CURA TECHNOLOGIES LIMITED, HYDERABAD,HYDERABAD vs. DCIT, CIRCLE-1(2), HYDERABAD, HYDERABAD

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. 301/Hyd/2017 Assessment Year: 2012-13 M/s Cura Technologies vs. Dy. CIT, Circle-1(2), Ltd., Hyderabad. Hyderabad.

PAN – AADCS2135A (Applicant) (Respondent)

Assessee by : Shri P. Murali Mohan Rao Revenue by : Dr. K. Srinivas Reddy

Date of hearing : 13-02-2018 Date of pronouncement : 11-05-2018 ORDER PER P. MADHAVI DEVI, J.M.: This is assessee’s appeal for the A.Y 2012-13, against the final assessment order dated 16.1.2017 passed u/s 143(3) r.w.s 144C of the IT Act.

2 ITA.No.301/Hyd/2017, M/s Cura Technologies, Hyderabad. the assessee and its AE a reference was made to the Transfer Pricing Officer (TPO) u/s 92CA of the IT Act for determination of Arm’s Length Price of the said transactions. The TPO passed an order u/s 92CA(3) of the IT Act on 29.01.2016 proposing Transfer Pricing adjustment and, accordingly, a draft assessment order was passed. Against such draft assessment order, the assessee preferred its objections before the DRP, and DRP has passed directions u/s 144C(5) of the IT Act on 09.12.2016. Consequent thereto, the final assessment order was passed, against which, the assessee is in appeal before us.

3 ITA.No.301/Hyd/2017, M/s Cura Technologies, Hyderabad. transactions with its AE. In support of his contentions, the Ld. Counsel for the assessee has placed reliance upon the following decisions:

i. Apollo Health Street Vs DCIT, reported in (2014) 45 taxmann. Com 507. ii. APP Labs Technologies P Ltd., Vs. DCIT, reported in (2014) 42 taxmann. Com 11. iii. CIT Vs. Global Vantedge Pvt Ltd.,, reported in (2014) 45 taxmann.com 475. 4.1 The Ld. DR, on the other hand, submitted that there is no concept of global profit and therefore that cannot be considered as one of the issues to be considered before making a reference to the TPO for determination of the Arm’s Length Price. He referred to the order of the DRP, wherein a categorical finding has been given by the DRP on this issue.

4.2. Having regard to the rival contentions and the material on record, we find that in the case of Apollo Health Street (supra), the Tribunal was considering the case of an assessee, who is the parent company of the group, and all the profits were flowing back to India and the DRP had given a finding that the TP adjustment could not be higher than the consolidated profits of the group. On appeal by the assessee against the order of the A.O not giving effect to the direction of the DRP, the Tribunal had

4 ITA.No.301/Hyd/2017, M/s Cura Technologies, Hyderabad. held that the directions of the DRP have to be given effect to by the A.O. There is no finding of the Bench as to whether the global profits have to be considered for reference to the TPO for the determination of the Arm’s Length Price. Therefore, said decision is not applicable to the facts of the case before us.

4.3 In the case of APP Labs Technologies P Ltd., (supra), the DRP had allowed the assessee’s ground with regard to restriction of TP adjustment to global profits of the group from international transactions and the Tribunal had only remitted the matter back to the file of the A.O for deciding the issue afresh, in conformity with the directions given by the DRP. Therefore, this decision is also not applicable to the facts of the case before us.

4.4 In the case of Global Vantedge Pvt Ltd, (supra), the Hon’ble Delhi High Court was considering the case of an assessee on an issue, where the departmental representative had not been able to controvert the findings of the CIT(A), and in these circumstances, it was held that the Tribunal was right in concurring with the view taken by the CIT(A). Therefore, this decision also does not apply to the facts of the case before us. In all the above three

5 ITA.No.301/Hyd/2017, M/s Cura Technologies, Hyderabad. decisions, there was no decision as to correctness of the order of the DRP, and therefore it cannot be said to have been be decided on merits of the issue. In view of the same, the assessee’s ground of appeal No. 4(l) is rejected.

5.1 The Ld. DR, though relied upon the orders of the authorities below, fairly submitted that the issue may be remitted to the file of the TPO for considering the segmental results of the assessee as well as comparable companies.

5.2 In view of the agreement of the both parties, we remit the issue to the file of the TPO with a direction to consider only the segmental results of the assessee as well as the comparables, for determining at the Arm’s Length Price of

6 ITA.No.301/Hyd/2017, M/s Cura Technologies, Hyderabad. the international transaction.. In the result, the ground of appeal No. 4 is partly allowed.

“29. We have carefully considered the rival contentions and perused the record. The ITAT, Delhi Bench in the case of Bharati Airtel Ltd., (supra) has considered an identical issue which was re-affirmed in the case of Siro Clinpharma Pvt. Ltd., vs. DCIT (order dated 31st March, 2016). The Bench observed that transfer pricing is a legislation seeking the tax-payers to organise their affairs in a manner compliant with the norms set- out. In short, it is an anti abuse legislation which tells you as to what is the acceptable behaviour but it does not trigger levy of tax in a retrospective manner because no party can be asked to do an impossibility. Analysing further the Bench observed that though Explanation to Section 92B is stated to be clarificatory,

7 ITA.No.301/Hyd/2017, M/s Cura Technologies, Hyderabad. it has to be necessarily treated as effective from the A.Y. 2013- 2014 and in this regard, relied upon the observations of the Hon'ble Delhi High Court in the case of Skies Satellite. We have also analysed the case law relied upon by the Ld. D.R. and also the provisions of the Act. In our considered opinion, the view taken by the Delhi Bench of ITAT in the case of Bharati Airtel Ltd., (supra) is one of the possible views on the matter and so long as there is no binding decision of any other Higher Forum taking a contrary view, the one which is favourable to the assessee has to be adopted even though other Benches have taken a different view. We, therefore, hold that the Explanation to Section 92B cannot be applied retrospectively and for the years under consideration the assessee having not incurred any costs in providing corporate guarantee it would not constitute "International Transaction" within the meaning of Section 92B of the Act and consequently, ALP adjustment is not warranted on this aspect. 6.1 Respectfully following the same, we hold that the corporate guarantee is not an international transaction for the A.Y 2012-13 and the ground of appeal No. 5 is accordingly allowed.

8 ITA.No.301/Hyd/2017, M/s Cura Technologies, Hyderabad. LIBOR plus percentage and not domestic rates as proposed by the A.O as the AE is a foreign company. The TPO, however, observed that no independent party would advance such huge funds without suitable returns. He held that under Arm’s Length situation, how much rate of interest could be earned is to be seen and that RBI does not regulate the interest rate chargeable on the out bound loans. He observed that the advances from India have been subsequently converted into the currency of the geographies location of AE and therefore, the PLR of the Indian banks ought to be applied for external CUP. He, therefore, charged the interest @ 14.75% and proposed the adjustment. The DRP confirmed the order of the A.O.

7.1 The Ld. Counsel for the assessee submitted that where the assesse has made advances to both AE as well as non AE’s and has not charged any interest to either of the parties, then there can be no adjustment, particularly, when the assesse has own funds / interest free funds. In support of this contention, he placed reliance upon the following decisions:

i. Batronics India Ltd. Vs DCIT, reported in ITA No. 259/Hyd/2017. ii. KAR Therapeutics & Estates Pvt Ltd. Vs DCIT, reported in ITA No. 86/Hyd/2016.

9 ITA.No.301/Hyd/2017, M/s Cura Technologies, Hyderabad. iii. GSS infotech Ltd. Vs ACIT, reported in ITA No. 497/Hyd/2015. 7.2 The Ld. DR, however, supported the orders of the authorities below.

7.3 Having regard to the rival contentions and material on record, we find that in the case of Batronics India Ltd. Vs DCIT(supra), the tribunal was considering the case of an assessee, where the transaction of investment was recharacterised as loan and the TPO had made a TP adjustment towards interest free loans and advances. The Tribunal at para 20 of its order has considered the issue and has held as under:

“20. Considered the rival submissions and perused the material facts on record. Assessee has transferred funds to its AE as investment and the same was classified in the balance sheet as’ loans and advances. However, it is only a classification of accounting entry in the books, but, what is relevant and important is whether such transfer of funds were duly treated as investment and accordingly shares were allotted in the subsequent AY. Assessee has submitted share allotment certificate as evidence. Since the transfer of funds were duly accounted by the AE and there is no restriction on the part of the AE to allot shares in the same AY of receipt of funds, as long as the shares allotted, it gives true nature of the transaction. In the given case, even there is no outstanding balance in the books of assessee as loans and advances, the same transaction was duly justified by receiving allotted shares in the subsequent AY. In our considered view, there is no element of profit in the above transaction. Moreover charging of interest is depending upon the contractual obligations between the parties. In the given case, assessee has transferred funds with an intention to make investment, it cannot be treated as international transaction as held by various courts, particularly, in the case of KAR

10 ITA.No.301/Hyd/2017, M/s Cura Technologies, Hyderabad. Therapeutics & Estates Pvt. Ltd. (supra) wherein the coordinate bench has held as under: “9. Considered the submissions of both the parties and perused the material facts on record as well as the orders of revenue authorities. There is no dispute that the assessee had remitted $ 3387182 towards investment in share capital. The shares were allotted to the extent of $ 2654797 in the same AY. The subsidiary company has treated the balance remittance as interest free unsecured loan and repayable on demand in their financial statement. In the next AY, the subsidiary company has allotted the shares on 15/03/2012. Now, can these transactions be treated as international transaction, which qualifies for ALP adjustment. In our considered view, the amount $ 732.385 is towards investment in share capital of the subsidiary outside India and the transactions are not in the nature of international transaction referred to section 92-B of the IT Act and transfer pricing provisions are not applicable as there is no income as well as there is no mutual agreement between the companies for such payment of interest. Moreover, the subsidiary company also disclosed as ‘interest free. Moreover, in the similar situation with uncontrolled transaction, the allottee company in normal course of transaction will not be expected to receive any interest leave away the international transaction. Without any certainty or any agreement on receiving any interest but merely relying on the accounting method and disclosure of the subsidiary in their financial statement cannot lead to this transaction as international transaction which require ALP adjustment. Assessee had relied on the case of Prithvi Information Solutions Ltd. (supra) wherein on the similar set of facts and circumstances, the coordinate bench of this Tribunal has held as below: “10. We have considered the rival submissions, perused the record and have gone through the orders of the authorities below as well as decisions cited. In our opinion, the amount representing 2118.84 is towards investment in share capital of the subsidiaries outside India as the transactions are not in the nature of transactions referred to section 92-B of the IT Act and the transfer pricing provisions are not applicable as there is no income. Accordingly, we set aside the order passed by the CIT u/s 263 and that of the AO is restored and the grounds raised by the assessee in this regard are allowed.” As held in the above, we are inclined to treat the above transaction as not an international transaction and accordingly ground No. 1 of the assessee is allowed. Since we have adjudicated ground No. 1 as allowed, the ground Nos. 2 & 3 are only academic in nature and accordingly, dismissed.”

11 ITA.No.301/Hyd/2017, M/s Cura Technologies, Hyderabad. Respectfully following the decision of the coordinate bench in the said case, we are inclined to treat the above transaction as not an international transaction and accordingly the ground raised on this issue is allowed. 7.4 In the case of GSS Infotech Ltd. Vs ACIT (supra), the

Tribunal has considered the similar issue and at para 4.3 of its order, has held as under:

“4.3. We have considered the rival contentions and perused the documents placed on record. From the orders of the TPO as well as the AO it is not clear whether the amount advanced is for the purpose of equity or the amounts advanced originally as loans and later converted to equity. Since facts are not clear, we are unable to give any finding whether the amounts advanced were in the nature of equity or not? TPO order in fact shows that the sums were shown as outstanding and he categorized them as interest free loans. There are also opening balances pertaining to earlier year to an extent of Rs. 43,12,68,000/-. It is not known whether department has accepted the advances in earlier year without any TP adjustment. In the absence of relevant facts, it is difficult to give a finding and apply various case law. Therefore, we are of the opinion that the facts required to be examined by the AO afresh. First of all, AO has to ascertain the nature of advances given to assessee whether it is loan or equity and how they are reflected in the respective accounts in the respective years. If assessee has invested them as investment in subsidiary they would be done under the head ‘investment’ otherwise, the same would figure under the head ‘loans and advances’. Likewise, if the amount is advanced as the share capital, the same would also be shown as share application money in the subsidiary hands. These require factual verification. It is also required to verify whether the funds provider or from Zero coupon bonds subscribed abroad or funds from India and necessary approvals from RBI, SEBI, Company Law Board and other statutory authorities governing these funds and finances. Consequently, AO is directed to examine assessee’s statements of accounts and also the necessary resolutions passed and information furnished to authorities to establish the nature of amounts advanced. If the amount is advanced towards loans, then, the transaction would be an international transaction and whether interest can be levied or not has to be examined in the light of the various decisions relied upon. What we also notice is that

12 ITA.No.301/Hyd/2017, M/s Cura Technologies, Hyderabad. many of the decisions are not in the context of TP provisions but in the context of general income tax computation. Therefore, the issue is to be re-examined viz-a-viz case law relied upon and the applicable provisions of the Act. Then, the rate of interest would be an issue. In case interest is levyable, then, LIBOR+2% is generally accepted as the rate of interest to be levied on international transactions by various decisions of the Co- ordinate Benches. Therefore, without adjudicating the issue on this, we set aside the matter to the file of AO/TPO to re-examine the facts afresh and then decide the issue accordingly, keeping in mind the provisions and the case law relied upon. Assessee should be given an opportunity to substantiate the contentions. Ground Nos. 1 & 2 are accordingly considered allowed for statistical purposes. 7.5 In the case before us, the nature of advances and the purpose of advances are not mentioned. Respectfully following the decision of the Coordinate Bench of this Tribunal in the case of GSS Infotech Ltd. Vs ACIT, we remit the matter back to the A.O for consideration of the purpose of the advances and if it is a trade advance, thus no interest shall be leviable, but if it is treated as a loan, then the rate of interest would be at LIBOR plus percentage as directed by the Tribunal in the case of GSS infotech Ltd. Vs ACIT. Thus, the ground of appeal No. 6 is treated as partly allowed for statistical purposes.

13 ITA.No.301/Hyd/2017, M/s Cura Technologies, Hyderabad. therefore the assessee should have charged interest on the same after allowing reasonable period, i.e. one month credit perid. The DRP confirmed the view of the TPO and the assessee is in second appeal before us.

8.1 The Ld. Counsel for the assessee relied upon the decision of the Tribunal in the case of Batronics India Ltd. Vs DCIT (supra) and also GSS infotech Ltd. Vs ACIT (supra) in support of his contentions that no interest is chargeable on outstanding receivables from the AE and even if it is chargeable, the credit period cannot be only one month, has held by the TPO.

8.2 The DRP relied on the orders of the authorities below.

8.3 Having regard to the rival contentions and material on record we find that in the case of GSS infotech Ltd. Vs ACIT (supra), the coordinate Bench of the Tribunal, has considered similar issue and at paras 9 to 11, has held as under:

“9. It was the submission of assessee that first of all, there cannot be any levy of interest as assessee is not charging interest from any other person whether AE or non-AE. Assessee is also not paying any interest amount to anybody. Further referring to the table of the AO in page 7 of the order, it was submitted that most of the invoices were dated 31-12-2009 and the year ends on 31-03-2010. Thus, if at all there is a delay it was only for a month in the impugned accounting year,

14 ITA.No.301/Hyd/2017, M/s Cura Technologies, Hyderabad. whereas, AO levied for a period beyond accounting year also which cannot be upheld. 10. Assessee relied on the following case law that no interest can be charged on credit which are given in the course of business.

Pegasystems Worldwide India Pvt. Limited, Hyderabad. ITA No. 1758/Hyd/2014 No interest can be Indo American charged on mobilization Jewellery Ltd Vs. Interest charged advance & it cannot be Dy. Commissioner on treated as loan as it of Income Tax, has been given during Circle-9(2), Mumbai. Receivables the course of business. [2012] 18 taxmann.com 303 (Mum.) Litnas India (P.) Ltd., Vs. ACIT [2012] 27 taxmann.com 300 (Mumbai-Trib.) Evonik Degussa India (P.) Ltd., Vs. ACIT – OSD Circle- 3(1), [2012] 28 taxmann.com 285 (Mumbai) Nimbus Communications Ltd., [2013] 34 taxmann.com 298 (Mumbai-Trib.)

10.1. The DR however, while accepting that levy was for the period beyond the accounting year, however, justified the levy of interest on receivables. 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,

15 ITA.No.301/Hyd/2017, M/s Cura Technologies, Hyderabad. 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 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”. 8.4 In the case of Batronics India Ltd. Vs DCIT (supra)

also the Tribunal at para 21 to 23 has held as under:

“21. As regards the addition of Rs. 7,05,11,490/- towards interest on receivables, the ld. AR submitted that change of nature from mobilization advances to receivables is not warranted. He submitted that as the case of non-charging of interest in the controlled transactions is not comparable with that of non charging from the international transactions, no transfer pricing adjustment can be made on this count. He submitted that since assessee company is not paying any interest on the amounts received by it from the contractor, this adjustment is not warranted. He submitted that no interest can be charged on receivables as assessee is not charging interest from both AE and Non AE for delayed payments. He relied on the following cases: 1. EKL Appliances Ltd. Vs. CIT, Delhi High Court, ITA No. 1068/2011 2. CIT Vs. Indo American Jewellery Ltd., ITA No. 1053 of 2012 3. GSS Infotech Ltd., Vs. ACIT, Hyd., ITA No. 497/Hyd/2015 4. Lanco Infratech Ltd. Vs. DCIT, ITA No. 450/Hyd/2016

16 ITA.No.301/Hyd/2017, M/s Cura Technologies, Hyderabad. 22. Ld. DR, on the other hand, relied on the orders of revenue authorities and further submitted that assessee has not submitted any details of outstanding before the TPO. 23. Considered the rival submissions and perused the material facts on record. This issue is squarely covered by the decision of the coordinate benches of ITAT, Hyderabad. In the case of GSS Infotech Ltd. (supra), the coordinate bench has 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 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.” 23.1 In the case of Lanco Infratech Ltd. Vs. DCIT (supra), the coordinate bench has held as under: “9. We have considered the rival contentions. It is well accepted practice that the construction industry pay advances at a certain percentage of the contract value to mobilise various resources for the execution of contract and these advances are given in the regular course of business. As seen from the facts of assessee's case, assessee is undertaking an EPC contract and has received mobilization advances as part of that. Like-wise, assessee has given some works to other parties on sub-contract basis and necessarily it has to provide mobilization advances to the parties. It is also noticed that assessee has advanced mobilization advances to both AEs and non

17 ITA.No.301/Hyd/2017, M/s Cura Technologies, Hyderabad. -AEs arid no interest has been charged from either party. Not only that assessee is also not required to pay any interest on the mobilization advances received, which are in fact more than the amounts advanced by assessee. Thus, there is complete uniformity in the act of assessee' in not charging interest from both AE and non-Ali; and also not paying interest/claiming interest for the advances received. Following the principles laid down by the Hon'ble Bombay High Court in the· case of Indo American Jewellery Ltd. Vs. CIT, Hon'ble Bombay High Court (ITA No. 1053 of 2012), we are of the view that there is no need for charging any interest on the amounts advanced as receivables. Since this amount is part of contract work, in our view it does not attract any adjustment under TP provisions. Moreover, advances given as part of contract work does not require any special addition, when the TPO was already examined and held that the transaction relating to 'work contract expenses' are within the ALP during the year. Thus, when the whole work contract is considered within the ALP, we are of the opinion that the advances given in the course of contract does not call for special adjustment. Moreover, these business advances cannot be categorized as 'loans and advances' so as to consider them for adjustment. Relying on the various case law relied upon by the Ld. Counsel, we are of the opinion that since assessee-company is not charging any interest from the AEs and non-AEs and also not paying any interest on the amounts received by it from the main contractor, this adjustment is not warranted. Respectfully following the principles laid down in various case law relied upon by assessee above, we have no hesitation in deleting the above adjustment. As seen from the order of the TPO in the next year AY 2013-14, he has considered the same- issue and has not made -any adjustment by stating as under: “7.5 Receivables: With regard to receivables it is noticed from the information filed that the company is not exporting and supplying any goods or services to AEs .. The balances appearing in the Balance Sheet are mobilization advances which are to be adjusted against future supply bills and hence no adverse inference is drawn.” Since the TPO order is in tune with the provisions of the Act and the principles laid down on this issue, we are of

18 ITA.No.301/Hyd/2017, M/s Cura Technologies, Hyderabad. the opinion that no adjustment is required on the issue of mobilization advances during the impugned year also. Accordingly, grounds raised by assessee including additional grounds are allowed. Respectfully following the decision of the coordinate benches in the above cases, we cancel the interest levied and allow the ground of assessee”. 8.5 In the case before us the amount was received within a period of one year from the date of advance. Therefore, respectfully following the decision of the Coordinate Benches (supra), we hold that no interest is chargeable on the receivables. The ground of appeal No. 7 is accordingly treated as allowed.

Pronounced in the open court on 11th May, 2018.

Sd/- Sd/- (S. RIFAUR RAHMAN) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 11th May, 2018 KRK

19 ITA.No.301/Hyd/2017, M/s Cura Technologies, Hyderabad. 1) M/s Cura Technologies Ltd., C/o P. Murali & Co., CA’s, 6-3-655/2/3: 1st Floor, Somajiguda, Hyderabad - 500 082. 2) Dy. CIT, Circle-1(2), Hyderabad. 3) Dispute Resolution Panel-1, Bengaluru. 4) The Departmental Representative, I.T.A.T., Hyderabad. 5) Guard File.