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Income Tax Appellate Tribunal, “A’’ BENCH: BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal by assessee is directed against assessment order passed u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income-tax Act,1961 ['the Act' for short] dated 28.2.2022 which was passed in consequent to direction of Ld. DRP dated w27.1.22 u/s 144C(5) of the Act for the assessment year 2017-18.
Facts of the case are that Cisco Systems Capital (India) Private Limited (hereinafter referred to as 'Cisco Capital' or the Appellant') is an Indian company incorporated under the IT(TP)A No.321/Bang/2022 Cisco Systems Capital (India) Private Ltd., Bangalore
Page 2 of 19 provisions of Companies Act, 1956 and is registered as a Non- Banking Financial Company ('NBFC') with the Reserve Bank of India. Cisco Capital is responsible for providing end-to-end financial solutions to the customers of Cisco in India by a variety of financing options.
2.1 For the AY -2017-18, the Appellant filed the return of income on November 11, 2017, wherein the Appellant had disclosed INR 369,08,46,410 as total income [(under the normal provisions of the Income Tax Act, 1961 (`the Act')] and was liable to pay income tax amounting to INR 127,73,28,126 (including surcharge and education cess). Post availing tax credit under Section 115JAA of the Act [Minimum Alternate Tax (MAT') provisions], the net tax liability was determined to INR 43,68,24,082. The same was discharged by the Appellant by way of taxes deducted at source amounting to INR 27,63,89,762 and advance tax amounting to INR 24,50,00,000 thereby claiming refund of INR 8,45,65,680. Subsequently, the case was picked up for scrutiny assessment under section 143(2) of the Act by the Assistant Commissioner of Income Tax — Circle 2(1)(1) vide notice dated September 5, 2018, for which appropriate response was provided. During the scrutiny assessment the jurisdiction of the Appellant was transferred to National e-Assessment Centre, Delhi (hereinafter referred to as the `learned faceless AO'). Further, during the assessment proceedings, the learned AO called for certain information/ documents vide notice under section 142(1), which was duly furnished by the Appellant. The Appellant's case was also referred to the Office of the Deputy Commissioner of Income Tax, Transfer Pricing Officer — 1(1)(2) (hereinafter referred to as the 'learned TPO') for determining the arm's length price (ALP') of the IT(TP)A No.321/Bang/2022 Cisco Systems Capital (India) Private Ltd., Bangalore
Page 3 of 19 international transaction entered into by the Appellant during the FY 2016-17.
2.2 The learned AO and learned TPO had proposed certain corporate tax and transfer pricing adjustments to the returned income of the Appellant which were incorporated in the draft assessment order dated April 26, 2021, which are as follows!
Disallowance of depreciation claimed by the Appellant on a) assets leased out under finance lease arrangement amounting to INR 232,42,69.223;
Transfer pricing adjustment made by learned TPO b) pertaining to administrative support services amounting to INR 11,72,93,944; Transfer pricing adjustment pertaining to interest on c) delayed receivables amounting to Rs. 1,79,24,794/- 2.3 Aggrieved by the draft order the Appellant filed objection before the Dispute Resolution Panel-1, Bangalore (`DRP') on July 20, 2021. In line with Hon'ble DRP's directions dated January 27, 2022, the learned TPO in its scrutiny report dated February 21, 2022 has recomputed the interest on delayed receivables, pursuant to which the revised adjustment has been computed at INR 89,11,183.
2.4 Further, the Ld. DRP had directed for verification of the principal and interest component of the financed leased assets offered to tax by Cisco Capital, and allow for the deduction of the principal component, where the depreciation on such assets is disallowed. However, learned faceless AO without providing the Appellant with an opportunity of being heard, has passed the final assessment, disallowing the depreciation on assets
IT(TP)A No.321/Bang/2022 Cisco Systems Capital (India) Private Ltd., Bangalore
Page 4 of 19 given under finance lease arrangement without providing for the lease rental deduction as directed by DRP.
Aggrieved, the Appellant has filed this appeal before this Tribunal, on following grounds of appeal:
3.1 Ground Nos.1, 2 & 3 of the appeal of the assessee are reproduced below:- “Disallowance of depreciation on assets given under finance lease: 1) The learned AO has erred in law and in fact by disregarding the ownership status of Cisco Capital in relation to the assets leased out by it under finance lease, thereby disallowing the claim for depreciation made by Cisco Capital in the return of income. 2) Without prejudice to the above grounds, the learned AO has erred in law and in fact, by not allowing depreciation on the opening written down value ("WDV") of the block of assets leased out under finance lease arrangement, pursuant to allowance of depreciation on the same block of assets for some of the prior years. 3) Without prejudice to the above grounds, the learned AO has erred law and in fact by not deducting the lease rentals received by the Assessee on assets leased out under finance lease (offered to tax by the Assessee in the return of income filed) while computing total income of the Assessee, in spite of depreciation on such assets being disallowed.”
3.2 The first ground for our consideration is with regard to disallowance of depreciation on assets given under finance lease. After hearing both the parties, we are of the opinion that similar issue came for our consideration before this Tribunal in assessee’s own case for assessment year 2016-17 wherein the Tribunal held as under:
8. “The ld. AR submitted at the outset that similar disallowance of depreciation on assets given under finance lease was made by the CIT for AY 2008-09 in assessee’s own case, by initiating proceedings under section 263 of the Act. The Tribunal quashed the proceedings under section 263 on the ground that the AO had applied his mind and had examined the issue on allowability of IT(TP)A No.321/Bang/2022 Cisco Systems Capital (India) Private Ltd., Bangalore
Page 5 of 19 depreciation on assets given on financial lease in detail. Aggrieved, the department had filed appeal before Hon'ble Karnataka High Court in dated 18 June 2021, which has upheld the order of ITAT in relation to quashing 263 proceedings initiated by learned CIT. While doing so, the Hon'ble High Court not only held that action of CIT was not proper but also examined the matter on the merits including examining terms of financial lease agreements and comparing it lease agreements in case of ICDS etc. and held that even on the facts and merits of the case, Assessee is entitled for depreciation on financial lease assets. After examining the terms of financial lease with facts in case of Apex court in case of ICDS (Supra) and Hon'ble Karnataka High Court in case of Hewlett Packard India Sales Pvt Ltd (ITA No.142/2013) dated 30 November 2020, it was held that since terms of arrangement entered into by assessee are similar to facts of case of ICDS (Supra) and Hewlett Packard (Supra), the assessee is eligible to claim depreciation on Assets given on finance lease. The findings of Hon'ble High Court is as under:-
“18. This court has minutely scanned the entire record and clauses of agreement in the case before the Supreme Court in M/s ICDS Ltd (supra) as well as in the case of Hewlett Packard India Sales Pvt Ltd (supra) and in the case of the assessee, in the present case, with regard to ownership, inspection, repossession of the equipment on default, delivery of equipment on expiry of lease and ownership at the end of the lease period, are similar and therefore it is the assessee alone who can claim depreciation, as rightly held by the assessing officer. The clauses relating to lease have already been interpreted by the Supreme Court in the case of M/s ICDS Ltd(Supra) and it has been held that the assessee is entitled to the benefit of depreciation on leased assets under section 32 or the Act of 1961 and therefore, the substantial question of law involved in the present appeal is no longer res integra and is squarely covered by the decision of the Hon'ble Supreme Court in M/s ICDS Ltd (Supra) as well as the judgement delivered by the Division bench of this court in case of Hewlett Packard India Sales Pvt Ltd (Supra).”
9. The ld. AR further submitted that the Tribunal in Assessee's own case for AY 2011-12 and AY 2013-14 dated June 7, 2019 has held that the decision in the case of M/s Asea Brown Boveri Ltd Vs. Industrial Finance Corporation of India & Ors in CA 3574 of 1998 dated October 27, 2004 as relied on by the Department is not on the issue of claim of depreciation of assets given on financial lease under the Act and was rendered in an appeal under section 10 of the Special Court Act, 1992. Further, the Tribunal also observed that the IT(TP)A No.321/Bang/2022 Cisco Systems Capital (India) Private Ltd., Bangalore Page 6 of 19 decision of the Hon'ble Supreme Court in the case of ICDS (supra) was delivered much after the judgement of in the case of Asea Brown Boveri Ltd (supa). Accordingly, the Tribunal has reversed the findings in the final assessment order dated November 24, 2017 and remanded the matter back to AO's file for fresh adjudication with a direction to the assessee to produce the copies of the lease agreements called for by the AO. Also, the Tribunal had directed that if the terms & conditions mentioned in these agreements are similar to the terms and conditions considered by the Hon'ble Supreme Court in the case of ICDS Ltd. (supra) and if there are no material variations in the contracts, then depreciation has to be granted to the assessee as claimed. 10 Pursuant to the order of the Tribunal case for AY 2011-12 and AY 2013-14, the AO has passed the order giving effect for AY 2011-12 recently on September 13, 2021 wherein the AO has examined the agreements signed by assessee with the lessees and recorded the findings that the facts in assessee’s case are also similar to facts in case of ICDS Ltd (supra). The AO has held that the assessee has also sold the assets given under finance lease arrangement to the Lessees at the end of the lease term which reinforces that the ownership of the assets under finance lease arrangement lies with the Lessor, i.e., the assessee and hence, assessee only is eligible to claim depreciation on assets given under finance lease arrangement.
11. Further, the ld. AR submitted that that following the decisions for AY 2011- 12 and AY 2013-14, the Bangalore Tribunal in relation to the aforesaid issue for AY 2012-13, AY 2014-15 and AY 2015-16 as well, has remanded the matter back to the file of the AO with similar directions as provided in AY 2011-12 & AY 2013-14. The order giving effect to the same is pending with learned AO.
In view of the above submissions, it was prayed that the disallowance may be deleted.
After hearing both the parties, we find that similar issue came up for consideration before the Tribunal in assessee’s own case for AYs 2011-12 & 2013-14 in IT(TP)A No.291/Bang/2018 & 688/Bang/2016 and the Tribunal vide order dated 7.6.2019 held as follows:-
“Disallowance of claim of depreciation on equipment leased by the assessee under financial lease arrangement 6. The AO in this case has not followed the binding judgment of Hon’ble Supreme Court in the case of ICDS Ltd. V CIT [Civil Appeal No.3282 of 2008). He has from page 6 onwards in his order recorded views contrary to the ratio laid down by the Hon’ble Supreme Court. This cannot be approved. He relied on the judgment of Hon’ble Supreme Court in the case of M/s. Asea Brown Boveri Ltd. v. Industrial Finance Corporation of India &
IT(TP)A No.321/Bang/2022 Cisco Systems Capital (India) Private Ltd., Bangalore Page 7 of 19 Ors. in CA 3574 of 1998 dated October 27, ,2004. This judgment is not on the issue of claim of depreciation of assets given on financial lease under the Income-Tax Act, 1961 [“the Act”]. This judgment was rendered in an appeal under section 10 of the Special Courts (Trials of Offences relating to Transactions in Securities) Act, 1992. In fact, the judgment of Hon’ble Supreme Court in the case of ICDS Ltd. (supra) has been delivered much after the judgment in the case of Asea Brown Boveri Ltd (supra). Hence, these findings of the ld. AO, which were approved by the DRP are hereby reversed as these are not in accordance with law.
Be it as it may, as at page 18 of the final assessment order for the AY 2011-12, the AO records that the assessee was asked to produce copies of agreements and that the assessee had only produced a few of them. We agree with the argument of the ld. DR that at least some more agreements have to be produced for examination before the AO, so that the submissions of the assessee that, the terms of the agreement in these financial leases are similar to the terms of the agreement considered by the Hon’ble Supreme Court in the case of ICDS Ltd. (supra) is correct or not.
In view of the above discussion, we set aside the issue to the file of the AO for fresh adjudication in accordance with law. The assessee is directed to produce copies of those agreements which the AO may call for. The AO shall examine these agreements and if the terms & conditions mentioned in these agreements are similar to the terms and conditions mentioned in the agreements considered by the Hon’ble Supreme Court in the case of ICDS Ltd. (supra) and if there are no material variations in the contracts, then depreciation has to be granted to the assessee as claimed. With these observations, we set aside this issue to the file of AO for fresh adjudication in accordance with the law.”
Respectfully following the above order of the Tribunal, we are inclined to remit the issue to the file of Assessing Officer for fresh decision with similar directions.”
3.3 The Ld. A.R. further submitted that Ld. DRP recently in assessee’s own case in assessment year 2018-19 wherein placing reliance on the judgement of Hon’ble Karnataka High Court has allowed the depreciation on assets leased under Finance lease arrangement. In our opinion, the facts of the present assessment
IT(TP)A No.321/Bang/2022 Cisco Systems Capital (India) Private Ltd., Bangalore
Page 8 of 19 year is similar to assessment year 2016-17 and it is appropriate to remit the issue to the file of AO for fresh consideration on similar direction.
Ground Nos.4 5 & 6 of the appeal of the assessee are reproduced as follows:- “4. Without prejudice to the above grounds, the learned AO has erred in law and in fact by not giving the Assessee an opportunity of being heard pursuant to Hon'ble DRP's direction with regard to verification of lease rentals (both principal component as well as the interest portion) of the assets leased out under finance lease prior to issue of final assessment order.
5. Without prejudice to the above grounds, the learned AO has erred in law and in fact by passing the final assessment order without taking into consideration the submissions made by the Assessee, pursuant to Hon'ble DRP's direction providing details of the principal and interest portion of lease rentals under finance lease.
Not allowing set-off of brought forward depreciation loss: 6. The learned AO has erred in law by re-computing the total income of the appellant without giving effect to the set off of brought forward depreciation loss from the prior years.”
4.1 The Ld. A.R. has not pressed the above grounds and hence these grounds are dismissed as not pressed.
Ground Nos.7 to 17 of the appeal of the assessee are reproduced as under:-
“B. Grounds of appeal in relation to transfer pricing matters Initiating scrutiny proceedings in relation to Specified domestic transaction, not considering amendment made by Finance Act - 2017
7. The learned AO/TPO has erred in law and fact, by initiating scrutiny proceedings in relation to the specified domestic transaction of payment made by the Appellant towards the fees for administrative support services to the AE. disregarding the deletion of clause (i) of IT(TP)A No.321/Bang/2022 Cisco Systems Capital (India) Private Ltd., Bangalore
Page 9 of 19 section 92BA of the Act by virtue of amendment by the Finance Act, 2017 w.e.f April 1, 2017. Transfer pricing adjustment on account of re-characterization of payment made for administration support services Treating payment for administrative support services to Cisco Systems India Private Limited ('Cisco India') as an International transaction
8. The learned TPO/AO has failed to appreciate the fact that the agreement between Cisco Capital and Cisco India for availing of administrative support services (which was in the nature of outsourcing of services to Cisco India or deputation services by Cisco India to Cisco Capital) is bona-fide arrangement and the same cannot be treated as an international transaction under section 92B of the Act. Alleging that Appellant has an arrangement with Cisco India and Cisco Systems International BV ("CSI BV") whereby Appellant has rendered marketing, sales and administrative support services to CSI BV The learned TPO/A0 has erred in law and fact by ignoring the fact that the appellant has not rendered any service to CSI BV.
10. The learned TPO/A0 has erred in law and fact by alleging a hypothetical international transaction under section 92B of the Act, wherein marketing, sales and administrative support services (which was in the nature of outsourcing of services to Cisco India or deputation services by Cisco India to Cisco Capital) are allegedly rendered by Cisco Capital and re-characterizing the payment made for these services to Cisco India as a transaction entered into pursuant to an understanding/ arrangement between Cisco Capital. Cisco India and CSI BV.
11. The learned TPO/A0 has erred in law and fact by ignoring that in absence of an arrangement/ understanding between Cisco Capital, Cisco India and CSI BV, the adjustment is outside the purview of the jurisdiction of learned AO/ TPO, as the alleged Advertising Marketing Promotion (`AMP') transaction and further determining a mark-up though it is not an 'international transaction' Bundled Approach for benchmarkinq should be accepted 12. Without prejudice, the learned TPO/A0 has erred, in law and in fact, by not appreciating that once the net margin is tested for arm's length price under Transactional Net Margin Method ("TNMM") method (including administrative fees paid to Cisco India), it presupposes that the various items of income and expenditure considered in the process of arriving at IT(TP)A No.321/Bang/2022 Cisco Systems Capital (India) Private Ltd., Bangalore
Page 10 of 19 the net profit are also at arm's length and therefore no separate adjustment in respect of particular item of expenditure. Considering Administrative/ Selling expenses as part of AMP expenses 13. Without prejudice, the learned TPO/ AO has erred, in law and in fact, considering certain pure administrative and selling expenses as AMP expenses, and therefore adjustment made considering such expenditure is unwarranted; Rejection of benchmarking analysis undertaken by Appellant 14. Without prejudice to the other grounds, the learned AO/TPO have erred. in law and in fact by a) not appreciating the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with Income Tax Rules, 1962, b) rejecting the transfer pricing approach identified by the Appellant in its transfer pricing documentation report maintained, c) conducting a fresh economic analysis for identification of comparables (with unreasonable comparability criteria) and determining of the ALP in connection with the impugned specified domestic transaction. Rejection of Non-comparable companies 15. Without prejudice, the learned TPO/ AO has erred. in law and in fact. by selecting certain companies as comparable companies ignoring the fact that the companies are functionally different: a) Pressman Advertising Limited b) Majestic Research Service and Solutions Limited c) ScarecrowCommunications Limited 16. Without prejudice, the learned TPO/ AO has erred, in law and on facts. in erroneously selecting the companies that has high fluctuating profit trend as comparable i.e. Pressman Advertising Limited. 17. Without prejudice, the learned TPO/ AO has erred, in law and on facts. in erroneously computing the operating margins of certain comparables.”
The crux of the above grounds are that TPO has made an adjustment alleging payment made towards administrative support services to Cisco Systems India Pvt. Ltd. as an international
IT(TP)A No.321/Bang/2022 Cisco Systems Capital (India) Private Ltd., Bangalore
Page 11 of 19 transaction u/s 92B of the Act. Similar issue came for consideration before this Tribunal in assessee’s own case for the assessment year 2016-17 in IT(TP)A No.309/Bang/2021 dated 8.11.2021 held as under:-
By ground No.9, the assessee grievance is bundled approach for benchmarking should be accepted. At the outset, the ld. AR submitted that the TPO has accepted the bundled approach of aggregation of payment of fees for administrative support services in the preceding years (i.e. from the incorporation year to AY 2015-16). Also, the Tribunal in its order passed for the AY 2015-16 dated April 8, 2021 has accepted the bundled transaction approach adopted by the Assessee. There has been no change in the functions, assets and risk analysis in the current year vis-a-vis preceding years. In this context, the Assessee submits that the rejection of the consistent approach adopted by the Assessee which has been accepted by the TPO in preceding years is incorrect. Given the fact that primary transaction of purchase of networking equipment for lease has been considered at arm's length, the claim of the TPO that the impugned specified domestic transaction should be separately benchmarked is erroneous and unjustified. In this regard, reliance is also placed on the following decision wherein bundled transaction approach has being upheld:- • Sony Ericsson Mobile Communications India Private Limited (231 Taxman 113) (Delhi HC) • Delhi High Court decision in case of Maruti Suzuki India Limited, 129 DTR 25 (Del) • Sony Mobile Communications (ITA No 6410/Del/2012) affirmed by Delhi High Court in (2019) 104 CCH 0355 Del HC • Audco India Ltd (264 Taxman 237) (Bombay High Court) • Bangalore Tribunal in the case of M/s. Forsoc Chemicals India Private Limited vs. ACTT [IT(TP)A No.1813/Bang/2013) • Bangalore Tribunal in case of M/s Parametrics Technology Private Limited Vs DCIT, ITA No.359(Bang)/2016
Accordingly, it was submitted that as the assessee’s primary transaction of import of equipment from AE (Appellant's margin 5.90%) has been accepted at arm's length after considering the payment of administrative and marketing support services as part of operating cost, no separate adjustment is warranted in respect of the same.
20. We have both the parties. This issue came up for consideration in assessee’s own case in AY 2015-16 in IT(TP)A No.2614/Bang/2019 and by order dated 8.4.2021 the Tribunal held as under:-
IT(TP)A No.321/Bang/2022 Cisco Systems Capital (India) Private Ltd., Bangalore
Page 12 of 19 “6.7 It is also an admitted fact that assessee has been carrying out these activities in a bundled format in the preceding years which has not been objected by the Ld.TPO/AO. Further that all these expenses incurred by assessee towards administrative expenses and sales and marketing expenses stands subsumed in the operating expenses under TNMM for computing the arm’s length margin of the international transaction, a separate benchmarking may not be necessary. However all these things deserves verification at the end of Ld.AO/TPO. The Ld.AO/TPO shall verify the transactions as indicated hereinabove. In the event the expenses are subsumed under TNMM we do not find any necessity for a separate benchmarking. Accordingly these grounds raised by assessee stands partly allowed.”
Taking a consistent view, we hold that payment of administrative and marketing support services is part of the operating cost, no separate adjustment is warranted. This ground of the assessee is partly allowed.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
7. In view of the above order of the Tribunal, we hold that the issue of administrative and marketing support services is part of the operating cost and no separate adjustment is warranted. These grounds of assessee are partly allowed for statistical purposes.
8. Ground Nos.18 & 19 of the appeal of the assessee are reproduced as under:-
C. Grounds of appeal in relation to interest on outstanding receivables
18. Without prejudice, the learned TPO/ AO has erred. in law and on facts, by determining a transfer pricing adjustment on account of interest on outstanding receivables, not appreciating the fact that such receivables are arising from rebates and discounts offered by CSI BV and should not be tested separately or re-characterized as a loan transaction.
IT(TP)A No.321/Bang/2022 Cisco Systems Capital (India) Private Ltd., Bangalore
Page 13 of 19 19. Without prejudice, the learned TPO/ AO has erred, in law and on facts, by using the SBI Short term deposit interest rate as against using of LIBOR rate for the transaction denominated in USD.
Facts of the case are that the plea advanced by the assessee that outstanding amount gets adjusted in working capital adjustment and that a separate adjustment is not required. It was contended that interest cost embedded in the pricing of the services and that a working capital adjustment would take into account the differences in the levels of account receivables and accounts payable vis-à-vis the comparable companies. But the assessee has not filed any factual information as to the extended credit period and its impact on the profitability or pricing of the transaction. The basic premise of the assessee's argument is that the interest cost related to delay in realization of receivable is factored in the profitability / pricing of the assessee. Such an assumption may be acceptable only to the extent of credit period agreed between the parties and cannot be extended beyond. Working capital adjustment can have no impact on determination of ALP on interest receivables from the AEs beyond the stipulated credit period. The Hon'ble ITAT Delhi in the case of-Bechtel (in dated 16 May 2017), deviating from its earlier order in the same case, rejected the contention that interest gets subsumed in the working capital adjustment. The Tribunal held that the deferred receivable transaction has to be analysed as a separate international transaction, and also observed that working capital adjustment can have no impact on the determination of ALP of international transaction relating to interest on deferred receivable. The relevant extract of the observation is as under:
IT(TP)A No.321/Bang/2022 Cisco Systems Capital (India) Private Ltd., Bangalore
Page 14 of 19 “19. In the case of Ameriprise (supra), it has been observed that the working capital adjustment is in respect of international transaction of rendering services to the AE. Interest for credit period allowed as per the agreement is given in the price charged for rendering of services. Whereas the non-realisation of invoice value beyond the stipulated period is a separate international transaction whose ALP is required to be determined. Granting of working capital adjustment is confined to the international transaction of rendering of services, whose ALP is separately determinable. On the other hand, the international transaction of interest receivable from its AEs for late realization of invoices beyond such stipulated period is a separate international transaction. Allowinq working capital adjustment in the international transaction of rendering of services can have no impact on the determination of ALP of the international transaction of interest on receivables from AEs beyond the stipulated period allowed as per agreement. In the case of Mckinsey Knowledge Centre Pvt. Ltd. (supra), again, the Tribunal reiterated this reasoning and, inter alia, observed that: ....... In our considered opinion, whereas, the international transaction of purchase/sale of goods from/to AE contemplates comparison of the price charged/paid for such goods by impliedly including the interest for the period allowed for realization of invoices as per the terms of the agreement, the international transaction of charging interest on late recovery of trade receivable covers the period which starts with the termination of the period of credit allowed under the agreement, which is subject matter of the international transaction of purchase/sale of goods."
The Tribunal also explained that if an invoice is raised during the year and the proceeds are realized within the year, but, beyond the stipulated period of agreement, then, 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 1st April and 31st 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.”
9.1 The crux of the issue is that TPO has concluded that the receivable transaction should be treated as a separate international transaction and given the delay in receipt of receivables from AE’s.
IT(TP)A No.321/Bang/2022 Cisco Systems Capital (India) Private Ltd., Bangalore
Page 15 of 19 In the TP order, passed and adopted SBI PLR rate of 14% as computed interest on delayed receivables at Rs.89,11,183/-.
We have heard the rival submissions and perused the materials available on record. Similar issue came for consideration before this Tribunal in the case of Swiss Re Global Business Solutions India Pvt. Ltd. In IT(TP)A No.397/Bang/2021 dated 21.1.2022 wherein held as under:
“35. The only other issue that remains for adjudication is ground No.15 with regard to re-characterizing certain trade receivables as unsecured loans and computing notional interest on such trade receivables. The main contention of the ld. AR is that deferred receivables would not constitute a separate international transaction and need not be benchmarked while determining the ALP of the international transaction. In our opinion, this issue was considered by the Tribunal in assessee’s own case for AY 2014-15 and in para 23 to 23.9 of the order dated 21.5.2020 this Tribunal held as under:-
“23. Ground No. 14-17 alleged by assessee against adjustment of notional interest on outstanding receivables. From TP study, it is observed that payments to assessee are not contingent upon payment received by AEs from their respective customers. Further Ld.AR submitted that working capital adjustment undertaken by assessee includes the adjustment regarding the receivables and thus receivables arising out of such transaction have already been accounted for. Alternatively, he submitted that working capital subsumes sundry creditors and therefore separate addition is not called for. 23.1. Ld.TPO computed interest on outstanding receivables under weighted average method using LIBOR + 300 basis points applicable for year under consideration that worked out to 3.3758% on receivables that exceeded 30 days. It has been argued by Ld.AR that authorities below disregarded business/commercial arrangement between the assessee and its AE's, by holding outstanding receivables to be an independent international transaction.
23.2. Ld.AR placed reliance on decision of Delhi Tribunal in Kusum Healthcare (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 79, deleted addition by considering the above principle, and subsequently
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Page 16 of 19 Hon'ble Delhi High Court in Pr. CIT v. Kusum Health Care (P.) Ltd. [2018] 99 taxmann.com 431/[2017] 398 ITR 66, held that no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Delhi Tribunal in case of Bechtel India (P.) Ltd. v. Dy. CIT [2016] 66 taxman.com 6 which subsequently upheld by Hon'ble Delhi High Court vide order in Pr. CIT v. Bechtel India (P.) Ltd. [IT Appeal No. 379 of 2016, dated 21-7-16] also upheld by Hon'ble Supreme Court vide order, in CC No. 4956/2017. 23.3. It has been submitted by 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 into company agreements provides for extending credit period with mutual consent and it does not provide any interest clause in case of delay. He also argued that the working capital adjustment takes into account the factors related to delayed receivables and no separate adjustment is required in such circumstances. 23.4. 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 Delhi Tribunal order in Ameriprise India (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 237 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 longterm 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;. . . . ' 23.5. 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 by AEs on IT(TP)A No.321/Bang/2022 Cisco Systems Capital (India) Private Ltd., Bangalore
Page 17 of 19 debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of 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 v. Patni Computer Systems Ltd. [2013] 33 taxmann.com 3/215 Taxman 108 (Bom.), which dealt with question of law: "(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?" 23.6. 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. Insofar as charging of rate of interest is concerned, he relied on decision of the Hon'ble Delhi High Court in CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523/231 Taxman 401 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. 23.7. 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 Special Bench of ITAT in case of Instrumentation Corpn. Ltd. v. Asstt. DIT (IT) [2016] 71 taxmann.com 193/160 ITD 1 (Kol. - Trib.), 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 92B of the Act. We also perused decision relied upon by Ld.AR. In our considered opinion, these are factually distinguishable and thus, we reject argument advanced by Ld.AR.
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Page 18 of 19 23.8. Alternatively, it has been argued that in TNMM, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and loans and advances to associated enterprise would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions (P.) Ltd. v. Dy. CIT [2018] 91 taxmann.com 286 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 discern a pattern which would indicate that vis-a-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 v. 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 characterised as international transactions." 23.9. 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.”
Accordingly, we are of the opinion that deferred receivables would constitute an independent international transaction and the same is required to be benchmarked independently as held by the Hon’ble Karnataka High Court in PCIT v. AMD (India) Pl. Ltd., dated 31.8.2018.
Once we have held that the transaction between the assessee and AE was in foreign currency with regard to receivables and transaction was international transaction, then transaction would have to be looked upon by applying the commercial principles with regard to international transactions and accordingly proceeded to take into account interest rate in terms of London Inter Bank Offer Rate [LIBOR] and it would be appropriate to take the LIBOR
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Page 19 of 19 rate + 2%. For this purpose, we place reliance on the judgment of the Bombay High Court in the case of CIT v. Aurionpro Solutions Ltd., 99 CCH 0070 (Mum HC). It is ordered accordingly.”
10.1 In view of the above order of the Tribunal, we direct the AO to consider the interest rate in terms of LIBOR and it would be appropriate to take the applicable rate of LIBOR + 2% and directed accordingly.
In the result, the assessee’s appeal is partly allowed for statistical purposes. Order pronounced in the open court on 21st Jul, 2022