment years. Learned DR does not dispute for this issue, to be sent to the learned Assessing Officer/learned TPO for factual verification as claimed by the assessee. Copies of the orders stated above are filed and they form part of record.
Considering the similarity of the issue and view taken in the earlier assessment years by a Co-ordinate Bench, we are of the considered opinion that the interest of justice would be met by restoring this issue to the file of the learned Assessing Officer for fresh factual verification as per law by directing the assessee to submit all the relevant material before the learned Assessing Officer. Grounds No. 4 to 12 are accordingly treated as allowed for statistical purposes.
Other issue remains to be considered is issue of interest on trade receivables. On this aspect, learned AR argued at length stating that this particulars transaction is not covered in the definition of international transaction as defined under section 92B of the Act; that the receivables
ITA-TP No. 484/Hyd/2022 are consequential/closely linked to the principal transaction of provision of services and hence has been aggregated for determination of ALP under Transactional Net Margin Method (TNMM); that the re-characterising the outstanding receivables as unsecured loan extended by the assessee to its AEs is improper; that the assessee is fully funded by its AEs and does not bear any working capital risks; that the assessee does not chargeable interest on outstanding receivables from third party customers as well; and that the assessee has outstanding payables due to AEs on which no interest has been levied by the AEs as well.
Learned AR in the alternative submitted that in the case of Afton Chemical India Private Limited vs. ITO in by order dated 05/09/2022 had taken a view that in these sorts of cases, the ends of justice would be met by accepting the interest rate on similar foreign currency receivables/advances as LIBOR+200 points, and if the Bench comes to the conclusion that the assessee is liable on this aspect, the same view may be adopted in this case also.
Per contra, learned DR submitted that this aspect does not leave any scope for any discussion in view of the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Patni Computer Systems (2013) 215 Taxmann 108 (Bom), wherein the amendment to Section 92B of the Act by Finance Act, 2012 with retrospective effect from 01/04/2002 was considered. Basing on the view taken in a number of decisions of the Tribunal of various Benches, learned TPO held that it is incumbent upon the taxpayer to separately benchmark the arm’s length price of the international transaction relating to interest on overdue receivables from the AE by way of analysis of functions, assets and risks. While following ITA-TP No. 484/Hyd/2022 the view taken by the Tribunal in the case of M/s. Logix Microsystems Ltd. Vs. ACIT in dated 07/10/2010, learned TPO thought it proper to consider the SBI short term deposit rate as appropriate CUP to determine the ALP of the interest on outstanding receivables.
We have considered the submissions on either side. In view of the view taken by the Hon'ble Bombay High Court in Patni Computer Systems (supra), on the amendment to Section 92B of the Act by way of Finance Act, 2012 with retrospective effect from 01/04/2002, it is not open for the assessee to agitate the question as to whether or not the interest on outstanding receivables is an international transaction requiring separate benchmarking. Only issue remains to be considered is in respect of the rate of interest, while placing reliance on the decisions reported in Tecnimont ICB House Vs. DCIT [2015] 60 taxmann.com 143 (Mumbai - Trib.), Hon'ble Bombay High Court in PCIT Vs. Tecnimont (P) Ltd., (supra) and CIT Vs. CottonNaturals (I) (P.) Ltd. [2015] 55 taxmann.com 523 (Delhi). Assessee prayed that LIBOR+200 basis points may be adopted. This aspect is no longer res integra and dealt with by the Mumbai Bench of the Tribunal in the case of Tecnimont ICB House (supra) and confirmed by the Hon'ble Bombay High Court. CottonNaturals (I) (P.) Ltd. (supra) is also on the same aspect.
Insofar as the interest on receivable is concerned, Munbai Bench of the Tribunal, vs. DCIT [2015] 60 taxmann.com 143 (Mumbai - Trib.) considered the view taken in Everst Kanto Cylinder Ltd. v. Asstt. CIT (LTU) [2014] 52 taxmann.com 395 (Mum.); PMP Auto Components (P.) Ltd. v. [IT Appeal No. 1484 (Mum.) of 2014, dated 22-8-2014]; Hinduja
ITA-TP No. 484/Hyd/2022 Global Solutions Ltd. v. Addl. CIT [2013] 145 ITD 361/35 taxmann.com 348 (Mum.); Tata Autocomp Systems Ltd. v. Asstt. CIT [2012] 52 SOT 48/21 taxmann.com 6 (Mum.); CIT v. Tata Autocomp Systems Ltd. [2015] 56 taxmann.com 206 (Bom.); Four Soft Ltd. v. Dy. CIT [2011] 142 TTJ 358 (Hyd.); and Everst Kanto Cylinder Ltd. v. Asstt. CIT (LTU) [2015] 56 taxmann.com 361 (Mum.) wherein the Hon'ble Tribunals has upheld use of LIBOR for the purpose of benchmarking loan/advance given to foreign AE's, and held that 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. This view is affirmed by the Hon'ble Bombay High Court [2018] 96 taxmann.com 223 (Bombay) observing that in cases where any business enterprise is required to pay interest on delayed payment, it would examine the cost of interest and if the same is higher than the amount of interest payable on funds obtained locally, it would take a loan from local sources and pay the amounts payable for exports and expenses within time. Therefore, extending of credit beyond the normal period of sixty days is in substance a granting of loan to an AE so as to enjoy the funds, which the AE would otherwise have to repay within the period of sixty days. On this premise the Hon'ble High Court upheld the Tribunal computing interest at LIBOR rates as the rate prevailing in country where the loan is received/consumed by the AE by observing that the same cannot be faulted.
In the case of CIT Vs. CottonNaturals (I) (P.) Ltd. [2015] 55 taxmann.com 523 (Delhi) the Hon'ble Delhi High Court considered the question - whether the interest rate prevailing in India should be applied,
ITA-TP No. 484/Hyd/2022 for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, observed that such a question must be answered by adopting and applying a commonsensical and pragmatic reasoning and held that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid; that the interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. It is further observed that the interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters; that the interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable; that the currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e. the rate of interest. While referring to the Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115, the Hon'ble High Court held that the PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate and the PLR rates are not applicable to loans to be re-paid in foreign currency. Hon'ble Court accordingly held that whatever the principle that is applicable to the case of outbound loans, would be equally applicable to inbound loans given to Indian subsidiaries of foreign AEs, that the parameters cannot be different for outbound and inbound loans, and a similar reasoning applies to both inbound and outbound loans.
ITA-TP No. 484/Hyd/2022
Respectfully following the judicial opinion stated supra, we are of the considered opinion that the ends of justice would be met by accepting the interest rate on similar foreign currency receivables/advances as LIBOR+200 points. We direct the learned Assessing Officer / learned TPO to adopt the same. Grounds are partly allowed accordingly.
In the result, appeal of the assessee is treated as partly allowed for statistical purposes.
Order pronounced in the open court on this the 9th day of May, 2023.