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Income Tax Appellate Tribunal, HYDERABAD BENCH “A”, HYDERABAD
Before: SMT. P. MADHAVI DEVI & SHRI S. RIFAUR RAHMAN
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH “A”, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA No.2071/Hyd/2017 Assessment Year: 2013-14 Open Text Technologies Vs. DCIT, India Private Limited, Circle-16(2), Hyderabad. IT Towers, A.C. Guards, PAN: AABCV 9961 D Hyderabad-500 004. (Appellant) (Respondent) Assessee by: Smt. Suvibha Nolkha Revenue by: Sri Y.V.S.T. Sai, CIT-DR Date of hearing: 02/04/2019 Date of pronouncement: 03/05/2019 ORDER PER Smt. P. Madhavi Devi, J.M.:
This appeal filed by the assessee is against the final assessment order of the A.O. dated 09/10/2017 u/s 143(3) r.w.s 144C(5) of the Act.
Brief facts of the case are that the assessee-company, engaged in the business of providing software development services, filed its return of income for the assessment year 2013-14 on 29/11/2013 declaring total income of Rs. 6,65,650/- after claiming deduction u/s 10A of Rs. 10,98,50,500/-. The case was selected for scrutiny under CASS and the assessee was directed to provide the details. The assessee furnished the details as called for and during the assessment proceedings u/s
143(3) of the Act, the A.O. noticed that the assessee-company had entered into certain international transactions with its AE pertaining to provision of SDS during the relevant previous year. Therefore, the case was referred to the TPO u/s 92CA of the Act for determination of Arm’s Length Price (ALP) of the transaction. The TPO examined the TP study conducted by the assessee and observed that the assessee has adopted TNM method as the most appropriate method and has short-listed 26 comparables, whose average arithmetic mean was computed at 11.14% as against the PLI of the taxpayer at 15.07%. However, the TPO was not satisfied with the assessee’s TP study and observed that the assessee has adopted some different filters which has resulted in selection of inappropriate comparables and rejection of companies that are appropriate comparables. He conducted an independent search and applied certain filters and arrived at certain set of comparables and after allowing working capital adjustment (WCA), the margin of the taxpayer was held to be within + / - 3% of the average margin of the comparables. Hence, he observed that no adjustment is necessary to be proposed with respect to provision of software services.
2.1. Further, from the RPT schedule, the TPO observed that the taxpayer has outstanding receivables of Rs. 29,58,87,986/-. The assessee was asked to submit the details of raising the invoice and subsequent receipt. On going through the submissions of the assessee and on perusal of the details thereof, the TPO noticed that as per the
intercompany agreement, the credit period is 30 days for making payments. Therefore, he proposed to charge interest @ 14.45% on the delayed payments after allowing one month’s credit period. The assessee, however, objected to the same. The TPO was not convinced and levied the interest @ 14.45% after allowing credit period of 30 days. He accordingly proposed the adjustment of Rs. 668,76,476/-. Accordingly, the A.O. passed the draft assessment order, against which the assessee preferred its objections before the DRP. The DRP granted partial relief by reducing the rate of interest to the PLR rate of State Bank of India and also directed the A.O. / TPO to compute the interest only upto the end of the relevant financial year and accordingly, the final assessment order was passed against which the assessee is in before us by raising the following grounds of appeal:
“Based on the facts and in the circumstances of the case and in law, the appellant respectfully craves leave to prefer an appeal against the order passed by the DCIT, Circle-16(2), Hyderabad u/s 143(3) r.w.s 92CA(3) r.w.s. 144C(5) of the Income Tax Act, 1961 in pursuance of the directions issued by the Dispute Resolution Panel-1, Bengaluru on the following grounds: On the facts and in the circumstances of the case and in law, the Ld A.O. / DRP has (i) Imputing interest on outstanding receivables (a) Making TP adjustment amounting to Rs. 31,72,350/- by imputing interest at the rate charged by SBI on short term fixed deposits on outstanding receivables relating to sale of services to Associated Enterprise’s as on March 31st, 2013. (i) Not appreciating that the instant transaction 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.
(ii) Not appreciating the fact and circumstances surrounding the receivables and re-characterising the outstanding receivables as unsecured loans advanced to AEs. (iii) Not appreciating the fact that under TNMM, the impact of outstanding receivables on the working capital adjustments have already been taken into account in determining the arm’s length margin hence there is no need of imputing interest on outstanding receivables again. (iv) Not appreciating the fact that the receivables are consequential / closely linked to the principle transaction of provision of IT services and hence have been aggregated for determination of ALP under TNMM. (v) Without prejudice to the above, not netting off the outstanding payable of Rs. 22,82,50,006/- against outstanding receivables from its AE while determining the interest amount. (b) Without prejudice to the above, not undertaking an objective economic analysis to determine the arm’s length price of the outstanding receivables by (i) Not appreciating that the receivables due from overseas AE’s are in foreign currency and hence interest, if any, is to be benchmarked with the rates prevalent in the international market for foreign currency loans (i.e. at USD “LIBOR Plus”). (ii) Determining the arm’s length credit period as 30 days without any basis and imputing interest on credit period provided for the invoices raised relating to provision of services.” 3. The Learned Counsel for the Assessee submitted that as recorded by the TPO, the impact of outstanding receivables on the working capital adjustment has already been taken into account by the TPO in determining the Arm’s Length Margin and therefore, there is no further need of making adjustment of interest on outstanding receivables. It was also submitted that the assessee has not paid any interest on outstanding payables to its AE and therefore, the TPO ought to have netted off the outstanding payable against the outstanding receivables
from the A.O. She also submitted that there is no credit period of 30 days in the agreement as recorded by the A.E. and therefore, allowing the credit period of 30 days only is without any basis. She further submitted that the receivables due from overseas AEs are in foreign currency and hence interest, if any, is to be charged at the LIBOR + basis points and not at the PLR rate of State Bank of India as directed by the DRP. In support of her contention, she placed reliance upon the case laws filed in the form of a paper book. She also submitted that the assessee is a debt free company and therefore, there is no interest expenditure to the assessee and hence no adjustment on interest from the outstanding receivables should be made. In support of this contention, she placed reliance upon the decision of the Hon’ble Delhi High Court in the case of Principal Commissioner of Income Tax vs. M/s. Bechtel India Pvt Ltd (ITA No.379/2016, dated 21/07/2016) (para 5.2) which has been upheld by the Hon’ble Supreme Court by dismissing the SLP filed by the Revenue.
The Learned Departmental Representative, on the other hand, supported the orders of the Authorities below and placed reliance upon the decision of the Hon’ble Delhi High Court in the case of Mckinsey Knowledge Centre India (P.) Ltd vs. Principal Commissioner of Income Tax [2018] 96 taxmann.com 237 (Delhi) wherein it has been held that the interest on outstanding receivables was an international transaction and that the assessee is liable to be visited with TP adjustment on
account of interest income short charged / uncharged. He submitted that this decision of the Hon’ble Delhi High Court has been upheld by the Hon’ble Supreme Court as reported in [2019] 102 taxmann.com 439 (SC). Therefore, he submitted that the interest on outstanding receivables is an international transaction and the TPO has rightly proposed the adjustment.
Having regard to the rival contentions and the material available on record, we find that the assessee has not charged interest on outstanding receivables. We have gone through the intercompany agreement and we do not find any such clause mentioning that only 30 days of credit period is allowed for making payments as recorded by the TPO his order. Therefore, in our opinion, fixing the credit period of 30 days is without any basis. We have gone through the details of outstanding receivables and we find that in certain cases, the period has exceeded to 600 days. In most of the cases, the period was below 100 days. The Hon’ble Delhi High Court in the case of Mckinsey Knowledge Centre India (P.) Ltd (supra) has considered the issue at length and has held that the Explanation to section 92B by Finance Act, 2012 is applicable retrospectively and therefore, the assessee can be visited with the Transfer Pricing adjustment. For the sake of ready reference the relevant paras 32 and 33 of the High Court order are reproduced hereunder:
“32. Further, to address the contention of the Assessee that early or late realization of sale/service proceeds is incidental to the transaction of sale/service, and that there can be no question to benchmark the interest separately, in calculating the ALP in an international transaction, we refer to the amendment brought under Explanation to section 92B of the Act vide Finance Act, 2012, w.e.f. 01.04.2012. Clause (i) of this Explanation, gives meaning to the expression 'international transaction' in an inclusive manner. Sub-clause (c) of clause (i) of this Explanation, states as follows:
"Explanation.--For the removal of doubts, it is hereby clarified that—
(i) the expression "international transaction" shall include— (a) to (b)** ** **
(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;...."
This explanation was explained in Ameriprise India (P.) Ltd. (supra) as follows: "22. On going through the relevant part of the Explanation inserted with retrospective effect from 1.4.2002, thereby also covering the assessment year under consideration, there remains no doubt that apart from any long-term or short-term lending or borrowing, etc., or any type of advance payments or deferred payments, 'any other debt arising during the course of business' has also been expressly recognized as an international transaction. That being so, the payment/non payment of interest or receipt/non-receipt of interest on the loans accepted or allowed in the circumstances as mentioned in this clause of the Explanation, also become international transactions, requiring the determination of their ALP. If the payment of interest is excessive or there is no or low receipt of interest, then such interest expense/income need to be brought to its ALP. The expression 'debt arising during the course of business' in common parlance encompasses, inter alia, any trading debt arising from the sale of goods or services rendered in the course of carrying on the business. Once any debt arising during the course of business has been ordained by the legislature as an international transaction, it is, but, natural that if there is any delay in the realization of such debt arising during the course of business, it is liable to be visited with the TP adjustment on account of interest income short charged or uncharged. Under such circumstances, the contention taken by the assessee before the TPO that it is not an international transaction, turns out to be bereft of any force. ** ** **
The foregoing discussion discloses that non-charging or undercharging of interest on the excess period of credit allowed to the AE for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined." 33. It was similarly held in BT e-Serv (India) (P.) Ltd. v. ITO [2017] 87 taxmann.com 251 (Delhi - Trib.) as follows: "22…The argument that assessee is an interest free entity and does not pay any interest and therefore no interest shall be imputed in the outstanding invoices is also devoid of merit because it is not a case of allowance of interest expenditure in the hands of the assessee but an 'international transaction' to be benchmarked at arm's length. It is a case of determination of arm's length price of a transaction. Undoubtedly the receivable or any other debt arising during the course of the business is included in the definition of 'capital financing' as an 'international transaction' as per explanation 2 to section 92B of the Act w.e.f. 01.04.2002 inserted by the Finance Act, 2012. Therefore, even the outstanding receivable partake the character of capital financing and consequently, overdue outstanding is an 'international transaction'. The natural corollary would be of imputing interest on such 'capital financing', if same is not charged at arm's length. Therefore, we reject the contention of the assessee that outstanding receivable is not an 'international transaction' and therefore, hence, according to us, interest on it requires to be imputed." Thus, this is a redundant contention, because as has been highlighted by the ITAT, by a plain reading of the (retrospectively applicable) amendment that introduced the Explanation to section 92B of the Act by Finance Act, 2012, it is determinable that if there is any delay in the realization of a trading debt arising from the sale of goods or services rendered in the course of carrying on the business, it is liable to be visited with transfer pricing adjustment on account of interest income short charged/uncharged. Hence, the assessee's contention that the ITAT erred in concluding that charging of interest on delayed receipt of receivables is a separate international transaction which requires to be benchmarked independently, is incorrect.
The assessee therein had appealed against this decision before the Hon’ble Supreme Court and the same was dismissed by the Apex Court and therefore, respectfully following the decision of the Hon’ble Delhi High Court, we hold that that the interest on outstanding receivables is an international transaction for the relevant assessment year and needs determination of ALP of the same.
With regard to the assessee’s objection that the working capital adjustment has already taken care of the impact of the outstanding receivables, we find that there is no working given by the TPO in the TP order nor has it been annexed to the TP order. We do not know whether the interest on outstanding receivables factored in the computation of working capital adjustment. Therefore, we are unable to give a finding as to whether the interest on outstanding receivables was a factor considered in the working capital adjustment given by the TPO.
With regard to the assessee being a debt free company and there being no interest expenditure, we find that the assessee has relied upon the decision of the Hon’ble Delhi High Court in the case of Bechtel India Pvt Ltd in ITA No. 1478/Del/2015, dated 21/07/2016 confirming the ITAT order and the Hon’ble Supreme Court dismissing the SLP of the Revenue vide order dated 21/07/2016. But we find that the Hon’ble Supreme Court in the latest order dated 04/02/2019 has dismissed the SLP filed by the appellant against the decision of the Hon’ble Delhi High Court in the case of MC Kinsey Knowledge Centre India (P.) Ltd dated 09/08/2018, wherein para 33 of its order (supra) which we have already reproduced in the above paras has held the issue in favour of the revenue. As per the law of precedents, the latest decision on an issue is to be followed. Therefore, the said contention of the assessee is also rejected.
Without prejudice to the above argument, the Learned Counsel for the Assessee has argued that the ‘LIBOR plus’ rate should be considered as an interest on outstanding receivables. In a number of cases, we have held that where the export turnover was brought in foreign exchange then international transaction should be considered in LIBOR + 200 points rate and after expiry of credit period. Therefore, we agree with the Learned Counsel for the Assessee that since the payments are to be made in foreign exchange, the interest should be charged at LIBOR plus (+) 200 basis points. Further, A.O / TPO are directed to work-out the industry average of the credit period for outstanding receivables and apply the above rate of LIBOR + 200 basis points after expiry of such credit period from the date of invoice. Needless to mention that the assessee shall be given a fair opportunity of being heard.
In the result, assessee’s appeal is partly allowed.
Pronounced in the open Court on 03rd May, 2019.
Sd/- Sd/- (S. RIFAUR RAHMAN) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated:03rd May, 2019 OKK Copy to:- 1) Open Text Technologies India Private Limited, Unit-301, Building No.14, Mind Space IT Park, Hitech City, Hyderabad – 081. 2) DCIT, Circle-16(2), I.T. Towers, A.C. Guards, Hyderabad – 500 004.
3) DCIT (TPO)-3, Hyderabad. 4) The DRP, Panel-1, Bengaluru. 5) The DR, ITAT, Hyderabad 6) Guard File