GALAX E SOLUTIONS INDIA PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(1), BANGALORE

As we have already noticed the first decision on the issue of application of turnover filter was rendered by the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, relying on Dun and Bradstreet’s analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The Tribunal held that size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. The Tribunal held for the purpose of classification of companies on the basis of net sales or turnover, a reasonable classification has to be made and in this regard relied on classification by Dun & Bradstreet & Bradstreet and NASSCOM and approved the classification made by Dun & Bradstreet as more suitable and reasonable. Therefore companies who fall within the group of Rs.1 crore to Rs.200 Crores cannot be compared with companies whose turnover fall in the range of Rs.200 to Rs.500 Crores and above. It was also held in the case of Autodesk (supra) that the decisions rendered later on the point of turnover at 10 times that of the Assessee have to be regarded as per incurium the law laid down in the case of Genisys Integrating Systems (supra). The argument that the Assessee himself chose 10 times turnover as criteria in its TP study is no ground to reject the plea of the Assessee, as it is well settled that tax liability has to be determined in accordance with law and not on admission of parties.

IT(TP)A No.389/Bang/2021 Page 16 of 24 There is no principle of estoppel that applies in determining tax liability. Therefore, we are of the view that the argument of the learned DR that the criteria of 10 times the turnover of the Assessee has to be applied in the present case, cannot be accepted.

The TPO/AO is directed to compute the ALP of the international transaction of rendering of SWD services by the Assessee to AE in the light of the directions given above, after affording Assessee opportunity of being heard.

The next issue to be dealt with in this appeal is Ground No.5 to 8 of the concise grounds of appeal with regard to determination of ALP by construing the delayed realization of receivable by the Assessee from its AE as a separate international transaction and determining ALP of such delayed receivables. These grounds read as follows:

Notwithstanding the ground no 5,6 and 7 above and without prejudice. the TPO/AO and DRP erred in law and on facts in arbitrarily adopting the notional interest rate based on 6 months LIBOR plus 450 basis point to compute the notional interest on the trade receivables.

The facts in this regard are that in the order passed under Section 92CA of the Act, the TPO determined a TP adjustment of Rs.1,18,23,644/- in respect of delayed receivables on a notional manner. The TPO has observed in this regard in his order that the Assessee was asked to furnish details of trade receivable and details of realization and in the absence of such details, he has no other option but to determine the interest attributable to delayed realization of trade receivables by applying 6 months LIBOR plus 450 basis points with a mark-up of 100 basis points (which works out to 4.985%) on the average of opening and closing receivable. The computation done by the TPO in this regard was as follows:

The DRP firstly held that realizing receivables beyond the agreed credit period was a separate international transaction and the ALP of such transaction has to be determined separately. Thereafter the DRP held that the TPO should have applied SBI Short term deposit rate of interest and not LIBOR and doing so resulted in an enhancement of the addition made by the TPO. The observations of the DRP in this regard were as follows:

Aggrieved by the order of the DRP which was incorporated in the final order of assessment, the Assessee is in appeal before the Tribunal. We have heard the rival submissions. The learned counsel for Assessee pointed out that the DRP in its direction dated 04.03.2021 in para 2.9.20 (Internal page 38 – Appeal Memo Page No 166) directed the TPO to obtain invoice wise details from the assessee and compute the interest on delayed receivables by adopting SBI short term deposit rate taking credit period of 60 days. It was submitted by him that all these details were provided to the TPO through online submission on 13.04.2021 (Paper Book No.1 - Page No 458 to 470) . The summary of the submission made before the TPO consequent to DRP order is as follows:

The entire Debtors both opening balance as at 01.04.2015 as well as closing balance as at 31.03.2016 were received within the stipulated time. Hence computation of notional interest does not arise

A tabulation of the debtors as at the Opening date 01.04.2015 and closing date 31.03.2016 with date, invoice wise details of receipt of payment, which reveal that the entire debtors were realized within a period of 180 days except for the opening debtors amounting to Rs. 3.97 Crores which were realized within a period of 200 days ie., delay of about 20 days. (average) was also given, which is as follows:

The learned counsel also invited our attention to the master service agreement, para 5.2 ( in page 5 of the agreement under the heading ‘Invoicing and Payments’) wherein the credit period allowed to the holding company is 180 days or such other time as may be prescribed by the Reserve Bank of India from time to time. It was argued that since the computation of notional interest did not arise, the TPO was requested to kindly delete the notional interest from the Draft TP order passed on 30.10.2019 and provide a copy of the Order Giving Effect to the direction of the DRP order dated 04.03.2021. It was submitted that the above submission made before the TPO was not considered by the TPO and therefore no relief arising from DRP direction was received. The learned DR relied on the order of the DRP/TPO.

After considering the rival submissions, we are of the view that the TPO/AO have erred in not giving effect to the direction of the DRP based on invoice wise delay in receipt of outstanding. Instead the TPO/AO proceeded on estimation basis by considering the average of opening and closing debtors balances and computed

Since the above facts with regard to realization of receivables from the AE not having been considered despite the details having been furnished to the TPO, we deem it fit and proper to verify the details by the TPO/AO. In the light of the above submissions, we set aside the order of the AO and the directions of the DRP and remand the issue to the TPO/AO for consideration afresh to decide whether there was at all delay in realizing receivables from the AE over and above the credit period of 180 days and if there was no such delay then there can be no international transaction at all in this regard and consequently there cannot be any determination of ALP. The TPO/AO will afford opportunity of being heard to the Assessee before deciding the issue.

In the result, the appeal by the Assessee is partly allowed.