Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, HYDERABAD BENCH “A”, HYDERABAD
Before: SMT P. MADHAVI DEVI & SHRI S. RIFAUR RAHMAN
PER S. RIFAUR RAHMAN, A.M.:
This appeal filed by the assessee is directed against the order dated 22/09/2017 of CIT(A) – 5, Hyderabad for AY 2013-14. In the appeal, the assessee is contesting the ALP adjustment on account of interest on receivables by raising the following grounds of appeal:
“1. That on the facts and circumstances of the case and in law, the Ld. Commissioner of Incometax (Appeals) ["CIT(A)") erred in confirming the transfer pricing adjustment on account of interest on outstanding receivables from Associated Enterprise (‘AE').
The on the facts and circumstances of the case and in law, the Ld. CIT (A) erred in not appreciating the fact that such outstanding receivables cannot be equated to 'capital financing' under the amended definition of international transaction u/s 92B.
2 ITA No. 1927/Hyd/17 United States Pharmacopeia India Pvt. Ltd., Hyd. 3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in confirming the notional adjustment made by the Ld. AO / Ld. TPO towards interest on receivables by completely ignoring the Jurisdictional Tribunal ruling in the case of Pegasystems Worldwide India Private Limited (ITA No 1758/Hyd/2014).
That on the facts and circumstances of the case and in law, the Ld. CIT (A) erred in confirming the adjustment made by the Ld. AO / Ld. TPO in relation to the outstanding receivables from its AEs, by disregarding the fact that such receivable had arisen out of services transaction.
That on the facts and circumstances of the case and in law, the Ld. CIT (A) erred in confirming the notional adjustment towards interest on receivables from its AEs by completely ignoring that no interest was charged on receivables from non- AEs.
That on the facts and circumstances of the case and in law, the Ld. CIT (A) erred in confirming the notional adjustment made by the Ld. AO / Ld. TPO towards interest on receivables as held in the case of Evonik Degussa India Private Limited (ITA No 7653/Mum/2011).
Without prejudice to the above grounds, that on the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in directing the Ld. AO / Ld. TPO to consider the domestic term deposit rates of State Bank of India prevailing as on various dates for FY 2012-13 instead LlBOR while computing the notional interest on the outstanding receivables.
The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.”
The only issue before us is, ALP adjustment with regard to interest on receivables. Brief facts relating to the above grounds of appeal are, assessee is engaged in the business of promotion and availability of good quality therapeutic products filed its return of income for the AY 2013-14 on 29/11/2013 admitting income of Rs. 6,52,37,970/-. The return of income was processed u/s 143(1) of the Act. Subsequently, the case was selected for scrutiny under CASS.
3 ITA No. 1927/Hyd/17 United States Pharmacopeia India Pvt. Ltd., Hyd. Accordingly, notices u/s 143(2) and 142(1) were issued and served on the assessee.
2.1 During the year under consideration, assessee has entered into international transactions and accordingly, the case was referred to Transfer Pricing Officer (TPO) for determining ALP. Assessee has entered into following international transactions:
AE Nature of transaction Amount (Rs. Provision of testing & 57,78,86,457 certification services Provision of customer 3,77,57,019 outreach services USP Holding Interest on ECB Loan 1,33,79,306 LLC, USA Repayment of ECB Loan 3,89,62,000 ECB Loan outstanding 30,45,80,080 Interest on ECB loan 11,39,224 outstanding Investment in equity shares 21,54,99,996 Reimbursement of expenses 1,95,58,980 Payables 2,98,77,923 Receivables 13,95,178
2.2 Assessee also carried out TP study and with regard to outstanding receivables, assessee was asked to furnish the details of receivables such as date of invoice, invoice amount, amount received out of such invoice with date of receipt and the balance outstanding. After considering the submissions of the assessee, it was noticed by the TPO that in the intercompany agreements with regard to payments, only 30 days credit period is allowed for making payments. Accordingly, he proposed to charge interest @ 14.45% on borrowed payments after allowing 30 days credit period and accordingly, assessee was asked to explain. Assessee vide its reply dated 28/10/2016, submitted the details of receivables and objected of such proposal of charge of interest on receivables as it should not be equated to capital financing and relied upon certain case law. TPO after considering the objections of the assessee observed that as per
4 ITA No. 1927/Hyd/17 United States Pharmacopeia India Pvt. Ltd., Hyd.
the insertion of explanation in section 92B, international transaction include receivables. According to him, once receivables are international transactions, then, its ALP has to be determined. In such situation, any independent party would like to receive its funds within the credit period allowed and, if not, would normally charge interest. He relied on the case of Logix Micro Systems Ltd., 42 SOT 525, in which, Tribunal held that a reasonable period should be provided as ‘interest-free’ period and no interest should be calculated for such period. Accordingly, TPO has calculated ALP adjustment as per the below table after 30 days grace period and charged interest @ 14.45%.:
Invoice Date of raising Amount Received date Delay in Delay after Interest No invoice (MM/DD/YYYY) No of days 30 days adjustme (MM/DD/YYYY) credit nt period proposed 162 9/8/2012 208153 9/17/2013 374 344 28348 252 12/3/2012 190528 9/17/2013 288 258 19466 253 12/4/2012 409699 9/17/2013 287 257 41684 254 12/7/2012 156097 11/13/2013 341 311 19219 255 12/11/2012 194700 11/13/2013 337 307 23664 256 12/11/2012 131611 9/17/2013 280 250 13026 278 12/21/2012 245244 9/17/2013 270 240 23302 279 12/21/2012 358270 9/17/2013 270 240 34041 280 12/21/2012 254677 9/17/2013 270 240 24198 301 1/9/2013 198680 9/17/2013 251 221 17383 302 1/9/2013 121846 9/17/2013 251 221 10661 303 1/10/2013 138609 9/17/2013 250 220 12072 304 1/17/2013 100702 9/17/2013 243 213 8492 305 1/17/2013 129278 9/17/2013 243 213 10901 306 1/28/2013 57029 9/17/2013 232 202 4561 307 1/28/2013 59345 9/17/2013 232 202 4746 308 1/28/2013 133176 9/17/2013 232 202 10650 309 1/28/2013 212661 9/17/2013 232 202 17006 310 1/28/2013 161986 9/17/2013 232 202 12954 311 1/28/2013 182504 9/17/2013 232 202 14595 321 2/11/2013 120211 9/17/2013 218 188 8947 322 2/11/2013 175388 9/17/2013 218 188 13054 323 2/11/2013 132157 9/17/2013 218 188 9836 324 2/11/2013 324045 9/17/2013 218 188 24118 346 2/13/2013 197709 9/17/2013 216 186 14558 347 2/13/2013 85635 9/17/2013 216 186 6306 348 2/24/2013 181959 9/17/2013 205 175 12606 349 2/25/2013 331152 11/13/2013 261 231 30284 388 2/27/2013 161132 9/17/2013 202 172 10972 389 2/27/2013 120305 9/17/2013 202 172 8192
5 ITA No. 1927/Hyd/17 United States Pharmacopeia India Pvt. Ltd., Hyd.
390 2/27/2013 64070 9/17/2013 202 172 4363 391 2/27/2013 217837 9/17/2013 202 172 14833 415 3/14/2013 123533 9/17/2013 187 157 7678 416 3/14/2013 175154 9/17/2013 187 157 10887 417 3/14/2013 131541 9/17/2013 187 157 8176 418 3/19/2013 83824 9/17/2013 182 157 5044 419 3/22/2013 94013 9/17/2013 179 149 5546 420 3/22/2013 253162 9/17/2013 179 149 14933 428 3/29/2013 69130 9/17/2013 172 142 3886 429 3/29/2013 104483 9/17/2013 172 142 5874 398 2/28/2013 2456090 5/6/2013 67 37 359767 4 399 2/28/2013 3317682 5/6/2013 67 37 485972 3 437 3/29/2013 3041282 6/14/2013 77 47 565887 3 438 3/29/2013 2624653 6/14/2013 77 47 488365 0 439 3/31/2013 9745008 10/3/2013 186 156 601841 440 3/31/2013 2692310 10/3/2013 186 156 166274 TOTAL 133625687 32,39,166
Aggrieved with the above order, assessee preferred an appeal before the CIT(A).
Before ld. CIT(A), assessee has made the following submissions relying on certain judicial decisions: a. Delay in receivables or deferred receivables would not constitute international transaction.
b. Receivables are not in the nature of ‘capital financing’ and hence would not constitute international transaction even as per the amended provisions.
c. When the primary service transactions are found to be at arm’s length, adjustment could be made on account of deferred receivables.
d. Receivables are closely linked with the principal transaction of provision of service, and not an independent international transaction. Re-characterising the transaction as loan transaction is not permissible.
e. Notional interest cannot be imputed on receivables when there is no finance cost to the assessee and when it has no external borrowings or when the assessee is a debt free company.
6 ITA No. 1927/Hyd/17 United States Pharmacopeia India Pvt. Ltd., Hyd. 5. After considering the submissions of the assessee, the CIT(A) has confirmed the findings of TPO with regard to interest on receivables as ALP adjustment. However, he has given some concession with regard to rate of interest to be charged. He has remitted this matter back to AO/TPO to consider the rate of interest on domestic term deposit of SBI instead of 14.45% with a clear cut direction to restrict the interest up to the end of the year vide paras 5.12 and 5.13 of his order.
Aggrieved with the order of CIT(A), the assessee preferred an appeal before us making similar submissions as was made before the ld. CIT(A) and also brought to our notice the decision of the coordinate bench of this Tribunal in the case of GSS Infotech Ltd., in ITA No. 497/Hyd/2015, order dated 29/04/2016, a copy of which has been filed on record.
Ld. DR, on the other hand, relied on the order of CIT(A).
Considered the rival submissions and perused the material on record. In the case of GSS Infotech Ltd. (supra), the coordinate bench on similar set of facts and ground as raised in this appeal, held as under: 11. We have considered the issue and examined the contentions. As seen from assessee's contentions, assessee is neither charging interest on any of the receivables outstanding. There is also no basis for adopting only two months as credit period. RBI itself allows an year for the amounts to be realised, if they are in foreign exchange. Whether it is AE or non-AE, it is in the interest of business that assessee receives the foreign exchange early so that it can claim deduction u/s. 10A. Therefore, in our view, putting a limit of two months of credit period itself is arbitrary. Moreover, as seen from the calculation provided in page 7 of the assessment order, the date of realization was shown as 02- 02-2011 and interest was levied from 01-04-2010 to 02- 02-2011 which is not pertaining to the year under consideration. As far as this year is concerned, the invoices raised on 31-12-2009 were outstanding only for a period of
7 ITA No. 1927/Hyd/17 United States Pharmacopeia India Pvt. Ltd., Hyd. three months by the end of the accounting year. We are of the opinion that this period is reasonable and so no interest can be levied, just because amounts are shown as 'outstanding'. Accordingly, we cancel the interest levied and allow assessee's contentions. Grounds are considered allowed.
As the issue under consideration is materially identical to the above decision, respectfully following the same, we set aside the order of CIT(A) and allow the grounds raised by the assessee on this issue.
In the result, appeal of the assessee is allowed. Pronounced in the open Court on 11th May, 2018.
Sd/- Sd/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 11th May, 2018 kv Copy to:-
1) United States Pharmacopeia India Pvt. Ltd., Plot No. D6 & D8, IKP Knowledge Park, Genome Valley, Turkapally, Shamirpet, Hyderabad – 500 101. 2) DCIT, Circle – 17(2), Signature Towers, Kondapur, Hyderabad - 84. 3) CIT(A) –5, Hyderabad. 4) Pr. CIT - 5, Hyd. 5) The Departmental Representative, I.T.A.T., Hyderabad. 6) Guard File