THOUGHTFOCUS INFORMATION TECHNOLOGIES PRIVATE LIMITED,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1), BANGALORE

PDF · subscribers
ITTPA 742/BANG/2022Status: DisposedITAT Bangalore11 January 2023AY 2018-198 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that while receivables arising from international transactions are indeed international transactions as per the Explanation to Section 92B(1), a credit period must be granted to the AE. The Tribunal agreed with the assessee's limited prayer, referencing its own decision in *Xchanging Solutions Ltd. vs. DCIT*. The Tribunal decided that a credit period of 90 days should be allowed for receivables. For any realization beyond 90 days, the arm's length interest rate should be LIBOR plus 300 basis points. The TPO is directed to recompute the ALP accordingly, after providing the assessee an opportunity to be heard. The Tribunal noted that it did not agree with the assessee's argument that no separate adjustment should be made if interest is not charged on delayed receivables from unrelated parties.

What were the facts?

The assessee, M/s. ThoughtFocus Information Technologies Pvt. Ltd., is appealing against the final order of assessment for Assessment Year 2018-19, passed by the ACIT. The assessee provides IT Enabled Services (ITeS) to its Associate Enterprise (AE). The Transfer Pricing Officer (TPO) observed that the assessee did not charge interest on unrealized amounts (receivables) from its AE for FY 2017-18. The TPO treated this as an international transaction, selected the CUP method, and computed an arm's length interest rate of 13.675% (SBI short-term deposit rate), making a TP adjustment of Rs. 3,73,77,565/- for extended credit beyond 30 days. The Dispute Resolution Panel (DRP) confirmed the TPO's action.

What were the issues?

1. Whether not charging interest on extended credit period for receivables from an AE constitutes an international transaction giving rise to a Transfer Pricing (TP) adjustment under Section 92C of the Income Tax Act, 1961 (Act)? Assessee's contentions: - Not charging interest does not result in income accruing or received, thus TP provisions are not applicable. - Extended credit period/receivables are not an international transaction as they do not impact profits, income, losses, or assets. - Receivables are part of the primary sale/service transaction, and if that transaction is at arm's length, no separate adjustment for receivables is needed. - Without prejudice, the TPO's adopted interest rate of 13.675% is incorrect; LIBOR should be the basis for USD-denominated receivables, citing *Indegene Lifesystems (P.) Ltd.*. Revenue's contentions (as reflected in DRP's confirmation): - The DRP relied on *Techbooks International Pvt Ltd.*, holding that Chapter X of the Act requires income to be determined at Arm's Length Price (ALP) if it is undercharged. It distinguished *Vodafone India Services Pvt. Ltd.*, stating that receivables from AEs are trading debts and revenue receipts. The Explanation to Section 92B(1) includes receivables as an international transaction. - The DRP also relied on the Karnataka High Court's decision in *DCIT vs. AMD India Private Limited*, which held deferred receivables as an independent international transaction requiring separate benchmarking.

Which sections of the Income-tax Act were involved?

Section 92,Section 92B,Section 92C,Section 92CA,Section 143(3),Section 144C(13)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “C” BENCH : BANGALORE

Before: SHRI N. V. VASUDEVAN & SHRI CHANDRA POOJARI

For Appellant: Shri. Narendra Kumar Jain, Advocate
For Respondent: Shri. Sreenivas T Bidari, CIT(DR)(ITAT), Bengaluru
Hearing: 04.01.2023Pronounced: 11.01.2023

Per N. V. Vasudevan, Vice President : This is an appeal by the assessee against the final order of assessment dated 16.07.2022, passed by the ACIT, Circle – 7(1)(1), Bengaluru, under section 143(3) read with Section 144C(13) of the Income Tax Act, 1961 (Act) in relation to Assessment Year 2018-19.

2.

The assessee is a company engaged in the business of providing Information Technology Enabled Services (ITeS) to its Associate Enterprise (AE). The transaction of rendering ITeS to an AE was an international transaction and therefore income arising from such transaction has to be determined having regard to Arm’s Length Price (ALP) as per the provisions

IT(TP)A No.742/Bang/2022 Page 2 of 8

of Sec.92 of the Act. The process of determining ALP involves a reference by the Assessing Officer (AO) to a Transfer Pricing Officer u/s.92CA of the Act.

3.

During the course of proceedings under section 92CA of Act, the Transfer Pricing Officer (TPO) observed that the assessee has not charged its AE interest in respect of unrealized amounts outstanding (receivables from the AE) for FY 2017-18. The TPO held that receivable is international transaction and selected CUP method as most appropriate method and computed arm’s length interest rate at 13.675% being the SBI short term deposit interest rate. The TP adjustment of Rs.3,73,77,565/- was made by the TPO for extended credit period provided to the AE beyond a period of 30 days. The relevant findings by the TPO are summarized below: The TPO has stated that working capital adjustment does not cover entire outstanding amounts, since it is restricted to certain amounts only and is computed on the basis of amounts at the beginning and the end of the year. On the other hand, the computation of interest on receivables is based on day wise analysis which is more detailed to working capital adjustment. The TPO relied on the decision of ITAT in the case of M/s Ameriprise P Ltd vs ACIT [2015-TII-347-ITAT-DEL-TP] to conclude that the transaction relating to receivables needs to be benchmarked separately and should not be aggregated (Page 41 and 42 of the Order); The TPO has stated that the taxpayer has not provided the details of interest on delayed receivables and accordingly the TPO computed notional interest on trade receivables based on the available data (Page 43 of the Order); The TPO adopted interest rate of 13.675% as ALP interest rate for computing the interest amount on delayed receivables for a period of 335 days. The TPO has considered 30 days as reasonable credit period.

4.

Before the DRP, the assessee submitted as below:

IT(TP)A No.742/Bang/2022 Page 3 of 8

(a) Not charging any interest to the AE for the extended credit period does not give rise to income accruing or received by the assessee and hence TP adjustment under section 92C cannot be made. It was submitted since no income has accrued or has been received or deemed to be received by the Assessee on the extended credit period and therefore provision of Chapter X are not applicable in the instant case. (b) The assessee submitted that receivable or extended credit period is not an international transaction. It was contended that the transaction of extended payment terms given to AE’s does not have a bearing on profits, incomes, losses or assets of the enterprise hence is not an international transaction. (c) All the international transactions are benchmarked by considering the assessee as the tested party and the margin of the assessee is within arm’s length range of comparable. Therefore, the international transactions are at arm's length. Since ‘receivable’ is not a separate transaction from sale or provision of service. It emanates from sale or service transaction. The international transaction is that of `sale’, the ALP is determined qua the `sale price’. While determining the ALP in a sale transaction, all the relevant aspects including the credit period allowed are taken into view. Once ALP in respect of the provision of service transaction is determined, it would deem cover all the elements and consequences of the transaction of provision of service. Once it is held that “sale or service transaction is at arm’s length”, separate addition for receivables is not required to be made. (d) Without prejudice to the above, it was contended that the arm’s length interest rate at 13.675% considered by TPO was incorrect. In this regard, the assessee submitted that the receivables due from the AE is denominated in USD. Accordingly, LIBOR without basis points should be adopted as a basis for benchmarking.

5.

To support the above contention, the assessee relied on the decision of Indegene Lifesystems (P.) Ltd. [2017] 85 taxmann.com 60 (Bangalore - Trib.), where the Tribunal has held that LIBOR rate should be adopted as a benchmark rate for foreign currency loans advanced to AEs.

IT(TP)A No.742/Bang/2022 Page 4 of 8

6.

The DRP, however, confirmed the action of the TPO and held that the ITAT Delhi in the case of Techbooks International Pvt Ltd,(ITA No.240/Del/2015/ AY 2010-11/ dated 6 July 2015) has held as under: “The ld. AR contended that the Agreement between the assessee and its AE does no provide for any charging of interest and, hence, there can be no question of any notional/hypothetical interest income as has been determined by the TPO. To support the non-charging of interest, he relied on the judgment of the Horrible Bombay High Court in the case of Vodafone India Services Pvt. Ltd. Vs. Union of India and Others (2014) 368 ITR 1 (Born.). He buttressed the same argument by relying on the judgment of the Hon'ble jurisdictional High Court dated 27.3.2015 in CIT vs. Cotton Naturals (I) Pvt. Ltd. (Del.). 13.3. We are not persuaded to accept this argument. The argument that the Agreement does not provide for charging any interest on late realization of invoice value and hence no interest can be charged, deserves the fate of dismissal under the transfer pricing provisions. Chapter X of the Act has been enshrined to determine the income from an international transaction at ALP, being in the same manner as is determined between two independent parties. It means that if an income is not charged or under charged by an Indian entity from its foreign AE, which ought to have been properly charged if the transaction had been between two independent parties, then such under charged or uncharged income needs to be brought to tax by determining the ALP of the international transaction giving rise to such income. 13.4. Coming to other argument that no interest is chargeable under the present circumstances on the strength of the judgment in the case of Vodafone India Services Pvt. Ltd. (supra), we find that the point of controversy in that case was quite distinct. Addition on account of the excess share premium was made which, in the opinion of the TPO, should have been received by that assessee from the issuance of shares. It is on this excess share premium short received, that the amount of interest was also charged. The base amount on which interest was calculated by the TPO in the case of Vodafone India (supra) was itself a capital receipt not chargeable to tax and not a trading debt arising during the course of business, which issue has been discussed in the immediately succeeding paras. Instantly, we are concerned with the

IT(TP)A No.742/Bang/2022 Page 5 of 8

late realization by the assessee of trading debt from its AE which is otherwise a revenue receipt and has also been offered for taxation. 13.5. At this juncture, it is apposite to note that the Finance Act, 2012 has inserted Explanation to section 92B with retrospective effect from 1.4.2002. Clause (i) of this Explanation, which is otherwise also for removal of doubts, gives meaning to the expression 'international transaction' in an inclusive manner. Sub-clause (c) of clause (i) of this Explanation, which is relevant for our purpose, provides as under:- Explanation.--For the removal of doubts, it is hereby clarified that-- (i) the expression "international transaction" shall include-- (a)…………………. (b)………………….

(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;....'

13.6. On circumspection of the relevant part of the Explanation inserted with retrospective effect from 1.4.2002, thereby also covering the assessment year under consideration, there remains no doubt that apart from any long-term or short-term lending or borrowing, etc., or any type of advance payments or deferred payments, 'any other debt arising during the course of business' has also been expressly recognized as an international transaction. That being so, the payment of interest or receipt of interest on the loans accepted or allowed in the circumstances as mentioned in this clause of the Explanation, also become international transactions, requiring the determination of their ALP. If the payment of interest is excessive or there is no or low receipt of interest, then such interest expense/income needs to be brought to ALP. The expression 'debt arising during the course of business' in common parlance encompasses, inter alia, any trading debt arising from the sale of goods or services rendered in the course of carrying on the business. Once any debt arising during the course of business has been ordained by the legislature as an international transaction, it is, but, natural that if there is any delay in the realization of such debt arising during the course of business, it is liable to be visited with the TP adjustment on account of interest income short charged or uncharged.

IT(TP)A No.742/Bang/2022 Page 6 of 8

7.

The DRP also referred to decision of Hon’ble Karnataka High court in the case of DCIT vs. AMD India Private Limited in ITA No. 274/2018 dated 31.08.2018 (TS-993-HC-2018-Kar-TP) wherein it was held that the deferred receivables would constitute an "an independent international transaction and hence, separate bench making has to be done and TP adjustment is to be made as per law". The DRP therefore held that interest imputation is not hypothetical but as per the requirements of TP regulations.

8.

At the time of hearing, the learned Counsel for assessee submitted that if relief is given in terms of the order of ITAT in the case of Xchanging Solutions Ltd., Vs. DCIT IT(TP)A No.2570/Bang/2019, order dated 16.08.2022, he would not press for any other relief. In the order cited by the learned Counsel for assessee, the ITAT, Bengaluru Bench held as follows:

“8. From the records we note that the Ld.TPO records that, realisation of receivables from non-AE was within 112 days, whereas there is a delay of 11 days in realising the receivables from the AE on which the Ld.TPO has computed interest. In our opinion, such imputation of interest is arbitrary and is not in accordance with the principles laid down by the various decisions of Coordinate Bench of this Tribunal on this issue as well as various High Courts. 9. It is also noted that the Ld.TPO has not considered whether the said receivables are subsumed in the computation of the Working Capital Adjustment. In fact, we note that, the Ld.TPO has not granted any Working Capital Adjustment to the assessee, which in our view is again not in accordance with the transfer pricing principles for computing arms length of the international transaction. It is noted that, the assessee has filed before the Ld.TPO the Working Capital Adjustment computation which is overlooked. 10. Be that as it may, we do not agree with the submission of the Ld.AR that, no separate adjustment for interest on the delayed receivables is to be computed when assessee is not charging interest on

IT(TP)A No.742/Bang/2022 Page 7 of 8

delayed receivables from unrelated third parties. This is so because, after the insertion of explanation to section 92B(1), payment or deferred payment or receivables or any debt arising during the course of business falls under the expression “international transaction”. Therefore in our view, the expanded meaning of international transaction as contemplated in clause (i) of explanation to section 92B(1), any delay in realisation of receivables from the associated enterprises would certainly fall within the ambit of international transaction. 11. However, as the receivables are closely associated to the primary rendering of software development services, a credit period has to be granted to the AE and has to be considered along with the main international transaction being the sale of software service development. 12. We therefore are of the view that the adjustment proposed by the Ld. TPO in respect of outstanding trade receivables has to be considered along with the main transaction being the software development service rendered by the assessee to the AE by considering a credit period of 90 days. The Ld.AO shall verify if the same is subsumed in the computation of the Working Capital Adjustment. In the event, the receivables stands subsumed, no adjustments deserves to be made. On the contrary, if any trade payables falls outside the credit period of 90 days, adjustment on such receivables would be restricted to LIBOR + 300 basis points. 13. In support of this above view, we rely on the observations of Coordinate Bench of this Tribunal in case of M/s. Zynga Game Network India Pvt. Ltd. vs. DCIT in ITA No. 2573/Bang/2019 by order dated 23/03/2021 for A.Y. 2015-16 which is placed at page 4436 of the legal paper book.”

9.

The learned DR relied on the directions of the DRP.

10.

We have carefully considered the rival contentions. In the decision cited by the learned AR rendered in the context of a software service provider to its AE, the Tribunal has held that the receivables are linked to

IT(TP)A No.742/Bang/2022 Page 8 of 8

Software Development Service and therefore a credit period has to be allowed and that period was fixed as 90 days. The Tribunal has held that LIBOR + 300 basis points should be the rate of interest for receivables realized beyond 90 days. As agreed at the time of hearing, the limited prayer of allowing 90 days credit period and interest rate at LIBOR rate plus 300 basis points on delayed realization beyond 90 days, is accepted. The TPO will accordingly compute the ALP on the lines indicated above after affording assessee opportunity of being heard. The appeal of the assessee is thus allowed in part.

11.

In the result, appeal of the assessee is partly allowed.

Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- (CHANDRA POOJARI) (N. V. VASUDEVAN) Accountant Member Vice President Bangalore, Dated: 11.01.2023. /NS/* Copy to: 1. Appellants 2. Respondent 3. CIT 4. CIT(A) 5. DR 6. Guard file By order

Assistant Registrar, ITAT, Bangalore.

More judgments on Section 92

All 434 judgments and leading authorities on Section 92 →

Recent GST High Court judgments

Search GST case law →