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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI. CHANDRA POOJARI & SMT. BEENA PILLAI
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER Present appeal by the assessee has been filed by assessee against the final assessment order dated 30.08.2021 passed by the National Faceless Appeal Centre (NFAC), Delhi relating to Assessment Year 2017-18 on following grounds of appeal: “The grounds hereinafter taken by the Appellant are without prejudice to one another. I. Transfer Pricing
1. The learned Assessing Officer ("AO"), learned Transfer Pricing Officer ("learned TPO") and the Honourable Dispute Page 2 of 9 IT(TP)A No. 566/Bang/2021 Resolution Panel ("DRP") grossly erred in making an adjustment of INR 3,48,38,463/- with respect to the international transaction rendered by the Appellant under section 92CA of the Income-tax Act, 1961 ("the Act").
2. The learned TPO erred in law and facts by charging notional interest on outstanding trade receivables and thereby erred in making an addition of INR 3,48,38,463/- thereby: a. Erred in not considering that receivables cannot be considered as an international transaction and it does not fall within the purview of capital financing as stated by Section 92B of the Act. b. Erred in not appreciating the fact that the Act provides for taxing only real income whether received or accrued under the normal provisions. c. Erred in not appreciating the fact that transfer pricing adjustment cannot be made on a hypothetical and notional basis unless there is material on record that there has been under charging of real income. d. Erred in imputing interest on delayed receivables without giving cognizance to the fact that the primary transaction has been tested by the TPO and has been accepted to be at arm's length while selecting the Transactional Net Margin Method ("TNMM") during the transfer pricing proceedings after considering working capital adjustments.
3. Without prejudice to the above grounds, the Hon'ble DRP erred in: a. not considering the fact that the Appellant is a debt free company and no interest is to be computed on the notional interest; b. not considering the fact that outstanding receivables forms part of the working capital adjustment and therefore no separate adjustment should be made on notional interest.
4. Without prejudice, the learned AO/ learned TPO/ Hon'ble DRP erred in ignoring the fact that as on 31 March 2017, there exists outstanding payables pertaining to the dues owned by the Appellant to various AEs (wherein no interest has been charged by or paid to the AEs) which ought to have been netted off from the outstanding receivables from AEs before proposing TP adjustment in connection with notional interest on outstanding receivables from AEs.”
2. Brief facts of the case are as under: The assessee is a company providing Assembly / Manufacturing activity and Engineering Design Services to its Associated Page 3 of 9 IT(TP)A No. 566/Bang/2021 Enterprises (“AE”). The assessee adopted TNMM as the MAM for the Manufacturing segment, which was accepted by the TPO. However, the Ld.TPO imputed cost to the outstanding receivables and computed interest for the same.
The Ld.TPO held that the outstanding receivables from the AE are of the nature of loan facility given to the AEs and imputed interest at the rate of 6 month LIBOR plus 400 basis points, which worked out to 5.87%, leading to an adjustment of INR 1,72,72,093/-. The Ld.TPO proposed the adjustment in respect of Interest on Outstanding Receivables – INR 1,72,72,093/-. The Ld.AO passed the draft assessment order incorporating the adjustment proposed by the Ld.TPO on interest on receivables. The Ld.AO also disallowed Rs. 17,02,430/- u/s. 40(a)(ia) for the non-deduction of TDS. Aggrieved by the draft assessment order, the assessee filed objections before the DRP. The DRP directed the Ld.AO to adopt SBI short term deposit interest rate and to recompute the adjustment made to the total income thereby increasing the adjustment by INR 3,48,38,463/-. It is submitted that the DRP did not issue a show cause notice or granted any opportunity to the assessee before proposing enhancement in respect of the proposed adjustment by the Ld.TPO. The Ld.AO on receipt of the DRP directions computed addition in the hands of the assessee at Rs. 3,48,38,463/-. Aggrieved by the final assessment order, the assessee filed appeal before this Tribunal.
Page 4 of 9 IT(TP)A No. 566/Bang/2021 4. The only issue contested by the assessee in the grounds raised are regarding interest imputed on outstanding receivables. We have perused the submissions advanced by both sides in the light of records placed before us. In our view, the entire adjustment deserves to be revisited by the Ld.AO / TPO in the light of the following observations. Ld.TPO computed interest on outstanding receivables at the rate equal to 5.87 % PLR (6 months LIBOR +400 basis points). The DRP directed the Ld.AO to apply short term deposit rate of SBI prevailing for financial year relevant to assessment year under consideration hat lead to enhancement.
5. The Ld.AR submitted that authorities below disregarded business/commercial arrangement between the assessee and its AE's, by holding outstanding receivables to be an independent international transaction. Ld.Counsel placed reliance on decision of Delhi Tribunal in Kusum Healthcare (P.) Ltd. v. Asstt. CIT reported in (2015) 62 taxmann.com 79 deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT v. Kusum Health Care (P.) Ltd. reported in (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 Hon’ble Delhi Tribunal in case of Bechtel India v. Dy. CIT reported in (2016) 66 taxmann.com 6, which 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.
Page 5 of 9 IT(TP)A No. 566/Bang/2021 6. It has been submitted by Ld.Counsel 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. On the contrary Ld.CIT DR submitted that interest on receivables is an international transaction and Ld.TPO rightly determined 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 v. Patni Computer Systems Ltd. reported in (2013) 215 Taxman 108, 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?' 8. He pointed out that while answering the above question, Hon'ble Bombay High Court noticed that amendment to section 92B has been carried out by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Page 6 of 9 IT(TP)A No. 566/Bang/2021 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. In so far 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. reported in (2015) 55 taxmann.com 523 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.
Finance Act, 2012 has 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;….' 10. We note 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 Page 7 of 9 IT(TP)A No. 566/Bang/2021 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 debt arising during course of business becomes international transactions, calling for computing its ALP.
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 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. We also perused decision relied upon by the Ld.AR. In our considered opinion, these are factually distinguishable and thus, we reject argument advanced by the Ld.AR.
Alternatively, it has been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and lones and advances to international transaction would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions (P.) Ltd. v. Dy. CIT reported in (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-à-vis the Page 8 of 9 IT(TP)A No. 566/Bang/2021 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 characterized as international transactions."
In view of the above, we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the 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 such fresh proceedings. Accordingly Ground 3.1 stands allowed for statistical purposes. Accordingly, the grounds raised by assessee stands allowed for statistical purposes. In the result, the appeal filed by the assessee stands allowed for statistical purposes. Order pronounced in the open court on 16th March, 2022.