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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’, NEW DELHI
Before: Dr. B. R. R. KumarSh. Yogesh Kumar US
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeals and Stay Application have been filed by the assessee against the orders passed by the National e- Assessment Centre, Delhi dated 30.03.2021 u/s 143(3) r.w.s. 254 of the Income Tax Act, 1961.
In , following grounds have been raised by the assessee:
“1. On the facts and circumstances of the case and in law, the Ld. Assessing Officer (‘AO’) erred in not passing the final assessment order u/s 143(3) of the Act dated 30th November 2016 in the original proceedings, in conformity with the binding directions of the Ld. Dispute Resolution Panel (‘DRP’) dated 16th November 2016 issued u/s 1440(5) of the Act and hence, the same has been passed in & 1099/Del/2021 2 SA No. 252/Del/2021 Orange Business Services India Solutions Pvt. Ltd. violation of the mandatory provisions of section 1440(10) read with 1440(13) of the Act. Accordingly, the assessment order is bad in law and void, and therefore, the entire assessment proceedings is liable to be quashed.
2. On the facts and circumstances of the case and in law, the Ld. DRP has erred in confirming the draft assessment order passed by the Ld. AO and enhancing the income of the Appellant by INR 3,41,17,479.
3. On the facts and in circumstances of the case and in law, the Ld. DRP erred in confirming the order passed by the Ld. Transfer Pricing Officer (‘TPO’) and treating the receivables outstanding beyond 60 days from associated enterprises as deemed loan and charging notional interest on it.
4. On the facts and in circumstances of the case and in law, the Ld. AO/ NeAC has erred in computing the demand of INR 36,84,22,643 consequent to adjustment / addition of INR 3,41,17,479 made in the assessment order dated March 31, 2021 and in doing so, have grossly erred in:
4.1 levying surcharge at 12% instead of rate of 5% applicable for the subject year;
4.2 not granting set-off of Minimum Alternate Tax (MAT) credit of INR 5,19,94,023 under section 115JAA of the Act;
4.3 short grant of credit of advance tax amounting to INR 3,95,95,000;
4.4 short grant of credit of tax deducted at source (TDS) amounting to INR 26,18,930;
4.5 not granting credit of self-assessment tax paid amounting to INR 1,82,80,000;
4.6 charging interest under section 234A of the Act;
4.7 computation of interest under section 234B and 234C of the Act; & 1099/Del/2021 3 SA No. 252/Del/2021 Orange Business Services India Solutions Pvt. Ltd. 5. The ld. AO/NeAC has grossly erred in initiating penalty under section 271(1)(c) of the Act mechanically and without recording any satisfaction for its initiation.”
In following grounds have been raised by the assessee:
“1. On the facts and circumstances of the case and in law, the Ld. Dispute Resolution Panel (‘DRP’) has erred in confirming the draft assessment order passed by the Ld. AO and enhancing the income of the Appellant by INR 8,05,59,981.
2. On the facts and in circumstances of the case and in law, the Ld. DRP erred in confirming the order passed by the Ld. Transfer Pricing Officer (‘TPO’) and treating the receivables outstanding beyond 60 days from associated enterprises as deemed loan and charging notional interest on it.
3. On the facts and in circumstances of the case and in law, the Ld. AO/ DRP/ TPO erred in inadvertently considering 30 days instead of 60 days while computing the notional interest on outstanding receivables.
4. The Ld. AO/ NFAC has grossly erred in computing interest under section 234B of the Act;
5. The Ld. AO/ NFAC has grossly erred in initiating penalty under section 271(1)(c) of the Act mechanically and without recording any satisfaction for its initiation.”
Orange Business Services India Solutions Private Limited (formerly known as Equant Solutions India Private Limited) ('OBSISPL'/’the Assessee'), a Company incorporated under the laws of India, is a subsidiary of EGN BV, Netherlands.
OBSISPL is primarily engaged in providing Information Technology ('IT') enabled network management / technical support and other back-office support services ('ITES') to its & 1099/Del/2021 4 SA No. 252/Del/2021 Orange Business Services India Solutions Pvt. Ltd. Group Company in Ireland, Equant Network Services International Limited ('ENSIL'). It also provides contract software development services ('CSD/ IT') for developing software applications for use within Equant Group.
In this case, the return of income for AY 2012-13 was e- filed on 30.11.2012 declaring an income of Rs.37,10,07,144/- and assessment u/s 143(3) was completed determining the total income at Rs.40,51,24,620/- by allowing adjustment of Rs.3,41,17,479/- on account of TP study pertaining to interest on outstanding receivables. A draft order u/s 143(2) read with section 144C was served on the assessee on 09.12.2019, proposing certain variations in the income returned. Aggrieved the assessee filed objections before the Dispute Resolution Panel.
The ld. DRP has considered the submission and upheld the order of the TPO, holding that the TPO has considered the judgments of the Hon'ble Delhi High Court in the case of PCIT Vs. Kusum Healthcare 398 ITR 66, at page 6 of the order dated 25.10.2019 and give categorical finding of distinguishable facts emerging in this case. It was held that the TPO has noted the study of the bill wise and payment wise analysis of the receivables in the case of assessee reveals that this is not a case involving this issue for a year or two and, in fact there exists a consistent presence of outstanding receivables for almost every year in which interest free credit period ranges from 14 to 148 days. It was further, held the impact of this continued arrangement of making payments pending during the year could not be neutralized while giving working capital adjustment as the working capital adjustments is done on the basis of opening and closing balances and it cannot rule out the & 1099/Del/2021 5 SA No. 252/Del/2021 Orange Business Services India Solutions Pvt. Ltd. considerable delay during the year which definitely resulted in revenue loss. The ld. DRP noted that there are no third party debtors in this case for making comparison of normal interest free credit period with AE. Further, the payments are received by the assessee from its AE beyond the normal period specified in the agreement. This is held to be indicative of a pattern in which assessee has given benefit to its AE by way of advancement of interest free loan in the garb of delay in payment for receivables without charging any interest.
In view of these facts and applying the amended law as per the Explanation (i) (c) of Section 92B of the Income Tax Act, 1961 and the relevant OECD guidelines, it was held that the TPO returned a finding that the outstanding receivables in the case of the assessee constitute an international transaction which is liable to be benchmarked separately. The Panel, therefore, rejected the contention of the assessee that the TPO did not follow the directions of the Tribunal.
Another argument was advanced on behalf of the assessee was that the outstanding receivables arising from inter- company services transactions (included in the definition of 'international transaction' vide Finance Act 2012) was duly benchmarked by the assessee by undertaking working capital adjustment during assessment proceedings and the same is subsumed in the working capital adjustment. The ld. DRP held that this argument was specifically negatived by the ITAT in Bechtel India cited supra, following its decisions in Ameriprise India (P) Ltd. and Mckinsey Knowledge Centre (P) Ltd. cited supra in the following words:
20. The Tribunal also explained that if an invoice is raised during the year and the proceeds are realized within the year, but, beyond & 1099/Del/2021 6 SA No. 252/Del/2021 Orange Business Services India Solutions Pvt. Ltd. the stipulated period of agreement, their, the same will not come within the working capital adjustment because working capital adjustment is made with reference to the opening and closing balances as on 1 s t April and 31s t March. Therefore, respectfully following the decision of the Tribunal noted above, we reject the assessee's contention that the interest on delayed payment of receivables get subsumed in the working capital adjustment allowed to the assessee.
The ld. DRP held that the assessee's reliance on the Delhi High Court's decision in PCIT Vs. Kusum Health Care (P) Ltd. 99 taxmann.com 431 (Delhi) 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 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.
This issue has been adjudicated by the Tribunal examining the decisions in the case of Kusum Healthcare, Mckinsey Knowledge, Ameriprise India P. Ltd. The details are as under.
The Delhi Tribunal in case of Kusum Healthcare Pvt. Ltd. vs. ACIT (ITA No. 6814/Del/2014) order dated 31.03.2015 held that the working capital adjustment takes into account impact of outstanding receivables and no further adjustment required & 1099/Del/2021 7 SA No. 252/Del/2021 Orange Business Services India Solutions Pvt. Ltd. if the margin of the assessee is higher than working capital adjusted margin of comparable.
The Hon’ble Delhi Tribunal in case of Ameriprise India P. Ltd. vs. ACIT (ITA No. 2010/Del/2014) [order dated 14.08.2015] considered the decision of coordinate bench in the case of Kusum Healthcare 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.
The Delhi Tribunal in the case of McKinsey Knowledge Centre Pvt. Ltd. Vs. DCIT [ITA No. 154/Del/2016] (order dated 15.12.2016) followed their finding in the case of Ameriprise India (supra).
In the meanwhile, the Hon’ble Delhi High Court, vide order dated 25.04.2017 in the case of Kusum Healthcare, dismissed the appeal of the revenue against the decision of Hon’ble Tribunal and that (i) The inclusion in the Explanation to Section 92B of the Act of the expression “receivables” does not mean that de hors the context every item of “receivables” appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterized as an international transaction and (ii) 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-characterized the transaction.
In the appeal filed by the assessee in the case of Mckinsey Knowledge, the Hon’ble High Court vide order dated & 1099/Del/2021 8 SA No. 252/Del/2021 Orange Business Services India Solutions Pvt. Ltd. 07.02.2018, while admitting the appeal on the other issue, remitted the issue of interest charged on outstanding receivables to ITAT, following their decision in the case of Kusum Healthcare.
However, vide order dated 09.08.2018, the Hon'ble High Court in the case of Mckinsey Knowledge, while deciding the appeal of the assessee on other issue, also referred to the decision of the Hon’ble Delhi Tribunal in case of Ameriprise India P. Ltd. vs. ACIT (ITA No. 2010/Del/2014) on issue of interest charged on outstanding receivable and concluded that the assessee’s contention that the ITAT erred in concluding that charging of interest on delayed receipt, of receivables is a separate international transaction which requires to be benchmarked independently, is incorrect."
Aggrieved, the taxpayer (Mckinsey Knowledge) filed Review Petition before the Hon'ble High Court against the order dated 09.08.2018 and the Hon’ble High Court, vide order dated 16.04.2019 in Review Pet. No. 360/2018, was pleased to recall/correct their order dated 09.08.2018, holding as under:
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 07.02.2018 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 07.02.2018 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 to inapplicability to Explanation of Section 92B and its prospective & 1099/Del/2021 9 SA No. 252/Del/2021 Orange Business Services India Solutions Pvt. Ltd. operation. As the order of 07.02.2018 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.
In view of the aforesaid sequence of events, it would be noted that the decision of Hon’ble Delhi High Court in the case of Kusum Healthcare is still the binding precedent on the issue of interest on outstanding receivables. Needless to mention that the law laid down by the Hon’ble High Court in the case of Kusum Healthcare was followed by the ITAT in case of Global Logic India Ltd. for the assessment year 2010-11 (ITA No. 1104/Del/2015), A.Y. 2012-13 (ITA No. 1115/Del/2017), A.Y. 2013-14 [ITA No.762l/Del/2017], A.Y. 2015-16 [ITA No. 8726/Del/2019] and A.Y. 2016-17 [ITA No. 868/Del/2021]. Hence, keeping in view, the established position, we hereby deleted the addition made by the Assessing Officer.
Since, the appeal of the assessee is decided, the Stay Application No.252/Del/2021 filed by the assesse is dismissed as infructuous.
In the result, the appeals of the assessee are allowed and the SA of the assessee is dismissed. Order Pronounced in the Open Court on 10/05/2022.