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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SMT. BEENA PILLAI & SHRI LAXMI PRASAD SAHU
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the final assessment order passed by the NFAC, Delhi dated 21/02/2022 for A.Y. 2017-18 on following grounds of appeal:
Tax effect relating to Grounds of Appeal each Ground of appeal Page 2 of 17 IT(TP)A No. 290/Bang/2022 Based on the facts and circumstances of the case and in law, the Ld. Assessing Officer (“Ld. AO”)/ Ld. Transfer Pricing Officer (“Ld. TPO”)/ Hon’ble Dispute Resolution Panel (‘Hon’ble DRP’) grossly erred in – 1. General Ground for TP adjustments Included in Ground No. 2 By not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 (‘Rules’) and modifying/ undertaking fresh analysis while determining the arm’s length price and in doing so making an adjustment of INR 41,71,929 to the international transaction.
2. Grounds against imputing interest on outstanding receivables due from AEs – Adjustment of INR 41,71,929 a) Not appreciating that outstanding receivables is not covered in the definition of international transaction as defined u/s 92B of the Act in the facts and circumstances of the case; b) Not appreciating that the receivables are consequential/ closely linked to the principal transaction of provision of services and hence have been aggregated for determination of ALP under TNMM; c) Not appreciating the fact that the working capital adjustments undertaken take into account the impact of outstanding receivables of the controlled transactions vis-à-vis the uncontrolled transactions in determining the arm’s length margin and no separate benchmarking is required; d) Not appreciating the facts and circumstances surrounding the receivables and re- characterising the outstanding receivables as 31.9609% of unsecured loans advanced to AEs; adjustment amount of INR 41,71,929 = INR e) Not following any statutorily prescribed 13,33,386 method and without doing any comparability benchmarking as prescribed under Chapter X of the Act. Without prejudice to the above f) Not considering netting off of outstanding receivables and payables from/ to AEs; g) Considering SBI short-term deposit rates for imputing notional interest instead of LIBOR; and h) Considering credit period of 45 days instead of the industry average credit period Page 3 of 17 IT(TP)A No. 290/Bang/2022
3. Ground on erroneous initiation of penalty under section 270A of the Act Ld. AO was not justified and rather grossly erred NA in law and in facts by initiating penalty proceedings under section 270A of the Act by falsely stating that the Assessee has under- reported the income.
4. Increase in book profits u/s 115JB and computation of tax liability u/s 115JB of the Act – Adjustment of INR 13,27,364 That on the facts and in law, Ld. AO was not justified and has erred in considering the book 21.3416% of profit at INR 36,97,81,854 while computing tax adjustment amount of liability in computation sheet, instead of book INR 13,27,364 = INR profit as per return of income of INR 283,281 36,84,54,490, where there is no adjustment being proposed to book profit in final assessment order and thereby leading to erroneous addition of INR 13,27,364 to the book profit returned by the Appellant. 5. Erroneous computation of total income The Ld. AO has erred in facts and in law by 31.9609% of considering incorrect total income as per adjustment amount of Intimation u/s 143(1) of the Act, which consists INR 1,84,174 = INR of arithmetical error, thereby leading to 58,864 adjustment of INR 1,84,174 while computing assessed income of the Appellant.
6. Shortfall in computation of interest u/s 244A of the Act That on the facts and in law, Ld. AO was not NA justified and has erroneously computed interest u/s 244A at INR 3,30,884, thereby resulting in short grant of interest. Necessary directions may please be given to the Ld. AO in this regard. The Appellant craves leave to add, alter, amend, vary, omit, or substitute any of the aforesaid grounds of appeal
at any time before, or at the time of hearing of the appeal, so as to enable the Hon’ble Tribunal to decide on the appeal in accordance with the law.
2. Brief facts of the case are as under: 2.1 The assessee was incorporated to provide a range of centralized back office services in the nature of finance, accounting, administration, human resources, etc. in support of Page 4 of 17 IT(TP)A No. 290/Bang/2022 its Group entities' business. The assessee is a wholly owned subsidiary of Interbrew International B.V.. Netherlands which is ultimately held by AB InBev. 2.2 The Assessee filed its return of income for the year under consideration on 29/11/2017 declaring its total income under the normal provisions of the Act at INR 7,26,32,430/- and under section 115JB (MAT) at INR 36,84,54,490/-. 2.3 The case was selected for scrutiny assessment by the Ld.AO and also referred assessee’s case to the Ld.TPO for determination of Arm's Length Price of the international transactions entered by the assessee with the AEs. 2.4 The Assessee made time to time submissions in response to the notices issued by the Ld. TPO. During the FY 2016-17, the Assessee had entered into the international transactions of provision of back office support services in the nature of IT enabled services. The Assessee applied TNMM as the most appropriate method and computed its margin that was within the range of the adjusted PLI (OP/OC) (i.e. after undertaking working capital adjustment to adjust for differences in receivables and payables) of the comparables selected by the Assessee in its TP study report. Accordingly, the transaction of provision of IT enabled services was concluded by the Assessee to be at arm's length. Ld.TPO after considering the submissions by the assessee proposed adjustment in relation to interest on delayed collection of receivables by applying the 6 months LIBOR plus 400 basis points after granting credit period of 30 days.
Page 5 of 17 IT(TP)A No. 290/Bang/2022 2.5 Subsequently, the draft assessment order dated 06/04/2021 was passed by the National Faceless Assessment Centre (NFAC'). In the said order the NFAC proposed to make the following variations to the returned income of the Assessee: Amount Particulars (in INR) Returned Business Income 7,28,16,601 7,28,16,601 Disallowance of arm's length Add: 25,19,50,424 price 25,19,50424 Add: Disallowance u/s 37 3,29,629 Total Assessed income 32,50,96,654 32,50,96,654 2.6 DRP vide its directions dated 24/01/2022 provided partial relief to the Assessee by directing the Ld.AO/TPO to include 5 companies and exclude 1 company from the final set of comparables, re-compute the interest on delayed receivables by taking credit period of 45 days or as per agreement or as per invoices at SBI short term deposit rates. The DRP rejected the interest rate of LIBOR + 400 basis points used by the Ld.TPO to benchmark the interest on delayed receivables and directed the Ld.TPO to adopt the SBI short term deposit interest rate for the subject year as the ALP interest rate on delayed receivables and re-compute the adjustment to be made to the total income invoice wise after allowing credit period of 45 days or as per agreement or as per invoices. 2.7 On receipt of DRP direction, the Ld.AO passed the final assessment order by making addition in the hands of the assessee as directed by DRP. Aggrieved by the order of Ld.AO, the assessee filed appeal before this Tribunal.
Page 6 of 17 IT(TP)A No. 290/Bang/2022 2.8 The Ld.AR submitted that the delayed/ outstanding receivables should not be considered as a separate international transaction. It was further submitted that determination of ALP in respect of delayed receivables from inter-company transactions is not required since ALP of inter- company transactions of provision of services has been already determined and no separate adjustment is necessary in this regard. 2.9 The Ld.AR alternatively submitted that, the assessee had trade payables amounting to Rs. 46,83,18,399 to its AE and invoices during the year amounting to Rs.1,71,05,79,298 to the AE in relation to the receipt of business support services availed for provision of services. The Ld.AR submitted that the AE provided the assessee with a credit period of 150 days from date of raising of invoice for making payments against the services rendered. (Refer page 181 of Item 5 of the appeal set). Further, it was submitted that the weighted average credit period by the Assessee to AEs -49.32 days is less than the credit period extended to Assessee by third parties. Therefore, the credit period provided by the Assessee is less than the credit period received from third parties. Hence, no adjustment is warranted on outstanding receivables from AEs. 2.10 It was argued by Ld.AR that, the authorities below disregarded business/commercial arrangement between the assessee and its AE’s, by holding outstanding receivables to be an independent international transaction. The Ld.AR placed reliance on decision of Hon’ble Delhi Tribunal in Kusum Healthcare Pvt. Ltd. vs. ACIT reported in (2015) 62 Taxmann.com Page 7 of 17 IT(TP)A No. 290/Bang/2022 79, deleted addition by considering the above principle, and subsequently Hon’ble Delhi High Court in Pr. CIT vs. Kusum Health Care Pvt. Ltd. reported in (2017) 398 ITR 66, held that no interest could have been charged as it cannot be considered as international transaction. Reliance was also placed on the decision of Hon’ble Delhi Tribunal in case of Bechtel India vs DCIT reported in (2016) 66 taxman.com 6 which was subsequently upheld by Hon’ble Delhi High Court vide order dated 21/07/16 in also upheld by Hon’ble Supreme Court vide order dated 21/07/17, in CC No. 4956/2017. 2.11 It was submitted by the Ld.AR that, outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. He also submitted that when the company agree to provide for extending credit period with mutual consent and it does not provide any interest clause in case of delay there cannot be any chargeability of interest. He alternatively argued that the working capital adjustment takes into account the factors related to delayed receivables and no separate adjustment is required in such circumstances. Without prejudice to the above contention, it was submitted that the outstanding receivables need not be treated as a separate international transaction as if same could be benchmarked using a combined transaction approach, by combining the outstanding receivables with the main international transaction of provision of services due to the Page 8 of 17 IT(TP)A No. 290/Bang/2022 fact that receivables are a result of the international transactions of the Assessee.
On the contrary Ld.CIT.DR submitted that interest on receivables is an international transaction and Ld.TPO rightly determined its ALP. In support of the contentions, he placed reliance on decision of Hon’ble Delhi Tribunal order in Ameriprise India Pvt. Ltd. vs. ACIT reported in 2015- TII-347-ITAT-DEL-TP wherein it is held that, interest on receivables is an international transaction and the transfer pricing adjustment is warranted. He stated that Finance Act, 2012 inserted Explanation to Section 92B, with retrospective effect from 1.4.2002 and sub-clause (c) of clause (i) of this Explanation provides that: (i) the expression "international transaction" shall include— (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;....’. 3.1 Ld.CIT.DR submitted that expression ‘debt arising during the course of business’ refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non-payment of interest Page 9 of 17 IT(TP)A No. 290/Bang/2022 by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Hon’ble Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon’ble Delhi Bench in this case noted a decision of the Hon’ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., reported in (2013) 215 Taxmann 108, dealt with question of law as under: “(c) `Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?” 3.2 Ld.CIT DR submitted that, while answering above question, Hon’ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon’ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/under-charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO.
Page 10 of 17 IT(TP)A No. 290/Bang/2022 3.3 In so far as charging of rate of interest is concerned, he relied on decision of the Hon’ble Delhi High Court in CIT vs. Cotton Naturals (I) Pvt. Ltd. reported in (2015) 276 CTR 445 holding that currency in which such amount is to be re-paid, determines rate of interest. He, therefore, concluded by summing up that interest on outstanding trade receivables is an international transaction and its ALP has been correctly determined. We have perused the submissions advanced by both the sides in the light of the records placed before us.
This Bench referred to decision of Special Bench of this Tribunal in case of Instrumentation Corpn. Ltd. v. Asstt. DIT in and 1549 (Kol.) of 2009, dated 15-7-2016, held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. Alternatively, it also argued by the Ld.AR that in TNMM, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables as loans and advances to associated enterprise would amount to double taxation. Hon’ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 has observed that: “There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to Page 11 of 17 IT(TP)A No. 290/Bang/2022 discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon’ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon’ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions.” 4.1 In view of the above, we deem it appropriate to set aside this issue to Ld.AO/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in accordance with law. We also direct the Ld.TPO that in the event the WCA subsumes the outstanding receivables, no separate characterisation is to be made. However for those receivables that fall out of the WCA pertaining to year under consideration, then, the rate of interest to be charged must LIBOR + 300 basis points in accordance with the principles laid down by Hon’ble Delhi High Court in case of CIT vs. Cotton Naturals (I) Pvt. Ltd., reported in (2015) 276 CTR 445 by considering a credit of 90 days. Accordingly these ground raised
by assessee stands allowed for statistical purposes.
5. Ground No. 4: This ground is raised due to increase in book profit u/s 115JB and computation of tax liability u/s 115JB of
Page 12 of 17 IT(TP)A No. 290/Bang/2022 the Act. It was submitted that following are the computational errors that needs to be considered. The Ld.AR submitted that the Ld. AO was not justified and in considering the book profit at INR 36,97,81,854 while computing tax liability in computation sheet, instead of book profit as per return of income of INR 36.84,54.490, where there is no adjustment being proposed to book profit in final assessment order and thereby leading to erroneous addition of INR 13,27,364 to the book profit returned by the Assessee. 5.1 The Ld.AR submitted that as per ROI filed, the deemed total income under the MAT provisions is INR 36,84,54,490. However, vide the Final Assessment Order, the same has been arrived at INR 36,97.81,854. In this regard, the adjustment of INR 13,27,364 made is already considered in the ROI filed by the Assessee as discussed below. The Ld.AR relied on following table in support of the computation error by Ld.AO/TPO. As per As per ROI Computation Sn Description filed & Final sheet to Final Order Order
Profit as per Statement of Profit & 34,62,30,361 34,62,30,361 Loss account 2. Add/ Less: Adjustments -Provision for current tax 2,35,51,493 2,35,51,493 -Interest on delay in remittance of 3,29,679 - TDS u/s 201(1A) of the Act -Deferred Tax (16,57,043) - Book profits u/s 115JB of the Act 36,84,54,490 36,97,81,854 5.2 In this regard, with respect to adjustment on account of deferred tax, we humbly submit that as per Section 115JB of the Act:
Page 13 of 17 IT(TP)A No. 290/Bang/2022 Explanation 1.—For the purposes of this section, "book profit" means the profit as shown in the statement of profit and loss for the relevant previous year prepared under sub-section (2), as increased by— if any amount referred to in clauses (a) to (i) is debited to the statement of profit and loss or if any amount referred to in clause (j) is not credited to the statement of profit and loss. and as reduced by. — (viii) the amount of deferred tax, if any such amount is credited to the statement of profit and loss. 5.3 In light of the above, as per explanation to Section 115JB(2) of the Act, the amount of deferred tax, if any, credited to statement of profit and loss is to be reduced while calculating the amount of book profits as per MAT provisions. 5.4 Accordingly, in the instant case, the deferred tax which has been credited to statement of profit and loss account amounting to INR 16,57,043 was reduced while computing the book profits in the return of income filed by the Assessee. However, the same is not considered in the computation sheet annexed to the Order passed by the Ld. AO.
The Ld.AR submitted that with respect to interest u/s 201(1A) of the Act, explanation to Section 115JB states as under: "Explanation 1.—For the purposes of this section, "book profit" means the profit as shown in the statement of profit and loss for the relevant previous year prepared under sub-section (2), as increased by— (a) the amount of income-tax paid or payable, and the provision therefor; or ……… Explanation 2.—For the purposes of clause (a) of Explanation 1, the amount of income-tax shall include— (i) any tax on distributed profits under section 115-0 or on distributed income under section 115R: (ii) any interest charged under this Act; 6.1 It was submitted that as per the above provisions, the amount of income tax paid or payable and provision are to be increased while calculating the amount of book profits as per Page 14 of 17 IT(TP)A No. 290/Bang/2022 MAT provisions. It was also submitted that as per explanation 2(ii), any interest charged under the provisions of the Act, shall be considered as income tax for purpose of Clause (a) to Explanation 1 to Section 115JB(2).
The Ld.AR further submitted that the interest on delay in remittance of TDS as per Section 201(1A) of the Act amounting to INR 3,29,679 gets covered under Clause (a) to Explanation 1 of Section 115JB(2) of the Act and accordingly the same is to be added back while calculating the book profits as per MAT provisions. However, in the computation sheet annexed to the Final order, the Ld. AO has not considered such adjustment while calculating book profits. 7.1 In light of above, the Assessee requests before the Hon'ble Bench to issue directions to the Ld. AO to deleting such erroneous addition of INR 13,27,364 to book profits of the Assessee.
It is also submitted that while passing the Final Assessment Order, the Ld. AO has considered an incorrect total income as per Intimation u/s 143(1) of the Act, which consists of an arithmetical error, thereby leading to adjustment of INR 1,84,174 while computing assessed income of the assessee. Screenshot of the same is mentioned below.
Page 15 of 17 IT(TP)A No. 290/Bang/2022 8.1 Further it was submitted that on the facts and in law, the Ld.AO was not justified and has erroneously computed interest u/s. 244A at INR 3,30,884/-, thereby resulting in short grant of interest. Necessary directions may please be given to the Ld.AO in this regard. On the contrary, the Ld.DR submitted that these issues do not arise out of the orders passed by the authorities below and therefore are to be rejected. We have perused the submissions advanced by both sides in the light of records placed before us.
We note that the above alleged mistakes are to be looked into in accordance with law by the Ld.AO in order to compute the correct taxable income in the hands of the assessee. The Page 16 of 17 IT(TP)A No. 290/Bang/2022 objection of the Ld.DR that these issues do not arise out of the orders passed by authorities below do not have any merit as in a 144C proceedings, the final computation of taxable income is computed by the Ld.AO while passing the final assessment order in the present case, the appeal filed by assessee arises out of an order passed u/s. 144(3) r.w.s. 144C(13) of the Act.
Even in any other circumstances, where an appeal is filed against an order passed by the Ld.CIT(A), any mistake that arises in the computation of income could be rectified only in an order passed by this Tribunal as the principle merger would be applicable. We therefore reject the argument advanced by Ld.DR. We direct the Ld.AO to compute the taxable income in the hands of the assessee in accordance with law by considering the objections raised by the assessee hereinabove in Grounds 3-6. Accordingly, these grounds raised by assessee stands allowed for statistical purposes. In the result, the appeal filed by the assessee stands partly allowed as indicated hereinabove. Order pronounced in the open court on 14th November, 2022.