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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & MS. S. PADMAVATHY
per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon’ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon’ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra).
In view of the aforesaid decision, we hold that companies listed in Sl.No.(a) to (g) of Grd.No.3 raised by the Assessee whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies.
The learned DR however submitted that the Assessee in its transfer pricing study had applied the filter of 10 times turnover of the Assessee as a criteria for comparing the Assessee company with a comparable company. He pointed out that the Tribunal in some cases has applied the filter of 10 times the turnover as criteria for choosing comparable companies and IT(TP)A No.389/Bang/2021 Page 15 of 24 therefore not all companies listed in Ground No.3 will have turnover 10 times more than that of the Assessee.
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:
5. The TPO, AO and DRP have erred in law and on facts in computing notional interest on alleged delay in collecting trade receivables amounting to Rs. 1,18.23.644 from its AE. As per the TPO order, the average of opening and closing receivable balances has been treated as unsecured loan for a period of 365 days and after allowing a credit period of 180 days, the AO/TPO has arrived at a delay of 185 days on the deemed loan amount. This is factually incorrect, since the appellant has received all the receivables in respect of invoices raised in FY 2015-16 from its AE within the agreed credit period of 180 days. Thus, as all the receivables are collected within due date, no interest on delay in collection of trade receivable should arise.
6. The TPO/A0 erred in law as well on facts by not following the direction of the DRP to recompute the interest on the delayed receivables after obtaining invoice wise details from the assessee. 7. The DRP erred in law while giving direction to the TPO/A0 to consider the credit at 60 days as against the 180 days which is as per
IT(TP)A No.389/Bang/2021 Page 17 of 24 the Master Service Agreement and which the TPO has correctly considered.
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:
Amounts in Rs 31.03.2016 31.03.2015 Receivables from AEs (A) 541123292 424388892 Payable due to AEs (B) 17952878 11642378 523170414 412746514 Net receivables (C=A-B)
467958464 Average Net receivables 4.985% Interest Rate Period of delay (days) 185 Interest Amount 1,18,23,644 *Period of delay is 365 — allowed period of 180 days.
IT(TP)A No.389/Bang/2021 Page 18 of 24 Thus, arm's length interest amount to be charged works out to be Rs.1,18,23,644 .The same is treated as adjustment u/s 92CA for interest on delayed receivables.
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:
“2.9.18 As regards adoption of ALP interest rate, the approach of the TPO in adopting LIBOR rate is incorrect. In the facts of the case, we consider that, it is pertinent to look into the opportunity costs i.e. the income that the assessee would have earned, had the assessee received the amounts in time. This has to be determined taking into account the Indian market conditions, the assessee being taken as the tested party Factoring these aspects, we are of the view, that the SBI short term fixed deposit interest rate may be the appropriate ALP rate to measure the interest compensation in these type of transactions. In this regard, we place reliance on the principle, held by the Honourable Bangalore ITAT in the case of LogixMicrosystems Ltd (ITA No. 423/Bang/2019 dated 07.10.2010) .(2010-TI 1-30-ITAT Bang- TP), under similar factual circumstances, wherein it was observed, "While adopting the Indian rate, it is not proper to rely on PLR of the State Bank of India. This is because if the funds were brought in time and those funds were properly deployed, the assessee company may earn an income at the maximum rate applicable to deposits and not at the rate applicable to loans. We find-it-appropriate to adopt a reasonable rate that would be available to the assessee on 'short-term deposits". This, Panel has been consistently applying this principle. Accordingly, the TPO is directed to adopt the SBI short term deposit interest rate for the subject year as the ALP interest rate and re-compute the adjustment to be made to the total income.
IT(TP)A No.389/Bang/2021 Page 19 of 24 2.9.19 The SBI short term deposit interest rate is as under: 'DOMESTIC TERM DEPOSIT RATES OF SB1 AS ON:
Duration 18.02.2014 18.07.2014 18.09.2014 07.10.2014 01.11.2014 08.12.2014 Revised Revised Revised for for Public for Public Public w.e.f. w.e.f. w.e.f.08.06. 10.04.2015 11.05.2015 2015 7 days 7.5 7 7 6.00 5.00 5.00 6.00 6.00 5.5 to 45 days 46 day 7.5 7 7 7.00 7.00 7.00 6.00 6.00 5.5 to 90 days 91 7.5 7 7 7.00 7.00 7.00 7.00 7.00 6.75 days to 179 days 180 7 7 7.25 7.25 7.25 7.25 7.25 7.25 7.25 days to 210 days 211 7.5 7.5 7.5 7.50 7.50 7.50 7.50 7.50 7.50 days to less than 1 year 1 year 9 9 8.75 8.75 8.75 8.50 8.25 8.00 8.00 to 455 days 456 9 9 8.75 8.75 8.75 8.50 8.50 8.25 8.25 days to less than 2 years 2 years 9 9 8.75 8.75 8.75 8.50 8.50 8.25 8.25 to less than 3 years 3 years 8.75 8.75 8.75 8.75 8.75 8.50 8.50 8.25 8.25 to iess than 5 years 5 years 8.5 8.5 8.5 8.50 8.50 8.25 8.25 8.00 8.00 and upto 10 years
ALM Department, Corporate Centre, Mumbai (Source SB1.Co.in.- rate history.xls)
IT(TP)A No.389/Bang/2021 Page 20 of 24 2.9.20 The TPO is therefore directed to obtain the invoice wise details from the assessee and compute the interest on delayed receivabls by adopting SB1 short term deposit rate taking credit period of 60 days. The assessee shall co-operate with the TPO in furnishing of all the invoice wise details and other information as required in this regard.”
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:
Debtors as at March 31, 2015 Name of the Date of the Amount Due in Date of Amount Party ( Debtors) Bill Rs. receipt Received in Rs. Aditya Birla Billed in 2013- 2,96,140 Amount not 2,96,140 Minacs IT – 14 ( 4 Bills) received and Domestic Billing written off as bad debts in FY 2015-16
IT(TP)A No.389/Bang/2021 Page 21 of 24 Fire Eye 31.03.2015 5,88,491 05.05.2015 5,88,491 Cybersecurity Pvt Ltd – Domestic Billing 16.04.2015 46,52,198 21.04.2015 6,25,17,499 25.05.2015 5,33,77,488 25.06.2015 Galaxe Inc. USA 31.03.2015 42,43,88,892 6,26,47,494 – Export Invoice 14.07.2015 1,25,18,122 21.07.2015 5,35,89,978 07.08.2015 94,63,107 21.08.2015 6,11,91,396 09.09.2015 65,63,702 22.09.2015 5,81,01,095 08.10.2015 1,03,81,729 20.10.2015 2,93,85,084 Total 42,52,73,523 42,52,73,523 Debtors as at March 31, 2016 Name of the Date of the Amount Due Date of Amount Party ( Debtors) Bill receipt Received Fire Eye 03.03.2016 2,93,910 06.04.2016 2,93,910 Cybersecurity 31.03.2016 2,93,910 27.04.2016 2,93,910 Pvt Ltd – Domestic Billing United Health 21.01.2016 8,55,780 14.04.2016 8,55,780 Group Information 15.03.2016 4,55,672 31.05.2016 4,55,672 Services P Ltd – Domestic Billing 31.03.2016 5,77,468 31.05.2016 5,77,468
12.04.2016 1,45,35,287 22.04.2016 8,54,20,043 06.05.2016 1,55,80,529 24.05.2016 8,06,96,974
IT(TP)A No.389/Bang/2021 Page 22 of 24
10.06.2016 1,85,56,752 Galaxe Inc. USA 31.03.2016 54,11,23,293 21.06.2016 8,71,61,983 – Export Invoice 08.07.2016 1,54,21,453 20.07.2016 8,68,99,986 09.08.2016 2,26,62,800 25.08.2016 9,33,05,001 08.09.2016 1,73,92,489 22.09.2016 34,89,996 Total 54,36,00,033 54,36,00,033 It was submitted that since the debtors were realized within the allowed credit period, computation of notional interest on the outstanding does not arise.
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
IT(TP)A No.389/Bang/2021 Page 23 of 24 interest for the whole year on this average balance receivable after treating it as a loan, after reducing the allowed credit period of 180 days from 365 days and has charged interest on the estimated average balance as explained above for an assumed delay of 185 days. In our view that as per contract with the holding company for providing software development services the credit period agreed is 180 days. And thus interest on delay if any, may be charged on invoice wise receipt exceeding the agreed credit period of 180 days. Since there is no delay whatsoever in realization of receivables, there was no question of attributing notion interest on delayed receivables and making any addition.
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.