ACQUEON TECHNOLOGIES PRIVATE LIMITED (FORMERLY SERVIONT GLOBAL SOLUTION LIMITED ),CHENNAI vs. ITO , NDAC , DELHI

आदेश /O R D E R

PER MANJUNATHA. G, ACCOUNTANT MEMBER:

This appeal filed by the assessee is directed against final assessment order passed by the Assessing Officer u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) dated 28.07.2022, in pursuant to directions of the DRP issued u/s. 144C(5) of the Act dated 15.06.2022 and pertains to assessment year 2018-19.

:-2-: IT(TP). No: 60/Chny/2022 2. The assessee has raised the following grounds of appeal: “Based on the facts and circumstances of the case, Acqueon Technologies Private Limited (formerly Serviont Global Solutions Limited) [hereinafter referred to as "Acqueon" or "the Appellant"], respectfully submits that: 1. The Assessment order passed by the learned Assessing Officer ("AO") and the order of the Dispute Resolution Panel ("DRP") under Income tax Act, 1961 ("the Act") are not in accordance with the law and are contrary to the facts and circumstances of the present case. Disallowance towards employee contribution to PF 2. The Ld. AO has erred, in law and on facts in disallowing the employee contribution towards Provident Fund amounting to INR. 2,51,120/- on the ground that the payments were remitted beyond the due date prescribed under the relevant Acts. 3. The Ld. AO has erred in not appreciating that the payments were made within the due date prescribed for filing return of income under section 139(1) of the Act and as such the payment is allowable expenditure. 4. The Ld. AO erred in not following the decision of this Hon'ble Tribunal in Assessee's own case in ITA No. 1974/Chny/2016 for AY 2009-10 and I.T.(TP)A.No.22/Chny/2020 for AY 2012-13. 5. The Ld. AO ought to have appreciated that the amendment to section 36(1)(va) of the Act brought out by the Finance Act, 2021 to disallow employee contributions paid after due date prescribed under the relevant acts would have prospective application with effective from 01.04.2021 and hence not applicable for prior AYs. Grounds on Transfer Pricing Adjustments Recharacterization of outstanding trade receivables as separate international transaction : 6. The learned AO and the Transfer Pricing Officer ("TPO") has erred in imputing notional interest on the outstanding receivables from the Associated Enterprise ("AE") and thereby making a TP adjustment.

:-3-: IT(TP). No: 60/Chny/2022 7. The learned AO / TPO has erred in law and on facts in holding the alleged delay in the realization of the receivables from AE as an international transaction ignoring the fact that the same is not an international transaction in terms of Section 92B of the Act but arises only as a consequence of an international transaction with its associated enterprise. 8. Without prejudice to the above grounds that the delay in receivables is not an international transaction, the Ld. AO has erred in law and on facts by making transfer pricing adjustment on account of delay in the realization of the receivables even after accepting the primary international transactions of the Appellant to be at arm's length based on the Transaction Net Margin Method at the entity level. 9. Without prejudice to our grounds that the delay in receivables is not an international transaction, the Ld. AO has erred in law and on facts in not appreciating that the Appellant has earned a high net margin, which has impliedly compensated the delay in realisation of outstanding receivables. 10. The Ld. AO ought to have appreciated that the Appellant does not charge interest on outstanding receivables from Non-AE and therefore the Appellant cannot be expected to charge interest on outstanding receivables from AE's. 11. Without prejudice to our grounds that the delay in receivables is not an international transaction, the Ld. AO has erred in law and on facts in computing notional interest on outstanding receivables without allowing any reasonable credit period for realisation of receivables. 12. Without prejudice to our grounds that the delay in receivables is not an international transaction, the Ld. AO has erred in law and on facts in not deducting outstanding payables to be made to the AEs while computing notional interest on outstanding receivables from AE. 13. The Ld. AO/TPO erred in incorrectly applying the most appropriate method while attributing notional interest. 14. Without prejudice to our grounds that the delay in receivables is not an international transaction, the learned

:-4-: IT(TP). No: 60/Chny/2022 AO has erred in law and on facts by considering LIBOR plus 350 BPS (i.e. 4.711%) as against LIBOR rate 15. Without prejudice to our grounds that the delay in receivables is not an international transaction, the learned AO has erred in law and on facts by considering LIBOR plus 200 BPS (i.e. 4.711%) as held by this Hon'ble Tribunal in Assessee's own case in ITA No. 1974/Chny/2016 for AY 2009-10 and I.T.(TP)A.No.22/Chny/2020 for AY 2012-13. Upward revision on account of provision of corporate guarantee to AEs: 16. The Ld. AO/TPO has erred in law and on facts in considering corporate guarantee as a separate international transaction under Section 92B of the Act. 17. The Ld. AO/TPO ought to have appreciated that provisions of corporate guarantee is not in the nature of shareholder activity and as such it will cannot be regarded as international transaction. 18. The Ld. AO/TPO ought to have appreciated that the Appellant does not incur any cost for extending such guarantee and hence the transaction does not have any bearing on the profits, incomes, losses or assets of the company. 19. The Ld. AO/TPO ought to have appreciated that the issuance of corporate guarantee is a transaction of routine nature and the AE does not derive any direct benefit from such guarantee in terms of reduced interest rate, or any other benefit. 20. The Ld. AO/TPO erred in incorrectly applying the most appropriate method while attributing corporate guarantee. 21. Without prejudice to the above, the rate of 1 % of Corporate Guarantee is very high and arbitrary. Each of the above ground is independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as

:-5-: IT(TP). No: 60/Chny/2022 to enable the Income Tax Appellate Tribunal to decide this appeal according to law.”

:-6-: IT(TP). No: 60/Chny/2022 TPO and also disallowance made by the Assessing Officer towards employee contribution to PF. Thereafter, the Assessing Officer passed final assessment order u/s. 143(3) r.w.s. 144C(13) of the Act and determined total income of Rs. 20,01,79,040/- by making additions towards imputation of interest on outstanding receivable from AE and additions towards corporate guarantee commission. The Assessing Officer, had also made addition towards disallowance of employee contribution to PF u/s. 36(1)(va) of the Act. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A).

:-7-: IT(TP). No: 60/Chny/2022 Supreme Court in the case of Checkmate Services Pvt Ltd vs CIT (Supra).

:-8-: IT(TP). No: 60/Chny/2022 transactions and imputing interest. The Assessing Officer has treated outstanding receivables from AE as separate international transactions in terms of Explanation to section 92B of the Act and imputed interest.

:-9-: IT(TP). No: 60/Chny/2022 below. We find that an identical issue has been considered by the Tribunal in assessee’s own case for assessment year 2014- 15 in IT(TP) No.46Chny/2019, where under identical set of facts the Tribunal held that after the amendment to section 92B by the Finance Act, 2012 w.e.f. 01.04.2002, deferred payment or receivables arising during the course of business is international transactions and thus, outstanding receivables beyond credit period from AE is an international transactions which needs to be benchmarked. We further noted that when it comes to rate at which interest needs to be computed, it was held that SBI PLR is not an appropriate rate for benchmarking interest receivables from AE and thus, directed the Assessing Officer to adopt LIBOR + 200 basis point as basis for imputation of interest. The relevant findings of the Tribunal are as under: “12. We have heard both the parties, perused the materials available on record and gone through the orders of authorities below along with case laws cited by both the parties. As regards preliminary arguments of the AR for the assessee that delay in realization of receivables from AE beyond credit period is not a separate international transaction, we find that the definition of international transactions has been amended by insertion of clause (c) to explanation to Section 92B by the Finance Act, 2012 with retrospective effect from 01.04.2002, where the “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 payments or receivables or any other debt arising during the course of business” are international transactions and hence delay

:-10-: IT(TP). No: 60/Chny/2022 in realization of receivables from AE beyond credit period constitutes a separate international transaction with effect from assessment year 2013-14 onwards. Therefore, we are of the considered view that there is no merit in the arguments taken by the assessee that delay in realization of AE receivables is not an international transaction. We further note that after the amendment to clause (c) of explanation to Section 92B of the Act, realization of receivables after abnormal delay beyond credit period would tantamount to indirect funding to AE and merely because the assessee is almost a debt free company or the margin of the assessee is higher than the comparables, no such funds of the assessee should be allowed to be utilized for indefinite period. We further note that once delay in realization of AE receivables constitute an international transaction, whether or not, assessee charges interest on receivables from AE or not, has no relevance because any understanding or arrangement between the assessee and its AE which is detrimental to Revenue and against the principles of scheme of Chapter X of the Act, cannot come to the rescue of the assessee. We further note that merely because there is no provision to chargeability of interest in the agreement between the assessee and its AE for delayed realization and merely because assessee does not pay any interest to the AE on the security deposit, the Revenue cannot be deprived on its legitimate share in accordance with the scheme of Chapter X of the Act and the purpose behind the Chapter X. Therefore, we are of the considered view that there is no error in the finding recorded by the AO as well as the TPO and the CIT(A) to come to the conclusion that delay in realization of receivables from AE beyond credit period tantamount to indirect funding to AE which constitutes separate international transactions. 13. Having said so, let us examine what is the appropriate rate for benchmarking international transactions for delay in realization of AE receivables. In order to impute interest on receivables, the benefit end detriment that it would be enjoyed and suffered by the parties to the transaction requires consideration. The assessee has allowed credit to its AE which is a non-resident, therefore the benefits that the AE derives from enjoying the long credit period for payment in respect of services rendered has to be measured in terms of the interest that would have been incurred by the AE in the country of residence. If we go by the standards, the LIBOR rate is most appropriate rate of interest in the international market and which is accepted by most of the countries. Therefore, it would be most appropriate if the LIBOR rate is applied as most appropriate rate of interest for

:-11-: IT(TP). No: 60/Chny/2022 imputing interest on delay in receivables from AE. In this case, the AO has imputed notional interest by adopting PLR as the base rate whereas the ld.CIT(A) has directed the AO to adopt LIBOR rate as the base rate for imputing the interest with an appropriate spread befitting the credit standing of the AE. Therefore, we are of the considered view the LIBOR + 200 basis point rate is most appropriate rate and hence, direct the AO/TPO to adopt LIBOR + 200 basis point for imputing interest on overdue receivable. As regards, the argument of ld.AR for assessee that the TPO has not given any credit period, we find that in any trade there is a credit period for payment to services or goods. Therefore the AO is directed to allow normal credit period allowed by the assessee, if any agreed credit period between assessee and AE. If there is no agreed credit period, then the AO is directed to allow standard credit period that the industry is allowing in this line of business.”

:-12-: IT(TP). No: 60/Chny/2022 12. The Ld. Counsel for the assessee, submitted that this issue is also covered by the decision of ITAT Chennai Benches in the case of Mega Soft Ltd vs DCIT [2012] 145 Taxmann.com 111 (Chennai Trib), where it has been held that corporate guarantee given by the assessee to its AE falls under the definition of international transactions which needs to be benchmarked. But, when it comes to rate at which said guarantee needs to be benchmarked, the Tribunal has adopted 0.5% as appropriate rate for bench marking guarantee commission.

:-13-: IT(TP). No: 60/Chny/2022 and same needs to be benchmarked. The Tribunal further held that when it comes to rate on which said guarantee needs to be benchmarked, rate adopted by the commercial bank is not appropriate rate because corporate guarantee given by the assessee’s and guarantee given by commercial banks are different and thus, by following the decision of Hon’ble Bombay High Court in the case of CIT vs Everest Kanto Cylinders Ltd [2015] 378 ITR 57 (Bom), held that 0.5% is appropriate rate for benchmarking corporate guarantee. The relevant findings of the Tribunal are as under: “9. We have considered relevant materials on record. As regards the arguments of the Ld.AR for the assessee that corporate guarantee per se itself is not an international transaction, we find that after amendment of definition of international transaction, corporate guarantee given by any entity to its AE falls under the definition of international transactions in terms of sec.92B of the Act and thus, any corporate guarantee given by the assessee to its AE is an international transaction, which needs to be bench marked. Further, when it comes to rate, at which, such guarantee commission needs to be benchmarked, then bank guarantee given by the commercial banks cannot be ayardstick to apply to corporate guarantees given by an entity. Further, the guarantee commission rate is depending upon the facts of each case and the risk involved in the transactions between the assessee and its AE. The Hon’ble Madras High Court in the case of PCIT v. Redington (India) Ltd. ,reported in [2021] 430 ITR 298 (Mad) had considered the issue of corporate guarantee given by an entity to AEs and after considering relevant facts held that rate adopted by the TPO on the basis of internal comparable uncontrolled price charged by the bank @0.85% is reasonable for benchmarking corporate guarantee. The Hon’ble Bombay High Court in the case of CIT v. Everest Kanto Cylinder Ltd. reported in (2015) 378 ITR 57 (Bom.) had

:-14-: IT(TP). No: 60/Chny/2022 considered an identical transaction and held that 0.5% is appropriate rate for bench marking corporate guarantee given by the assessee to its AE. Therefore, considering the facts and circumstances of the case and also by following the decision of the Hon’ble Bombay High Court in the case of Everest Kanto Cylinder Ltd. (supra), we direct the TPO to benchmark corporate guarantee fees @ 0.5% on total corporate guarantee given by the assessee to its AE.”

Order pronounced in the court on 19th May, 2023 at Chennai. Sd/- Sd/- (मंजुनाथ. जी) (महावीर �सह ) (MANJUNATHA. G) (MAHAVIR SINGH) उपा�य� /Vice President लेखासद�य/Accountant Member चे�ई/Chennai, �दनांक/Dated, the 19th May, 2023 JPV आदेश की �ितिलिप अ�ेिषत/Copy to: आदेश की �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3.आयकर आयु�/CIT 4.. िवभागीय �ितिनिध/DR 5. गाड� फाईल/GF