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Income Tax Appellate Tribunal, Hyderabad ‘ A ‘ Bench, Hyderabad
Before: Before Shri Rama Kanta Panda & Shri Laliet Kumar
IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘ A ‘ Bench, Hyderabad Before Before Shri Rama Kanta Panda, Accountant Member AND Shri Laliet Kumar, Judicial Member ITA No.362/Hyd/2021 Assessment Year: 2010-11 Satyam Venture Vs. The Asst. Commissioner of Engineering Services Income Tax, Private Limited, Central Circle – 3(2), Secunderabad. Hyderabad. PAN : AAFCS3287D (Appellant) (Respondent) Assessee by: Sri CA S Subrahmanyam Revenue by: Dr. Rajendra Kumar, CIT Date of hearing: 23.06.2022 Date of pronouncement: 28.06.2022 O R D E R Per Laliet Kumar, J.M. This appeal is filed by the assessee feeling aggrieved by the order of ld.ACIT, Circle 3(2), Hyderabad dt.30.04.2021 for the assessment year 2010-11 on the following grounds :
“1. The order of the learned Assessing Officer / Transfer Pricing Officer / Dispute Resolution Panel is erroneous in law and on the facts of the case. 2. AO / TPO / DRP erred in making transfer pricing adjustment of Rs.3,59,67,697 towards interest on trade receivables balances from associated enterprises by applying interest rate of 14.75% being SBI short term deposit interest rate. 3. The AO / TPO / DRP erred in not considering the fact that no transfer pricing adjustment to be made for trade receivables from AEs, since the assessee did not charge any interest for trade receivables from Non-AEs also.
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The AO / TPO / DRP erred in not considering the alternate ground of the assessee that even if interest is charged, such interest should only be at LIBOR and not SBI short term deposit rates.
The captioned appeal filed by the assessee is barred by limitation by 72 days. The assessee has moved a petition requesting the bench to condone the delay. In this connection, the assessee has filed an affidavit for condonation of the said delay wherein, it was, inter-alia, affirmed that due to lock down imposed by the central government as preventive measures to contain the spread of Covid-19 form 23/03/2020, caused the impugned delay in filing the appeal belatedly. We rely on Case law Collector Land Acquisition Vs. Mst. Katiji & Ors, 1987 AIR 1353 (SC) and University of Delhi Vs. Union of India, Civil Appeal No. 9488 & 9489/2019 dated 17 December, 2019, hold that such a delay; supported by cogent reasons, deserves to be condoned so as to make way for the cause of substantial justice. We accordingly hold that impugned delay in filing the appeal is neither intentional nor deliberate but due to the circumstances beyond its control. The same stands condoned. Cases is now taken up for adjudication on merits.
The brief facts of the case are that assessee company filed its return of income for A.Y.2010-11 on 30-10-2010 declaring a total income of Rs.43,62,886/ -. Subsequently, the case was selected for scrutiny. The case was referred to TPO as there were certain international transactions. The TPO vide its order u/s 92CA(3) of the I.T Act dated 30.12.2013 determined arm's length price of the notional interest on outstanding with AE transactions. During the scrutiny proceedings, assessee company filed a letter stating that the company was not eligible for the claim of deduction u/s10A and are withdrawing the claim of deduction of Rs.11,01,60,874/- and accordingly filed a revised computation declaring income of Rs.11,48,54,944/ -. Subsequently, the draft assessment u/s 143(3) rws 144C was completed on
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28.03.2014 determining the income at Rs.13,54,76,709/ - and did not suggest any adjustment on the international transaction. The TPO determined the interest of Rs.65,40,787/ - on the receivables of Rs.27,26,01,273/- which assessee failed to report in the form 3CEB. Aggrieved with the same, assessee filed objections before the DRP. The DRP vide its directions u/s144C(5) dated 24.12.2014 allowed certain objections and rejected certain objections. Feeling aggrieved, with the directions of Dispute Resolution Panel (DRP), assessee preferred appeal before ITAT. 4. At the outset, ld.AR for the assessee has submitted that assessee is only pressing ground No.4 in the present appeal. The ground No.4 of the present appeal provides as under : “4. The AO / TPO / DRP erred in not considering the alternate ground of the assessee that even if interest is charged, such interest should only be at LIBOR and not SBI short term deposit rates.”
In this connection, the ld.AR for the assessee has drawn our attention to Para 18 of the order of Tribunal dt. 30.11.2015 in the appeal of the assessee for A.Ys 2005-06 & 2010-11. “18. We have heard the arguments of both the parties and perused the material on record as well as the orders of revenue authorities. From the above, it may be perceived that assessee has not charged any interest to AE as well as non-AE entities. Moreover, the TPO has considered only the account receivable of AE without considering the account payable to AEs. It is pertinent to note that account payable to AE and its affiliates are Rs. 28,58,98,204 compared to account receivables from AE and its affiliates of Rs. 26,88,97,856. We find that the account payables are more than the account receivables from AE. Hence, charging of notional interest does not arise. Therefore, we are inclined to remit the issue back to the file of DRP to give their findings clearly in this matter after going through the material available on record and give their findings according to the provisions of the Income-tax Act.”
The ld.AR thereafter has submitted that the DRP has recorded a finding in para 3.1.6 to 3.1.9 whereby the DRP has applied the interest rate as applicable to SBI short term fixed deposit as the Transfer Pricing Officer 3
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(TPO) is directed to calculate the interest @ 14.75% for the amount receivables. It was submitted that the interest rate charged by the SBI as short term fixed deposit cannot be charged and Libor +200% rate can be applied.
“3.1.6 From the above, it is evident that the receivables are related to both domestic and international related parties. As held by the earlier DRP, the domestic receivables amounting to Rs. 6,60,32,090/- along with the unbilled revenues is directed to be excluded from the computation of receivables for the purpose of notional interest The amount of Rs.20,28,65,764/- pertains to Satyam Technology, Inc. USA, AE and the same requires to be considered for the purpose of notional interest. Whereas the payables are entirely related to M/s. Satyam Computer party amounting and accordingly to: Rs.20,28,65,764/ cannot be -. considered Services Accordingly, Limited, for the netting which netting with is of a receivables domestic receivables related of and AE payables cannot be considered and notional interest has to be computed on the receivables amounting to Rs. 20,28.65,764/- in the case of M/s. Satyam Technology, inc. USA and an amount of Rs.37,03,876/- in the cases of affiliates of M/s. Venture Global Engineering. These findings in this matter are rendered after thorough examination of the material available on record and considering the further submissions made by the assessee. Accordingly, the assessee's objection is disposed of.
3.1.7 As regards adoption of ALP interest rate, in the facts of the case, we consider that, it is pertinent to look into the opportunity costs i.e., the income that the assessee would have earned, had the assessee received the amounts in time. This has to be determined taking into account the Indian market conditions, the assessee being taken as the tested party, Factoring these aspects, we are of the view, that the SBI short term fixed deposit interest rate may be the appropriate ALP rate to measure the interest compensation in these type of transactions. In this regard, we place reliance on the principle held by the Honourable Bangalore ITAT in the case of Logix Microsystems Ltd (ITA No. 423/Bang/2019 dated 07.10.2010) (2010-TI-50-ITAT Bang-TP), under similar factual circumstances, wherein it was observed, "While adopting the Indian rate, it is not proper to rely on PLR of the State Bank of India. This is because if the funds were brought in time and those funds were properly deployed, the assessee company may earn an income at the maximum rate applicable to deposits and not at the rate applicable to loans. We find it appropriate to adopt a reasonable rate that would be available to the assessee on short-term deposits". 3.1.8 This, Panel has been consistently applying the SBI PLR rate for the computation of notional interest. Accordingly, the TPO is directed to adopt the SBI short term deposit interest rate @ 14.75% for the subject year as the ALP interest rate and re-compute the adjustment to be made to the total income.
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3.1.9 With regard to the 90 days credit period, we note that the assesses has not submitted the Intercompany Agreements entered with the AEs related to the entities where there is receivable. There is no information before us to consider 90 days credit period for the receivables. In the absence of specific information as to credit period, it is reasonable to allow credit period of 30 days. We also note that the Hon'ble Delhi ITAT in the case of BT e-serve India Private Limited held that where the agreement does not specify any credit period for payment, then adopting a reasonable credit period of 30 days is justified. Accordingly, we consider that the TPO has allowed reasonable credit period of 30 days. However, the AO/TPO is directed to verify the delay invoice-wise and re- compute the notional interest in the case of delay exceeding 30 days.”
On the other hand, ld.DR has submitted that Libor +200% rate cannot be applied. He further relied upon the orders of lower authorities.
We have heard the rival submissions and perused the material on record. Recently, the Tribunal in the case of Zeta Interactive Systems (India) Pvt. Ltd. had decided the issue of receivables and at para 39 and 40, it held as under :
“39. In the present case, the total turnover of the assessee in respect of Software Development Services was Rs.9,86,90,620/- whereas the trade receivable during the present period was Rs.5,84,94,810/-. Thus, more than 60% of the total turnover is receivable from the AE by the assessee. If we apply the principles as submitted by the assessee that only the LIBOR+200 points are required to be charged, then the very purpose of benchmarking of the trade receivables would be lost and in fact, it will amount to shifting the profit of the assessee to its AE situated abroad. In fact, the transactions of the assessee is required to be examined from the perspective of a prudent business man and required to be analyzed whether the assessee would give similar benefits to unrelated parties or not. In the present case, the trade receivables were 5.84 crores and if the assessee is required to bear the cost of Rs.5,84,94,810 without any carrying cost, then the assessee would be rendering the services at ALP at a lower rate than the comparable cases. undoubtedly the assessee would be incurring the infrastructure cost, manpower cost, raw material, bank financial charges for the purpose of manufacturing or delivering of the services/goods to its AE, failing to receive Rs.5.86 crores from AE in time had economic consequences, hence assessee is required to be compensated for delay in receiving its outstanding. It needs no business sense, if a person rendering services or supply the goods after making the afront payment, then the services/goods would be available at a lower rate and in case of converse situation of delayed payment goods/services would be available at higher value, as the cost of delay/ upfront payment would be factored in the price. In the present case, TPO as well as the assessee have determined the ALP of the international 5
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transactions after considering the price charged by the assessee from its AE, albeit without factoring in interest to be chargeable on the delay in receiving the outstanding amount from the associated enterprises. Therefore, we do not find any error in bench marking the interest to be charged on delayed outstanding by the lower authority. In the present case, the learned CIT (A) in the facts of present case, noticed that 60% of the total turnover were receivables from the AE alone, CIT(A) had held that the interest rate at 8% was reasonable . In the present case, the assessee has not filed its transfer pricing study at the outset. However, the assessee has only filed TP study to benchmark the transaction in respect of two segments i.e. ITeS and SDW only after receipt of show cause notice and no separate study was filed with respect to interest chargeable from the AEs. Assessee has not submitted any details of raising of invoices and subsequent receipts of the receivables from the AE despite the receipt of the show cause notice before the TPO. The TPO, in the light of non cooperation of the assessee and also no objection of the taxpayer had computed the interest by applying interest @ 12%. However, the said rate of 12% was reduced as mentioned herein above to 8% by the learned CIT (A). In our considered opinion, the application of 8% interest, though in strict sense, would be contrary to the principles of TP analysis as the transfer pricing officer was required to bring the comparable either internal comparable or the external comparable by applying CUP method and then fix the rate of interest on the delayed receivables from the AE. However, with a view to give a quietus to the issue, we are of the opinion that instead of 8% interest rate, rate of interest of 6% be applied on outstanding receivable at the year end. 40. In our considered opinion, the submission of the assessee that LIBOR+200 points require to be applied, cannot be upheld in these facts of the case, as it will amount to shifting of profit from assessee to its AE, which cannot be countenanced under Chapter X of the I.T. Act. Moreover, the rate of interest on loan transaction (LIBOR + points) cannot be equated with delayed receipt of the outstanding amount by assessee from its AE, as both stands on different premises having different purpose and nature. In fact, if outstanding receivable are due for a longer period, then assessee would be required to deploy more resources either in the form of debt/equity to meet out the cash flow/working capital requirements.”
In our view, in the present case, the outstanding receivables by the assessee are required to be benchmarked. It is an admitted fact that the outstanding recibable by the assessee are more than 30 days as held by the DRP in para 3.1.9. In the light of the above, respectfully, following the decision of co-ordinate Bench of the Tribunal in the case of Zeta Interactive Systems (India) Pvt. Ltd. (supra), we modify the order passed by the DRP and direct the TPO to compute by applying 6% interest rate on outstanding
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receivable at the year end as against 14.75% on the analogy of Zeta Interactive Systems (supra) and recompute the adjustment to be made to the total income of the assessee. 10. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the Open Court on 28th June, 2022.
Sd/- Sd/- (RAMA KANTA PANDA) (LALIET KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, dated 28th June, 2022. TYNM/sps Copy to: S.No Addresses 1 Satyam Venture Engineering Services Private Limited, 1-8-301-306, 3rd Floor, Ashoka My home Chambers, S.P. Road, Secunderabad – 500 003. 2 The Assistant Commissioner of Income Tax, Central Circle – 3(2), Hyderabad. 3 DRP – 1, Bengaluru. 4 DR, ITAT Hyderabad Benches 5 Guard File By Order