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Income Tax Appellate Tribunal, HYDERABAD BENCH “B”, HYDERABAD
Before: SMT P. MADHAVI DEVI & SHRI B. RAMAKOTAIAH
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.
In this appeal, the assessee is aggrieved by the
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
Imposition interest u/s section 234B and 234D of the Act on the Transfer Pricing adjustment. 3. Imposing penalty u/ s 271(1)( C ) of the Act
Brief facts of the case are that the assessee company,
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.
The TPO during the proceedings u/s 92CA of the Act,
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 assessee submitted its detailed explanation, but
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.
The A.O, consequently proposed the draft assessment
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.
The Ld. Counsel for the assessee submitted that the
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.
The Ld. DR, on the other hand, supported the orders
of the authorities below.
Having regard to the rival contentions and material on
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.
As regards the other grounds of appeal, we find that
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.
In view of the above decision, the alternate ground in
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