CORDYS SOFTWARE INDIA PVT.LTD., (NOW MERGED WITH OPEN TEXT CORPN. INDIA P. LTD),HYDERABAD vs. DCIT, CIR-1(2), HYD, HYDERABAD

THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH “B”, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA No.232/Hyd/2016 Assessment Year: 2011-12 Open Text Corporation vs. Dy. CIT, Circle-1(2), India Pvt Ltd., (Cordys Hyderabad. Software India Pvt Ltd is now merged with Open Tex Corporation India Pvt Ltd.,) Hyderabad. PAN- AAACB8264E

(Appellant) (Respondent) Assessee by : Shri Ravi Bharadwaj Revenue by : Shri R. Laxman

Date of hearing : 07-02-2018 Date of pronouncement : 28-03-2018 ORDER PER P. MADHAVI DEVI, J.M.: This is assessee’s appeal for the A.Y 2011-12. The

assessee was originally known as M/s Cordys Software

India Pvt Ltd., and the assessment was completed in the

said name. The appeal was also disposed of by the CIT(A)

in the same name. Thereafter, there has been a merger

with M/s. Open Text Corporation India Pvt. Ltd., and the

revised Form No. 36 incorporating the name of assessee as

M/s Open Text Corporation India Pvt. Ltd., is filed on

2 ITA No. 232/Hyd/2016 Open Text Corporation Indi Pvt Ltd., Hyderabad. 27.10.2017 and therefore this appeal is disposed in the

name of the merged company.

transfer pricing adjustment made by the TPO by imputing

interest on outstanding receivables relating to provision of

software services rendered by the assessee to its AEs as on

31.03.2011. The assessee has raised the following grounds

of appeal:

1.a) Making TP adjustment by imputing interest at 5% on outstanding receivables relating to provision of software services to Associated Enterprise's (AE's) as on March 31st 2011: (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 that the receivables are consequential closely linked to the principle transaction of provision of software services and hence have been aggregated for determination of ALP under TNMM. (iii) Not appreciating the facts and circumstances surrounding the receivables and re-characterizing the outstanding receivables as unsecured loans advanced to AEs. (iv) Not appreciating the fact that under TNMM, the impact of outstanding receivables on the working capital adjustments have already been taken into account while determining the arm's length margin for the international transactions and hence there is no need of imputing interest on outstanding receivables again.

l.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

3 ITA No. 232/Hyd/2016 Open Text Corporation Indi Pvt Ltd., Hyderabad. to be benchmarked with the rates prevalent in the international market for foreign currency loans. (i.e. at USD "LIBOR plus"). CORPORATE TAX ISSUES

which is engaged in the business of providing software

development services, consultancy and reselling services,

filed its e-return for the A.Y 2011-12 on 29.09.2011

admitting a total income of Rs. 9,90,00,709/- under the

normal provisions of the Act and Rs. 10,40,34,469/- under

the provisions of sec 115JB of the Act. During the

assessment proceedings u/s 143(3), the A.O observed that

the assessee has entered into an international transaction

with its AEs and therefore he made a reference to the TPO

u/s 92CA of the Act for determining the Arm’s Length

Price.

called for various details and observed that after allowing

the working capital adjustment, the transactions of

software development services and also the distribution

activity are at Arm’s Length. However, he observed that a

sum of Rs. 45,38,74,268/- was receivable by the assessee

4 ITA No. 232/Hyd/2016 Open Text Corporation Indi Pvt Ltd., Hyderabad. at the end of the year and that a sum of Rs. 45.12 crores

has been received after considerable delay and the balance

has been received within time. He, therefore, issued a

show cause notice proposing to charge interest @ 12% on

the delayed receipts after allowing credit period of one

month.

the TPO was not convinced with the contentions of the

assessee. The TPO observed that any independent party

would like to receive its funds within the credit period

allowed and if not, would normally charge interest. After

coming to this conclusion, the TPO relied upon the decision

of the Tribunal at Bengaluru in the case of Logix Micro

Systems Ltd., in ITA No. 524/Bang/2009 (42 SOT 525), for

charging interest @ 12% p.a and proposed an adjustment

under Sec. 92CA of the Act.

order, against which, the assessee preferred its objections

before the DRP. The DRP, vide its orders dated

02.11.2015, confirmed the order of the A.O, but restricted

the interest to 5% as against 12% applied by the TPO.

5 ITA No. 232/Hyd/2016 Open Text Corporation Indi Pvt Ltd., Hyderabad. Thereafter, the A.O passed the final assessment order,

against which the assessee is in appeal before us.

interest on outstanding receivables has become an

international transaction only by virtue of Finance Act

2012 and therefore is applicable only prospectively and

cannot be applied to the assessment year before us. He

submitted that similar transaction of corporate guarantee

also has become an international transaction only by virtue

of the amendment in 2012, and various Benches of the

Tribunal including the Benches at Hyderabad have held the

amendment to be applicable prospectively. He also placed

reliance upon some decisions to contend that notional

interest on outstanding receivables cannot be treated as an

international transaction and taxed during the relevant

assessment year.

of the authorities below.

record, we find that the issue whether notional interest is

chargeable on receivables has been considered by the

6 ITA No. 232/Hyd/2016 Open Text Corporation Indi Pvt Ltd., Hyderabad. Coordinate Bench in the case of Pegasystems Worldwide

India Pvt Ltd (cited Supra) and it was held as under:

“17.3. We have considered the issue and examined the rival contentions. In the case of Evonik Degussa India P. Ltd., in ITA No. 7653/Mum/2011, it was already held the TP adjustment cannot be made on hypothetical and notional basis, until and unless there is some material on record that there has been under charging of real income. Thus on the facts and circumstances of the case, we are of the opinion that addition on account of notional interest relating to alleged delayed payment in collection of receivables from the AEs is uncalled for on the facts of the present case. Even though DRP tried to distinguish the above decision on facts, as seen from the facts in both the cases, we are of the opinion that the above decision will equally apply to Assessee's case. Assessee has outstanding service charges receivables and as seen from the order of TPO, the outstanding is only from 31- 07-2009. There seems to be no such delay in earlier months. Assessee has no interest liability at all so notional interest cannot be brought to tax under the provisions of TP. As rightly pointed out by the Ld. Counsel, the outstanding receivables on account of services cannot be equated with capital financing as provided for in the Explanation by the amendment by Finance Act, 2012 retrospectively. Even otherwise, as rightly held by the Logix Micro Systems Ltd v. ACIT [42 SOT 525] (supra), TPO should have allowed some interest free period for receiving the outstanding service charges. While acknowledging the order of the ITAT, TPO did not even bother to exclude the reasonable period and levied interest not only from the date of invoice to the date of realization during the year but also for the period beyond 31- 03-2010 in later year. We were informed that no such addition was made in the later year on Assessee's receivables. We are of the opinion that both on the facts of the case and principles of law, there is no need for bringing to tax the notional interest on the outstanding receivables. Accordingly, we allow the grounds 7 & 8 of Assessee and direct AO/ TPO to delete the said addition made.”

7 ITA No. 232/Hyd/2016 Open Text Corporation Indi Pvt Ltd., Hyderabad. 10. Respectfully following the above decision, we hold that

the notional interest on outstanding receivables is not

chargeable and no TP adjustment can be made. Thus,

ground of appeal No. 1.a (i) is allowed.

where the working capital adjustment is considered by the

A.O, it takes care of the interest on receivables as well.

This aspect has been considered by the Tribunal at Delhi in

the case of Kusum Healthcare Pvt Ltd., in ITA No.

6814/Del/2014 dated 31.03.2015 which has been

confirmed by the Hon'ble High Court of Delhi and at para

14 of its order has held as under:

“14. As mentioned earlier, the differential impact of working capital of the assessee vis-à-vis its comparables has already been factored in the pricing/profitability of the assessee and therefore, any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified.” 12. We find that the Hon’ble High Court of Delhi has

confirmed the decision of the ITAT and the SLP filed by the

Revenue is pending before the Hon’ble Supreme Court. We

find that in the case of EPAM Systems India Pvt Ltd in ITA

No. 192/Hyd/2017 dated 24.10.2017, Coordinate Bench of

this Tribunal has followed the decision of the Hon’ble Delhi

High Court in the case of Kusum Healthcare Pvt Ltd., to

8 ITA No. 232/Hyd/2016 Open Text Corporation Indi Pvt Ltd., Hyderabad. hold that working capital adjustment takes into

consideration the interest on the receivables as well.

Therefore, on this ground also, no TP adjustment is

required. Thus grounds No. 1a(ii) to (iv) are allowed.

No. 1(b) is not decided at this stage, as it would be only an

academic exercise. Ground No.2 is consequential in nature

and AO is directed to give consequential relief, if any, to

the assessee.

14 In the result, the appeal filed by the assessee is partly

allowed.

Pronounced in the open court on 28th March, 2018.

Sd/- Sd/-

(B. RAMAKOTAIAH) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated: 28th March, 2018 KRK/pvv 1 M/s Open Text Corporation Ind Pvt Ltd., C/o Building ‘D’ Plot No. 17, Software Units Layout, Madhupur, Hyderabad – 500 081. 2 Dy CIT, Circle-16(2), Hyderabad. 3 Dispute Resolution Panel-1, Bengaluru – 560 001. 4 Pr.CIT-1, Hyderabad. 5 The DR, ITAT Hyderabad