OSI SYSTEMS PRIVATE LIMITED,HYDERABAD vs. DY. COMMISSIONER OF INCOME TAX , CIRCLE-16(2), HYDERABAD

ORDER PER D.S. SUNDER SINGH, A.M. This appeal is filed by the assessee against the order passed u/s 143(3) rws 92CA(3) rws 144C(5) of the IT Act, 1961, dated 26/10/2017.

3.1 The TPO was not convinced with the submissions of the assessee in view of introduction of clause ‘c” to Explanation to section 92B clarifying that all the transactions of capital financing including long term and short term borrowings and receivables or any debt arising during the course of business w.e.f 01/04/2002 by finance act 2012. Thus, the TPO held that imputation of interest on receivables as international transaction and accordingly, rejected the contentions of the assessee and suggested adjustment for of Rs. 6,54,11,154/- u/s 92CA(3) of the IT Act.

3.2 Accordingly, the AO issued draft assessment order proposing to make the adjustment u/s 92CA(3) of the Act to the extent of Rs. 6,54,11,154/-, as suggested by the TPO and in response to which, the 3 ITA.No. 2228/Hyd/2017 OSI Systems Pvt. Ltd., Hyderabad. assessee filed objections before the Ld. Dispute Resolution Panel(DRP).

3.3 The Ld. DRP upheld the adjustment proposed by the TPO on the ground that interest on receivables would constitute separate international transactions. The DRP observed that the Ld. TPO charged the interest till the date of passing the order, which was not proper, and directed the Assessing officer(AO) to charge the interest till the end of the Financial Year(FY) relevant to Assessment year(AY). The Ld. DRP further directed the AO to restrict the adjustment for delay in payment till the end of FY and also to consider the invoice raised in the earlier FY also, in respect of which payments were received during the FY relevant to the impugned AY and compute the ALP.

3.4 The assessee also raised objections with regard to netting of outstanding payables of Rs. 13,08,87,984/- against the outstanding receivables from its AE. The DRP noted that the assessee was to furnish the details of such payables along with terms and conditions of agreement. Since the assessee failed to furnish any such information, the DRP rejected the contention of the assessee with regard to netting of outstanding payables against outstanding receivables.

3.5 Accordingly, the AO passed final assessment order and made the adjustment of Rs. 3,44,83,411/- u/s 92CA(3) of the Act, against which, the assessee filed appeal before the Tribunal.

4 ITA.No. 2228/Hyd/2017 OSI Systems Pvt. Ltd., Hyderabad.

Particulars Mfg SDS ITES Trading Total Sales A 327311992 218910676 68836166 191732383 806791217 Operating B 268295716 177932133 52536734 180932235 679696818 Cost C= A-B 59016276 40978543 16299432 10800148 127094399 Profit OP/OC% D= 22.00 23.03 31.02 18.70 C/B% E= OP/OR% C/A% 5.63 15.75 Compara-ble margin F (0.84) 15.69 17.85 OP/OC% OP/OR% G 2.24 4.1 The assessee further submitted that the excess profit earned by the assessee was Rs. 8,77,55,919/-, which takes care of of the adjustments that are required to be made to determine ALP in 5 ITA.No. 2228/Hyd/2017 OSI Systems Pvt. Ltd., Hyderabad. imputing the interest and, thus, argued that no separate adjustment is required to be made on account of imputation of interest on receivables. The assessee further argued that transaction is not covered in the definition of international transaction as defined u/s 92B of the Act, since, the same was on account of international transactions and not a separate transaction of financing. Accordingly, the Ld.A.R submitted that there is no case for making adjustment and requested to set aside the orders of lower authorities and allow the appeal of the assessee.

4.2. Alternatively, the ld. AR also submitted that AO/TPO imputed the interest @ 14.5%, which is at SBI Fixed deposit rates/lending rates and allowed the credit period of 30 days. He, therefore, requested to change the interest as per LIBOR rate, since, the assessee has receivables in foreign exchange and allow credit period of 120 days against 30 days allowed by the assessee. The ld. AR further argued that outstanding payables required to be netted against outstanding receivables for computing the interest.

7 ITA.No. 2228/Hyd/2017 OSI Systems Pvt. Ltd., Hyderabad. and convenience, we extract clause (c) of explanation to section 92B, which as under:

“(c) capital financing, including any type of long-term or short- term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business”.

6.1 From the plain reading of clause (c) of Explanation to section 92B, it is clear that any debt arising during the course of business constitute international transaction. No separate treatment was given for the trading transactions. Similarly, the contention of the Ld.AR if the international transaction at ALP, no separate adjustment is required to be made on account of outstanding deferred receivables has no basis and the same was not specifically excluded in the meaning of international transaction. Therefore, even though trading transactions are at ALP, with the introduction of amendment to Explanation to section 92B, we are of the considered opinion that interest is required to be imputed on outstanding receivables if the same are realized beyond the agreed period as per the terms and conditions of the agreement. The Ld. DRP rejected the contention of the assessee with regard to deferred receivables in it’s order in page No.3 &4 placing reliance on the decision of coordinate bench of ITAT in Bechtel India Pvt Ltd in dated 16/05/2017.

8 ITA.No. 2228/Hyd/2017 OSI Systems Pvt. Ltd., Hyderabad. 6.2 Ld. AR relied on the decision of CCL Products India Ltd., of Vizag Bench order dated 03/04/2019. In the said order, the CIT(A) has given a finding that receivables were received in a reasonable period and there was no delay, whereas, no such finding was given in the instant case by the ld. DRP/TPO. As submitted by the Ld.DR the realization was made beyond 353 days which is abnormal under any circumstances. Therefore, the case law relied upon by the assessee in the case of CCL Products India Ltd. is not applicable to the case of assessee. The ld. AR also relied upon the decision of ITAT, “A’ bench, Hyderabad in the case of M/s Value Labs Technologies, ITA No. 1921/Hyd/2018 dated 04/09/2020 wherein, the Hon’ble Tribunal has taken a view that no adjustment is required if the delay is between 90 and 120 days. In the instant case, as submitted by the ld. DR, the delay was around 353 days. Therefore, the Value Lab’s case is also not helpful to the case of the assessee.

6.4 The ld. DR relied on the decision of Techbooks International Pvt. Ltd. (supra), wherein the ITAT, Delhi confirmed the decision of DRP in imputing the interest on delayed receipts. Similarly, the ld. DR relied also on the decision of BT e-Serve (India) Pvt. Ltd. (supra), wherein, the coordinate bench of ITAT, Delhi held that even the outstanding receivables partake the character of capital financing and consequently, overdue outstanding is an international transaction in dated 30/10/2017 Delhi Bench in para No 22 for the 9 ITA.No. 2228/Hyd/2017 OSI Systems Pvt. Ltd., Hyderabad. A.Y. 2011-12. For the sake of clarity and convenience, we extract para 22 of the order of the coordinate bench, as under:

“22. We have carefully considered the rival contentions. The service agreement dated 01st August 2009 is placed at page No. 294 to 311 of paper book. The service fees are governed by clause 4 of the agreement. According to clause No. 4.9 subsequent to confirmation of the invoices it is provided that the paying party will pay the invoice amount to the invoicing party in accordance with the BT group policy for the settlement of intra-group transaction. Schedule 1 of that agreement is with respect to the services, Schedule -2 is with respect to BTGS transfer pricing policy. According to para No. 3.4 of that policy the service fee for the provision and receipt of services are calculated in the order that BT, BT Ltd and OPCO receive an arm’s length return for the services provided and received. Therefore, according to that policy it is evident that the policy of the group is to charge the services at arm’s length. In this background it needs to be examined that whether a third party in a given circumstances would allow it’s outstanding to drift to such an extent. The apparent answer to this query would be emphatic „No‟. Further on reading the transfer pricing study report prepared by the assessee, in the credit and collection risk it has been mentioned that when an entity supplies products or services to a customer in advance of customer payment, the firm runs the risk that the customer will fail to make payment. BT e-serv provides service for in house consumption and invoices its AEs. It bears no credit and collection risk since it received charges from its AEs. Therefore it is evident that assessee has not stated credit and collection risk in its TP report. Looking at the period of outstanding invoices it is apparent that it is the not the case of mere sale but it is a case of sales as well as loan to its AE in the form of overdue outstanding receivables. The argument that assessee is an interest free entity and does not pay any interest and therefore no interest shall be imputed in the outstanding invoices is also devoid of merit because it is not a case of allowance of interest expenditure in the hands of the assessee but an “international transaction” to be benchmarked at arm’s length. It is a case of determination of arm’s length price of a transaction. Undoubtedly the receivable or any other debt arising during the course of the business is included in the definition of „capital financing‟ as an „international transaction‟ as per explanation 2 to section 92B of the Act w.e.f. 01.04.2002 inserted by the Finance Act 2012. Therefore, even the outstanding receivable partake the character of capital financing and consequently, overdue outstanding is an “international transaction‟. The natural corollary would be of imputing interest on such „capital financing‟, if same is not charged at arm’s length. Therefore, we reject the contention of the assessee that outstanding receivable is not an „international transaction‟ and therefore, hence, according to us, interest on it requires to be imputed. Now the next question arises is that if outstanding receivables are within the 10 ITA.No. 2228/Hyd/2017 OSI Systems Pvt. Ltd., Hyderabad. terms of agreement of rendering of services than it may be argued that interest on such outstanding is already covered in the sale price of the goods. Naturally such is not the case of the assessee before us as some of the outstanding are for more than 300 days. Decision relied upon by the ld AR in the case of Ameriprice and Bechtel are distinguishable on the facts as they had credit period as per agreement but in case of assessee it is not so. The arguments that master circular of RBI does not prescribe any conditions for repatriation of exports proceeds for SEZ, it cannot be said that for determining ALP of export receivable, which becomes capital financing, if outstanding is beyond agreed or reasonable time limit, does not have any impact on the benchmarking of the same, as the purposes of RBI policy and Income Tax Act are on different footings. However, even if the agreement does not specify the term of the payment even then assessee must be given benefit of credit period which is accepted business practice in the trade. Before the ld Transfer Pricing Officer as well as before the ld DRP the assessee could not establish what is the accepted business practice in its trade about the credit period and what the group policy is in this regard. Therefore, there cannot be any grievance where the ld Transfer Pricing Officer has considered as 30 days credit period. Even before us this credit period was not challenged. In view of this we do not find any infirmity in the order of the ld Transfer Pricing Officer of considering 30 days as normal credit period. The subsequent question arises about the benchmarking analysis and computing the arm’s length price. In the present case the ld Assessing Officer has computed interest @14.88% applying the CUP method using external CUP. Before us as well as before the ld DRP the assessee could not demonstrate how the method employed by the ld Transfer Pricing Officer using external CUP is erroneous. In view of this we do not have any hesitation in confirming the Transfer Pricing adjustment made by the ld. Transfer Pricing Officer on outstanding receivable beyond 30 days credit period applying the interest rate of 14.88% p.a. and computing the interest receivable at Rs. 31577050/-. In the result, grounds Nos. 10 to 12 of the grounds of the appeal are dismissed.”

6.5 On similar facts, the coordinate bench of this tribunal in the case of Infor (India) Pvt. Ltd. order dated 19/10/2020 held that with the introduction of Explanation to section 92B, interest on receivables constitute international transaction and separate adjustment is required to be made on account of interest on delayed payments. Therefore we, hold that the Ld.DRP/TPO/AO is 11 ITA.No. 2228/Hyd/2017 OSI Systems Pvt. Ltd., Hyderabad. justified in imputing the interest on deferred receivable as international transaction accordingly we, uphold the order of the DRP/AO and dismiss the assessee’s appeal in these grounds.

6.6 The next issue is rate of interest on receivables. In the instant case, the receivables represent the trade receipts and the same are required to be received in foreign exchange. The Tribunal in the case of M/s Value Labs Technologies Vs. ITO, for AY 2013-14, vide order dated 05/04/2019 has held that in the case of export turnover, which required to be received in foreign exchange, the international transaction shall be considered at LIBOR + 200 basis points rate after the expiry of credit period. Further, in the case of Cambridge Technology Enterprises Ltd., Vs. DCIT, ITA No. 208/Hyd/2018 for AY 2013-14, vide order dated 19/11/2019, the Tribunal held that notional interest has to be charged at LIBOR + interest rates as the receivables are in foreign exchange. Therefore, respectfully following the view taken by the coordinate benches of ITAT in the said cases, we hold that interest rate should be charged on receivables at LIBOR + 200 points. Accordingly, we direct the AO/TPO to charge interest at LIBOR + 200 basis points.

6.7 Similarly, in respect of credit period, TPO has allowed 30 days and no agreement was placed by the assessee before us. However, in the case of M/s Value Labs(Supra), on which reliance was placed by the assessee, this Tribunal held that interest to be charged in the 12 ITA.No. 2228/Hyd/2017 OSI Systems Pvt. Ltd., Hyderabad. case of delay between 90 to 120 days and in the case of Infor (India) Pvt Ltd, ITAT allowed 90days. Considering the facts and merits of the case , we hold that 120 days is reasonable period in this case, hence, we direct the AO/TPO to allow 120 days credit period and charge interest over and above the outstanding period of 120 days .

6.8. As regards netting of interest, the ld. counsel argued that interest on payables is to be netted against the outstanding receivables. This issue has been considered by the DRP and in the absence of details, the assessee’s request for adjustment was rejected. No details are furnished by the assessee even before us with regard to netting of payables against receivables. We, therefore, reject the ground of the assessee on this issue of netting out of payables against the receivables.

Pronounced in the open court on 18th November, 2020