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Facts
The assessee, a wholly owned subsidiary, provided information services to its associated enterprises (AEs). The TPO imputed interest on outstanding receivables from AEs realized beyond 60 days, treating them as unsecured loans, resulting in an adjustment of Rs. 55,93,455. The assessee contended that it was a debt-free company and interest on receivables was not an international transaction.
Held
The Tribunal held that the assessee is a debt-free company and has recovered remittances within the agreed terms, with no excessive delay in remittance suggesting the AE enjoyed credit facility beyond reasonable period. The revenue failed to provide material evidence of benefit transfer to AE by borrowing or extending remittance beyond industry average. The findings in the Bechtel India case were found applicable.
Key Issues
Whether interest on outstanding receivables from AEs, in the case of a debt-free company, constitutes an international transaction subject to adjustment, or if it is subsumed within working capital adjustment.
Sections Cited
144, 144C, 144B, 92CA, 92B, 92CE, 234B, 234C
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Income Tax Appellate Tribunal, DELHI BENCH ‘H’: NEW DELHI
(Assessment Year: 2020-21) Standard and Poors South Asia Services Private Ltd., vs. ACIT, P – 24, Green Park Extension, New Delhi. Green Park Market, South West Delhi, New Delhi – 110 016. (PAN : AALCS0858G) (APPELLANT) (RESPONDENT) ASSESSEE BY : Ms. Ananya Kapoor, Advocate Shri Shivam Yadav, Advocate Shri Tarun Chanana, Advocate REVENUE BY : Shri S.K. Jhadav, CIT DR Date of Hearing : 16.01.2025 Date of Order : 21.03.2025 O R D E R
PER S.RIFAUR RAHMAN, AM :
This appeal is filed by the assessee against the final assessment order dated 29.06.2024 passed u/s 144 r.w.s.144C (13) r.w.s. 144B of the Income Tax Act, 1961 (hereinafter called ‘the Act’) subsequent to the directions of the Ld. Dispute Resolution Panel (DRP)/TPO for Assessment Year 2017-18 raising following grounds of appeal :- “On the facts and circumstances of the case and in law, the Assessment Unit, Income Tax Department ("learned AO") has 143(3) read with section 144C(13) read with section 1448 of the Income Tax Act, 1961 ("the Act") after considering the adjustments proposed by the learned Transfer Pricing Officer ("the learned TPO") in his order passed under section 92CA(3) of the Act and subsequently confirmed by the Hon'ble Dispute Resolution Panel ("Hon'ble DRP"). Each of the ground is referred to separately, which may kindly be considered independent of each other.
1. The learned Assessing Officer/TPO/DRP, have erred in law and on facts and circumstances of the case, by making an addition of INR 5,593,455 to the total income of the appellant in respect of interest on outstanding receivables arising from the main international transactions i.e., provision of support services and rating support services by the appellant to its associated enterprise ("AE"). The said addition is illegal, bad in law and is liable to be deleted as Assessing Officer/TPO/DRP, have erred in- 1.1. Not appreciating that interest on receivables is not covered in the definition of international transaction as defined under section 928 of the Act and as such is not an independent international transaction. 1.2. Delinking the inter-company receivables arising from the main international transactions i.e., provision of support services and rating support services ("main service transactions") and proceeding to benchmark the same as a separate transaction by purported application of Comparable Uncontrolled Price ("CUP") method; 1.3. Making a separate adjustment with respect to outstanding receivables arising from the main service, transactions which are accepted to be at arm's length without appreciating that outstanding receivables emanate from the service transaction itself; 1.4. Re-characterizing the outstanding receivables as loan extended by the appellant to its AE; 1.5. Not considering the fact that the appellant is a debt free company where the appellant does not incur any finance charges and accordingly there is no need to make such notional interest adjustment; 1.6. Not considering the weighted average credit period while evaluating outstanding balances; 1.7. Not appreciating the fact that the even if interest needs to be charged on the receivables, the average receivable days of comparable companies selected by the learned DRP/ TPO for main service transactions, should be considered to establish arm's length interest; 1.8. Granting the credit period of 60 days instead of 90 days having regard to the provisions of section 92CE of the Act (Secondary adjustment provisions); and 1.9. Determining the arm's length interest rate for inter-company receivables at LIBOR plus 425 basis points on an arbitrary basis without any cogent reasons.
2. While the Hon'ble DRP principally concurred with the view to allow working capital adjustment, it erred in law and on facts and circumstances of the case, by giving erroneous finding that the appellant has not given the reliable data for the computation of working capital adjustment and consequently rejected the claim for working capital adjustment whereas all data has been duly submitted and as such, once the working capital adjustment is allowable, no further adjustment on account of receivables is required/mandated in law.
3. The learned AO has erred in levying consequential interest under section 234B, 234C of the Act.”
In the grounds of appeal
, a solitary issue raised by the assessee is levy of interest on the outstanding receivables from its AE treated by the TPO as international transactions. In this regard, ld. AR of the assessee brought to our notice relevant facts as under: “The assessee is a wholly owned subsidiary of S&P Global Inc. USA ("SPGI") and is engaged in providing information services related to credit rating and back-office support services to its group entities (100% captive entity). During the year, the assessee entered into the following international transactions with its Associated Enterprises ("AEs") which were scrutinized during the assessment proceedings :- S.No. Nature of Value (in Method used Margin Arm’s Adjustment International INR) earned by length post DRP transaction SPSA range directions determined by the TPO (post DRP directions)
1. Provision of 11,39,86,892 15.00% 6.50% to NIL rating 33.62% support with Transactional median Net Margin 24.32%
2. Provision of 49,45,69,545 Method 11.40% 7.19% to NIL business 14.84% support with services median 13.53% Further, the TPO imputed interest on outstanding receivables from AEs realized beyond 60 days by deeming them as unsecured loan advanced by the assessee to its AEs, resulting into an adjustment of Rs.55,93,455 by relying on various decisions.”
Aggrieved with the above order, assessee filed objections before the ld. DRP and ld. DRP after considering the detailed submissions of the assessee held as under: “(xxii) Hence, on the specific facts of the case, the Panel observes that there is a pattern in trading behavior of the Applicant where the payment for supplies to AEs are not collected nor received in due time and interest on these trading debts goes uncharged.
(xxiii) As discussed above, interest on deferment of collection and receivable is a separate international transaction. There is no relevance of non-charging to Associated Enterprise/Non- Associated Enterprise or, on payables. An international transaction is required to be benchmarked as a trading debt arising during business. Ratio of McKinsey Knowledge Centre India (P.) Ltd. V. Pro c/T [2018] 96 taxmann.com 237/407 ITR 450 (Delhi) returns a categorical finding. (xxiv) There is no case of lire-characterization" by the Ld. TPO as alleged by the applicant. The outstanding receivables are separate and independent international transactions as per the scheme of Income Tax Act and require benchmarking. Delayed realization and collection from AEs is international transaction on its own footing, and there is no necessity for "re-characterization”. (xxv) Transfer Pricing adjustments are Specific Anti Avoidance Rules to charge scenarios of tax avoidance by benchmarking international transactions. The anti-avoidance rules are applicable to cases of controlled transactions. There is no question of notional/real income in the anti-avoidance rules. The sub-objection 1.4 is not acceptable. (xxvi) As discussed above, interest on deferment of collection and receivable is a separate international transaction. There is no relevance of non-charging to Associated Enterprise/Non- Associated Enterprise or, on payables. An international transaction is required to be bench marked as a trading debt arising during business. Ratio of McKinsey Know/edge Centre India {P.} Ltd. v. Pro CIT [2018] 96 taxmann.com 237/407 ITR 450 (Delhi) returns a categorical finding. (xxvii) The case for aggregation of closely linked transactions does not arise, since it is a separate and independent international transaction. The norm is benchmarking of transaction by transaction (The transaction by transaction approach). The Applicant has not been able to establish how it is impossible to benchmark the interest component on trade receivables. Further there is no closely linked international transaction to a transaction of interest on receivables.
(xxviii) The Panel approves the method used by the Transfer Pricing Officer. (xxix) The benchmark methods do not envisage "netting off" and further, netting off requires exact matching of period of outstanding. A receivable due outstanding for 180 days cannot be netted off with a payable of 10 days. The Transfer Pricing scheme does not have provisions for netted benchmarking. (xxx) Thus, keeping in view the facts of the case, the Ld. TPO has rightly determined the Arm's Length Price of interest on deferred receivables and trade receivables.”
At the time of hearing, ld. AR of the assessee submitted as under: “In this regard, we wish to submit that the Assessee is a debt free Company and therefore no adjustment at all can be made relying on jurisdictional Delhi High Court Judgement in the case of Bechtel India Pvt Ltd where Department's SLP has also been dismissed by Hon'ble Supreme Court. The contention of the Assessee are further discussed in detail below : A. Assessee is a Debt Free company: The assessee is a zero debt/debt free company as it does not have any borrowings from both internal as well as external sources. Accordingly, the assessee has not paid any interest expense to its lenders/creditors during the year as evident from the financial statements of the Assessee for FY 2019-20. An amount of INR 180,031 disclosed as "Interest on other" under the Finance charges in the P&L A/c pertains to Interest u/s 234B and 234C of the Income Tax Act for FY 2019-20. Hence, this is an admitted position that the Assessee is a debt free entity and bears no interest cost. The revenue has also not brought on record that the Assessee has been found paying interest to its creditors or suppliers on delayed payments. Since it does not carry any interest cost on its funds, interest on delayed receipts from AE is not warranted in Assessee's case relying on the following judgements. o Bechtel India Pvt Ltd for AY 2010-11 Delhi HC [ITA 379/2016] [Refer Para 4, Page 3 of CLC}; SLP dismissed by SC [CC No(s). 4956/2017] [Refer Page 1 of CLC] o Boeing India Pvt Ltd for AY 2015-16 [ITA 71/2022] - Delhi HC [Refer Para 6-10, Page 28-30 and Para 15, 33-34 of CLC] o Inductis India Pvt Ltd for AY 2012-13 [ITA 175/2019] - Delhi HC [Refer Para -6.2-6.6, Page 22-24 of CLC] o Global Logic India Pvt Ltd for AY 2010-11 and AY 2012-13 [ITA 845/2018 and ITA 846/2018]- Delhi HC [Refer Para 3- 5, Page 14-15 of CLC] o XL India Business Services Pvt. Ltd for AY 2013-14 [ITA 6602/Del/2017] [Refer Para 13-15, Page 62-63 of CLC] o Avaya India Pvt Ltd for AY 2017-18 [ITA 702/DELl2022] [Refer Para 12, Page 94 of CLC] o Opium Global Solutions (India) Pvt Ltd for AY 2013-14 [ITA 6665/Del/2017] [Refer Para 7-10, Page 102-103 of CLC] o Rambollindia Pvt Ltd for AY 2018-19 [ITA 1468IDel/2022] [Refer Para 7-8, Page 115-117 of CLC} B. No separate adjustment required as outstanding receivables are intrinsically linked to the main service transactions and no adjustment is warranted once working capital adjustment is granted. Outstanding receivables are intrinsically linked to the main service transactions. Since, the adjustment pertaining to provision of rating support services and other support services is deleted by the Ld. TPO post directions of the Ld. DRP, it can be said that no separate adjustment is required with respect to outstanding receivables arising from the main service transactions which are accepted to be at arm's length.
The outstanding receivables arising from provision of services can be benchmarked by undertaking working capital adjustment, wherein differences in working capital deployed by the assessee and comparables have been adjusted and factored in and once working capital adjustment is allowed, the same subsumes and accounts for the differences and hence no further addition is warranted. While the Ld. DRP principally concurred with the view to allow working capital adjustment [Refer Para 7.7.1 (xii) on Page 36 of Appeal set], it erred in giving erroneous finding that the assessee has not given the reliable data for the computation of working capital adjustment and consequently rejected the claim for working capital adjustment. This is factually incorrect as all data has been duly submitted before the Ld. TPO IDRP [Refer DRP objections on Page 140 of appeal set]. The Assessee has also filed a rectification application before the Ld. DRP which is pending disposal. Hence, as DRP has in principle agreed with the fact that to allow working capital adjustment but states that no data was filed (which is incorrect), hence, it is also prayed that the Assessee is entitled to the working capital adjustment. Once the working capital adjustment is allowable, no further adjustment on account of receivables is required/mandated in law on interest on outstanding receivables relying on the following judgements. o Kusum Health Care Pvt. Ltd for AY 2010-11 HC [ITA 765/2016] [Refer Para 10-12, Page 9-10 of CLC]; SC [(C) No(s).2297/2018] [Refer Page 4-50 of CLC] o Qualcomm India Pvt Ltd for AY 2014-15 [ITA 586/2023] [Refer Para 21-25, Page 49-50 of GLG] o Global Logic India Pvt Ltd for AY 2010-11 and AY 2012-13 [ITA 845/2018 and ITA 846/2018] [Refer Para 3-5, Page 14- 15 of GLG] o XL India Business Services Pvt. Ltd for AY 2013-1.4 [ITA 6602/0eI/2017] [Refer Para 11-12, Page 60-62 of GLG] Alcatel Lucent India Ltd for AY 2017-18 [ITA 366/Oe1.l2022] [Refer Para 10-13, Page 72-75 of GLG] o TCI-GO Vacation India Private Limited for AY 2018-19 [ITA 537/Oe1/2023] [Refer Para 6-7, Page 78-81 of GLG] o Optum Global Solutions (India) Pvt Ltd for AY 2013-14 [ITA 6665/0e1/2017] [Refer Para 8-10, Page 102-103 of GLG] o Ramboll India Pvt Ltd for AY 2018-19 [ITA 1468/0e1/2022] [Refer Para 7-8, Page 115-117 of GLG] o Rusabh Oiamonds for AY 2009-10 [ITA 2840/Mum/2014] [Refer Para 12-17, Page 128-134 of GLG] G. Claim for working capital adjustment The claim for working capital should be allowed relying on the following judicial precedents: o Hapag Lloyd Global Service for AY 2009-10 and AY 2010- 11 [ITA 436 OF 2018 and ITA 439 of 2018]- Mum HC [Refer Page 149 of GLC] o Hapag Lloyd Global Service for AY 2009-10 and AY 2010- 11 [ITA 2300/Mum/2014 and ITA 7539/Mum/2014] [Refer Para 11, Page 157; Para 18, Page 160 of CLG] o Zensar Technologies Ltd for AY 2005-06 [ITA 8389/MUM/2010] [Refer Para 20.5, Page 184 of CLC] o Doowon Electronics India Private Limited for 2016-17 [ITA 1 0/Chny/2024 and ITA 15/Chny/2024] [Refer Para 11-12, Page 226-227 of CLC] o Red Hat India Private Limited for 2015-16 [ITA 215/Mum/2020] [Refer Para 11-12, Page 249-250 of CLG] o ST Microelectronics Pvt Ltd for AY 2005-06 [ITA 4774/0eI/2017] [Refer Para 22-23, Page 273 of CLG] In AY 2012-13 in Assessee's own case, the Ld. TPO had allowed for suitable adjustment for working capital employed by the Assessee in Para 9 on Page 13-14 ofTP order. D. Industry average Without prejudice to the Assessee's argument that no adjustment is warranted as the Assessee is undisputedly a debt free company, other contentions raised by the Assessee are: Without prejudice, it is also relevant to note that the average credit period of the Assessee for FY 2019-20 i.e. 92 days is less than the average debtor days of the comparables taken by the TPO i.e. 105 days and therefore no adjustment should be sustained in this case as even our average is much lesser than the average of the comparable companies. It is also submitted that while there is no standard methodology to determine industry practice for credit period, the same is always dependent on a year-to-year basis and on the basis of final set of the comparable companies taken by the TPO. In this year, if we apply the same, the average debtor days of the com parables will be 105 days (the average credit period of the Assessee is much lesser). Further, the Assessee computed average receivable/debtor days of comparable companies selected by the Ld. TPQ in the TP assessment order for main service transactions i.e., 91 days which was also submitted to the Ld. DRP [Refer DRP objections on Page 189 of Appeal set). The average receivable/debtor days of comparable companies post directions of the DRP now i.e. 105 days (Computation enclosed as Annexure 1 to this synopsis) may be considered, on a without prejudice basis, to establish arm's length interest instead of 60 days credit period allowed by the Ld. TPQ. Considering the above points, average credit period of the Assessee itself is 92 days (Simple Average Credit period: 91.59 days- Refer Annexure 2 to this synopsis) is less than
On the other hand, ld. DR of the Revenue relied on the findings of the ld. DRP and decision of jurisdictional ITAT in various decisions relied upon by the ld. DRP in their order.
Considered the rival submissions and material available on record We observed that the assessee is engaged in the providing information services related to credit rating and back office to its group entities and it is affiliated to S&P Global Inc. When the case was referred to the TPO to determine the ALP of the International transactions relating to provision of rating support services and provision of business support services. The TPO proposed ALP adjustments for the value of Rs. 666,81,630/-. However, Ld DRP after considering the submissions, deleted the proposed ALP adjustment and retained only the proposed interest on the outstanding receivable or received the remittance beyond 60 days as international transaction. Ld DRP rejected submissions of the assessee on the issue not to consider the above proposition as international transaction and rejected the of reliance of Bechtel India Pvt Ltd case (supra).
After careful consideration, we are also of the view that in case it is proved that the assessee has transferred the benefit to its AE then certainly this transaction will fall in the International transaction. No such findings were brought on record by the tax authorities. We observed that the assessee was properly compensated by its AE, this is also fact on record that the Ld DRP has deleted the adjustment proposed by the TPO on the provision of services to its AE. It clearly shows that the assessee is being compensated properly. Now the issue before us is whether the assessee incurs financial cost in India and allows extended period of credit to its AE, so that the AE enjoys the benefit out of funds borrowed in India. The revenue must bring on record how the benefit is exported without claiming any compensation for the same. In the given case, the company is debt free and able to survive based on the compensation from its AE. We noticed that the assessee has actually incurred finance cost of Rs.201,871/- and majority of the finance cost consist of penal interest paid to revenue u/s 234B/C of the Act. Technically there is no finance cost of employment for any debt or borrowings. If that is the case, the passing of benefit to its AE is ruled out. We cannot apply the provisions of the Act blindly without show casing how it is falling under the short term loan or financial transaction. Even though Ld DRP tried to distinguish the Bechtel India case, however, unless it is brought on record that this particular transaction falls within the framework of financial transaction, you cannot invoke the provisions mechanically.
8. The term of settlement is subjective and depends upon the mutual agreement and industry practice. We noticed that the average credit period of the assessee is 92 days against the average credit period in the case of comparable companies determined at 105 days. Since the assessee is debt free company and has recovered the remittances within the terms agreed between them and there is no red flag of excessive delay in remittance which gives the impression that the AE is enjoying the credit facility beyond reasonable period. Therefore, revenue has failed to bring any material to suggest that the assessee has passed on the benefit to its AE by borrowing or extension of remittance beyond the industry average. In the regular business transactions even in the case of non AE, the credit period extension within the industry average is accepted norms. In our view the findings of Bechtel India (supra) is applicable in this particular case. Therefore, we are inclined to allow the grounds raised by the assessee and direct the AO to delete the additions proposed by TPO.
9. In the result, appeal filed by the assessee is allowed. Order pronounced in the open court on this 21st day of March, 2025.