Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI V. DURGA RAO& SHRI D.S. SUNDER SINGH
आदेश /O R D E R PER D.S. SUNDER SINGH, Accountant Member: These appeals are filed by the assessee against the order passed by the Deputy Commissioner of Income Tax / [(Transfer Pricing Officer (TPO)]-1, Hyderabad dated27.01.2015and 30.01.2016 for the assessment year 2011-12 and 2012-13 respectively u/s 143(3) r.w.s.144C(13) of the
2 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
Act. Since the issues involved in both the appeal are common, both the appeal are clubbed and heard together and disposed off in a common order for the sake of convenience.
The assessee filed 7 grounds appeal No.67/Viz/2016 for the A.Y.2011-12and subsequently filed the two additional grounds with a petition for admission of additional grounds which reads as under : (a) Additional ground filed vide petition dated 17.07.2018 “Whether on the facts and in the circumstances of the case, the assessing officer erred in enhancing the income by way of adjustments towards Arm Length price when the income of the appellant is eligible for exemption u/s 10A of the Act?”
(b) Additional ground filed vide petition dated 30.07.2018 “On the facts and in the circumstances of the case, whether the assessing officer erred in not granting exemption u/s 10A in respect of business profits enhanced on account of additions of Rs.10,00,000 and Rs.2,04,215/- made towards disallowance of professional charges and foreign travel expenses.”
During the appeal hearing, the Ld.AR has withdrawn the additional ground filed vide petition dated 17.07.2018 relating to the claim of exemption u/s 10A of the Income Tax Act (hereinafter called as ‘Act’) on account of enhancement of income by way of adjustment of Arm Length Price (ALP). Therefore, additional ground No.1 relating to the exemption
3 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
u/s 10A on enhanced income by way of adjustments(ALP) is dismissed as withdrawn.
The first issue in appeal No.ITA/67 for the assessment year 2011-12 is the disallowance of sum of Rs.10,00,000/- u/s 40(a)(ia) of the Act towards professional charges paid to K.Jyothi & K.Venkateswara Rao without deduction of tax at source. During the assessment proceedings, the AO found that the assessee has made the payment of Rs.10,00,000/- towards professional charges to K.Jyothi and K. Venkateswara Rao, but the assessee failed to furnish evidence to show that the assessee had deducted the tax at source and made payment to the Central Government account, therefore proposed for disallowance of Rs.10,00,000/- u/s 40(a)(ia) of the Act. The assessee filed objection before the Dispute Resolution Panel (DRP)-1, Bengaluru u/s 144C(1) of the Act. The DRP rejected the petition filed by the assessee and confirmed the proposed disallowance. Therefore, the Assessing Officer (AO) made the disallowance u/s 40(a)(ia) of the Act vide order u/s 143(3) r.w.s. 144C(13) of the Act dated 14.01.2016.
4 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
Against the order of the AO passed u/s 143(3) r.w.s. 144C(13), the assessee is in appeal before this Tribunal.
We have heard both the parties and perused the material placed on record. In this case, the assessee made the payment of professional charges to Ms.K.Jyothi and Mr.K.Venkateswara Rao without deduction of tax at source. There is no dispute that the payments made to Ms.K.Jyothi and Mr.K.Venkateswara Rao represent the professional charges and the assessee is required to deduct the tax at source and to remit to Government of India account u/s 194J of the Act. Therefore, we do not see any reason to interfere with the order of the Ld.AO and uphold the disallowance. The assessee’s appeal on this ground is dismissed.
Ground No.3 for the A.Y.2011-12 is related to the addition of Rs.2,04,215/- towards adhoc disallowance @10% of the foreign travel expenses. In the draft assessment order passed u/s 144(C)(1) of the Act, the AO found that the assessee had incurred the foreign travel expenses of Rs.20,42,150/-. The assessee had produced the books of accounts and on verification, the AO found that the director made several visits to the
5 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
foreign countries, but the nature and purpose of such visits as well as the business conducted by the Director was not explained to the AO satisfactorily. The assessee also failed to explain the genuineness and relevance of the foreign travel expenses to the satisfaction of the AO. Therefore, the AO proposed to disallow 10% of the foreign travel expenses which worked out to 2,04,215/- towards unverifiable expenses in the draft assessment order. The assessee has not filed any objection before the DRP against the draft assessment order. Therefore, the AO disallowed the foreign travel expenses of Rs.2,04,215/- representing 1/10 of the expenditure debited under the head ‘foreign travel expenses’ to the Profit & Loss Account.
Against the order of the AO, the assessee filed appeal before this Tribunal.
During the appeal hearing, the Ld.AR did not place any evidence to controvert the finding of the AO and to establish the relevance and genuineness of the expenditure with foreign visits made by the Director and the purpose and nature of expenses. Therefore, we do not find any
6 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
reason to interfere with the order of the Ld.AO. The disallowance made by the AO is upheld and the appeal of the assessee on this ground is dismissed.
Ground No.4 is related to the ALP adjustment towards interest on advances given by the assessee to its Associate Enterprise (AE) amounting to Rs.1,38,12,847/-. During the assessment proceedings, the AO found that the assessee had entered in to an international transaction, hence the case was referred to TPO for determining the ALP in respect of the international transactions reported by the tax payer company. The TPO, while examining the transfer pricing document found from the Form 3CEB report or transfer pricing document that the assessee has given adavances to the AE, Greatwater Software Inc towards patient point project(PPK) for an amount of Rs.18,44,00,935/- but not charged any interest on the advances given to the AE. The TPO also observed that the similar advance was given in the immediately preceding assessment year also. Thus, the opening balance was outstanding at Rs.8,85,00,559/- and the outstanding amount at the end of the year was Rs.27,29,01,494/-. In the earlier year, the TPO has charged the interest @12% p.a. on outstanding advances. Therefore,
7 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
the TPO proposed to charge the interest @12.25% on interest at PLR. The assessee objected for the proposed charging of interest and submitted before the TPO that the advance was given for business purposes, hence, the disallowance was not called for. The assessee further submitted that out of the advances, a sum of Rs.4,54,92,337/- was converted into equity, thus, there is no requirement to charge interest on sums converted as equity. The Ld.TPO considered the objections raised by the assessee for charging the interest and observed that in ALP, independent party would either invest in equity and to that effect the shares are allotted within a specified period or if a loan or advance has been given, it would expect a suitable interest on it. It is immaterial, whether the source of the loan is interest free or interest bearing. Further the Ld.TPO observed that under arms length situation, it is only to be seen that how much interest that could be earned from the application of the funds. Though RBI does not regulate the interest rate chargeable on outbound loans, but the loans received from non-resident direct investor as well as loan extended to the subsidiaries or associates abroad has to be reported in a prescribed form. The advances from India and Indian currency has been subsequently converted into currency of the geographic location of the AE, hence the PLR
8 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
of the Indian Banks have to be applied as external CUP. Thus, the TPO was of the view that outbound loans are effectively rupee loans and the returns have to be bench marked with a domestic interest rate rather than LIBOR. The ideal interest rate on outbound and intra group loans would be that the interest rate which would have been charged independently by independent parties in similar circumstances during the same period of time. Accordingly, the AO held that the prevalent PLR during the 2010-11 was 12.25% and charged the interest on outstanding balances as per the dates of remittances on 22,74,09,157/- which worked out to Rs.1,99,06,753/- and proposed for adjustment u/s 92CA of the Act. The AO issued draft assessment order u/s 144C(1) dated 18.03.2015 proposing to make the adjustment of Rs.1,99,06,753/- as suggested by the TPO.
Against the draft assessment order, the assessee filed objections before the DRP and submitted that the advances given to the AE is in the interest of business and further submitted that the advances were given out of interest free funds of the company, therefore, charging of interest is unjustified. Alternatively, the assessee submitted that the AO had charged the interest @ 12.25 against LIBOR plus 2%.The Ld.DRP considered the
9 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
submissions made by the assessee and observed that in view of clause (C ) of explanation to section 92B of the Act, which was inserted with retrospective effect from 01.04.2004, specifically including the deferred payments or receivables as international transactions, the objection raised by the assessee is not acceptable. The Ld.DRP has taken the support from the ITAT, Bengaluru decision in the case of Logix Micro System Ltd. Vs. ACIT (42 SOT 525) and observed that the assessee had incurred the financial charges of Rs.5,92,23,347/- during the financial year which includes the interest on working capital loans amounting to Rs.2,74,34,290/-. Had the assessee did not divert these funds there would have been reduction in the interest payments to the extent of the interest on receivables. Hence, held that there was potential loss to the effect of the funds advanced to the AE, thus adjustment proposed to be made by the AO was justified. However, the Ld.DRP has scaled down the interest to 8.5% the rate applicable to the interest rate charged by the lending banks, instead of 12.25% on production of necessary evidences. Accordingly, the AO passed the order u/s 143(3) r.w.s. 144C(13) dated 14.01.2016 making the addition of Rs.1,38,12,847/- against the proposed disallowanceRs.1,99,06,753/-.
10 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
Against the order of the AO, the assessee is in appeal before this Tribunal. During the appeal hearing, the Ld.AR made two fold argument. Firstly, the Ld.AR stated that the advance given to the AE was out of interest free funds available to the company, hence, there is no case for making the adjustment towards ALP. The Ld.AR also invited our attention to the order of the TPO, wherein, the TPO observed that the PLR margin of the assessee on independent search for comparables is found to be 37.26%, which is higher than the average margin of the comparable companies. Hence, argued that no adjustment is required since the PLI is higher than the comparable cases. The Ld.AR also submitted that the advances given were for business purposes and to fortify his contention, the Ld.AR invited out attention to page No.116 of the paper book, wherein the opening balance of Rs.27,29,01,494/- was adjusted out of the software services rendered by the AE. Hence, argued that the advance was purely business purpose and no adjustment is required. The Ld.AR also relied on the decision of Hon’ble ITAT ‘A’ Bench of Hyderabad in the case of Cura Technologies Ltd. Vs. DCIT, Circle-1(2), Hyderabad in ITA No.301/Hyd/2017, wherein, the Hon’ble ITAT remitted the matter back to
11 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
the file of the AO for considering the purpose of advance with a direction of not to charge the interest on trade advance and in case of loan, to charge the interest @ LIBOR plus percentage as directed by the Tribunal in the case of GSS Infotech Ltd. Vs. ACIT in ITA No.497/Hyd/2015. The LdAR argued that, since the account copy of Greatwaters Inc, in respect of Patient Point project(PPK) establishes that the advances were the trade advances, the case law of Cura Technologies supra is squarely applicable in the assessee’s case and there is no justification to charge the interest on advances. Alternatively argued that in case the submission of the assessee that no interest is chargeable is not accepted, without prejudice to his submission not to charge the interest, the Ld.AR considered for charging the interest @ LIBOR plus 2%.
On the other hand, the Ld.DR supported the order of the Ld.DRP/AO and argued that with insertion of Clause ‘C’ to Explanation to Section 92B of the Act, deferred payments, receivables and the advances given to the AE held to be international transactions and required to charge the interest.
12 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
We have heard both the parties and perused the material placed on record. In this case, the AO charged the interest of Rs.1,38,12,847/- and made the ALP adjustment confirmed by the Ld.DRP. The assessee contended that the assessee had the interest free funds in the business and out of the said interest free funds, the assessee company has made the certain advances to the AE in the interest of business. The assessee, further stated that the advance was business advance and relied on the decision of the Coordinate Bench of ITAT Hyderabad in the case of Cura Technologies (supra). Perusal of work order enclosed in page No.117 to 123 shows that there is no need to make the advance to AEs as part of trade advance or deposit. As per the work order dated 03.05.2010, the assessee is required to execute off shore project as per the specifications and the PPK would make the payment via wire transfer as per the agreed prices between the PPK as well as the assessee. The work order between the PPK and the assessee does not show the requirement of any advance or securitydeposit, margin money etc. In this case , the assessee is required to execute work for PPK and the PPK is obliged to make the payment as per the bills raised by the assessee. The assessee also did not place any evidence to establish that there is obligation on the part of the assessee to make the advance to
13 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
the AE. Therefore, we are unable to accept the contention of the assessee that the payment is for business purpose. We have gone through the Form 3CEB Report which is enclosed in the paper book at page No.105 to 113. The transfer pricing document also does not show any such requirement of payment of advance to the AE. During the appeal hearing also the assessee did not establish with any evidence to show that the assessee is required to make payment to the AE for executing the project or for trade advance etc. Since the advance given to PPK is not established as trade advance, the case law relied upon by the assessee in the case of Cura Technologies of ITAT Hyderbad is not applicable in the assessee’s case. The Ld.DRP relied on the decision of the Coordinate Bench, ITAT Bengaluru in the case of Logix Micro System Ltd. (supra), and held that the financial impact of international transaction is applicable in the assessee’s case. Parking huge funds for a longer period with AE without interest is not acceptable. If the funds are repatriated to India as observed by the Ld.DRP there would be substantive reduction in the interest cost and potential increase in the profit of the company. Therefore, the case law relied upon by the ITAT Bangalore in the case of Logix Micro System Ltd. is squarely applicable in the assessee’s case. Even in the case law relied upon by the assessee in the
14 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
case of Cura Logistics (supra) also, the Coordinate Bench held that if the purpose of advance is trade advance, the interest is not chargeable but in case of loan the interest is chargeable. Having observed that the advance is not a trade advance, we hold that the interest is chargeable on the advances given to the AE.
11.1. The next issue of the Ld.AR is that the advance was given out of interest free funds. In an international transaction, it is to be seen the financial impact of the transaction and the potential benefit or loss to the tax payer company. The assessee has incurred huge financial cost including the interest on working capital. As rightly observed by the Ld.DRP, had the assessee did not divert the funds, the tax payer would have saved the interest to the extent of diversion of funds. Therefore, the arguments of the Ld.AR not to charge the interest on interest free funds given or advance to the AE is not acceptable and we hold that the AO has rightly made the adjustment.
Having held that the interest required to be charged on advance given to the AE, the issue for adjudication is the rate of interest. The AO
15 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
charged the interest @12.25% on the outstanding advances. The Ld.DRP directed the AO to charge the interest as per the bank rate. On the similar facts and circumstances, the ITAT Vizag Bench in the case of ACIT, Circle 1(1), Guntur Vs. CCL Products (India) Ltd., Duggirala, Guntur in I.T.A. Nos. 192 & 193/Viz/2017 dated 21.09.2017 held that the interest @LIBOR plus 2% is reasonable following the decision of Hon’ble Delhi High Court in the case of Cotton Naturals. For ready reference, we extract relevant part of the order of this Tribunal which reads as under : “10. In the instant case the assessee had advanced the sums on of it's 100% foreign subsidiary for increasing the business and to improve the brand image of the company. The loans were for purely business purpose. Hon'ble Delhi High Court in the case of Cotton Naturals cited (supra) held that LIBOR should be adopted in outbound loans. The assessee has established the fact that the loans were given for the purpose of carrying on the business and to build the brand image globally and there is no intention of earning interest. Therefore, we hold that the interest charged by the assessee @ 2% which is more than LIBOR rate is reasonable and at arms length. Accordingly, we uphold the order of Ld. CIT(A) and dismiss the appeal of the revenue.”
This view is supported by the decision of ITAT Kolkata Bench 'C', in Deputy Commissioner of Income-tax, Circle-4 (1), Kolkata v. M.K. Shah Exports Ltd.*[2017] 81 taxmann.com 477 (Kolkata - Trib.)
Respectfully following the view taken by the Coordinate Bench of this Tribunal, we direct the AO to charge the interest @2% more than the
16 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
LIBOR which is reasonable and at arms length. Accordingly, the assessee’s appeal on this ground is partly allowed. This issue is involved for the assessment year 2011-12 and 2012-13 and the appeal of the assessee is partly allowed for both the assessment years.
14, The next issue is interest on receivables. For the assessment year 2011-12, the AO made the adjustment of Rs.34,17,765/- and for the assessment year 2012-13, Rs.2,44,65,964/- as ALP adjustment towards interest on receivables. The TPO observed that the assessee had outstanding receivables of Rs.6,83,55,290/- for the assessment year 2011- 12. Since the receivables were not received in due time, the AO held that interest is required to be charged u/s 92B of the income tax act. The assessee objected for the proposal of charging the interest, stating that the receivables are received as per the terms of sale agreement and no interest is chargeable and there was no delay. However, the AO relied on the decision of Logix Micro Systems Private Ltd. (supra) and accordingly charged the interest on receivables and proposed for adjustment u/s 92CA of the Act for an amount of Rs.83,73,523/- for the assessment year 2011-12 and Rs.3,28,06,636/- . The AO issued draft assessment order and the
17 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
assessee filed objection before the DRP, Bengaluru and raised objection for the proposed adjustment. The DRP Bengaluru held that after insertion of Clause (c) of Explanation to section 92B of the Act, deferred payments or receivables during the course of business are international transactions. The DRP further observed that even otherwise, the moment normal credit period expires, the receivables against sales etc. takes the colour of deferred payments and consequently gets covered with Explanation to section 92B of the Act directly. Accordingly held that the receivables automatically take the character of loans after the expiry of normal period of 30 days. The Ld.DRP relied on the Logix Micro Systems Ltd. wherein the ITAT Bengaluru confirmed the adjustment of charging interest on receivables. However, the Ld.DRP has scaled down the interest to the cost of the borrowed funds subject to production of necessary evidences before the AO. Accordingly, the AO made the adjustment of Rs.34,17,765/- for the assessment year 2011-12 and Rs.2,44,65,964/- for the assessment year 2012-13.
Aggrieved by the order of the AO u/s 143(3) r.w.s. 144C(13), the assessee is in appeal before this Tribunal. During the appeal hearing, the
18 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
Ld.AR submitted that the interest on receivables is purely a trade transaction, the payment of receivables depends on the terms and conditions of the sale, bargaining capacity of the vendor and the prevailing market conditions. The reasonable period of receivables would be one year. Even though there was a longer period for collecting the receivable the PLI of the assessee is higher than the comparable cases and hence the argued that delay and the consequent interest is taken care in the sale price. The assessee also relied on the decision of ITAT Hyderabad in the case of Bartronics India Ltd., ITA No.259/Hyd/2017 dated27/09/2017, wherein, Hon’ble ITAT held that where the whole work contract is considered within the ALP, the advance given during the course of contract does not call for special adjustment. In this case, the Ld.AR argued that the advances were part of business transactions and the PLI margin of the assessee company was higher than the comparable cases as evidenced from the order of the TPO in page No.3. The margin of the assessee company was 37.26% which is higher than the comparables. Since the assessee is neither charging the interest on receivables nor paying interest on trade payables, the decision of ITAT Hyderabad in Bartronics India Ltd. is squarely applicable. The Ld.AR invited our attention to page No.22 in
19 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
para No.23.1, wherein the Coordinate Bench has taken the support of Lanco Infratech Ltd. Vs.DCIT and cancelled the interest levied on receivables. For ready reference, we extract relevant part f the order of the ITAT in para No.23.1 in page Nos.22 and 23 which reads as under : “23.1 In the case of LancoInfratech 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 subcontract 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 -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-AE; 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 23 ITA No. 259 /Hyd/2017 Bartronics India Ltd., Hyd..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
20 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
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 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.“
15.1. The Ld.AR also invited our attention to the order of this Tribunal in ITAT Vizag Bench in the case of GVK Power & Infrastructure Ltd. Vs. ACIT, Circle-2(1) in ITA No.530/Viz/2017 for the assessment year 2013-14 dated 18.05.2018, wherein, the Coordinate Bench allowed the appeal of the assessee on disallowance of notional interest relying on the decision of Hon’ble Delhi High Court in the case of Pr.CIT Vs. B.C.Management Services Ltd. (2018) 164 DTR (Del) 299.
On the other hand, the Ld.DR relied on the orders of the lower authorities.
We have heard both the parties and perused the material placed on record. In this case, there were receivables outstanding for both the
21 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
assessment years which was not received in time. It was also observed that the receivables were not received during the entire year. The Ld.TPO has not furnished the delay in recovery of receivables and period of outstanding. As per the order of the TPO, the PLI margin in the assessee’s case is 37.26% which is higher than the average margin of comparable case. The interest on receivables is bench marked to equate the PLI of the tax payer company with that of comparable company. The TPO has accepted that there is no arm length adjustment is required in this case on account of margin. The AO has not brought on record to show that the assessee has extended undue credit to the AE for the period beyond the time specified in the master service agreement. The AO has also not made out a case that there was any undue advantage by extending credit on receivables by the assessee. Though there was financial impact on giving loans from the funds of the assessee such impact cannot be imparted in the case of receivables when the PLI is comparable. Hon’ble ITAT Hyderabad in the case of Cura Logistics relied upon by the assessee held that on trade advance, no interest is leviable, relying on the decision of GSS Infotech Ltd. Vs. ACIT (supra).In the case of Bartronics India Ltd., ITAT Hyderabad has held that if the work contract is within the ALP, there is no separate
22 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
requirement for bench marking the interest on trade advances. The assessee relied on the decision of this tribunal in GVK Power & Infrastructure Ltd. vs ACIT Circle-2(1) dated 18/05/2018 where in ITAT held that no notional interest is chargeable on delayed payments. For ready reference we extract the relevant para of the ITAT’s order in GVK Power & Infrastructure Ltd which reads as under: 12. Even otherwise as observed from the order of the TPO on three occasions, there was a delay of receivables and pointed out by the Ld. A.R. the assessee is not indulged in any systematic or organized activity of allowing the undue credit to the AEs. The assessee relied on the decision of MothersonSumiInfotech& Designs Limited Vs. DC1T reported In (2018) 52 CCH 0122 Delhi, and Hon'ble ITAT Delhi held as under: 5. We have considered the rival submissions and perused the material available on record. The assessee has given several reasons to explain that it being a business transaction, commercial consideration should have been considered by the authorities below. It was explained that the long term business relation with the customer and A.E. predicate waiver of this right. The interest is only associated with the loans and not services. It was explained that payments are received only after satisfaction of the customer and therefore, there was delay in receiving the payments. The assessee also explained before T.P. authorities below that average outstanding days for recovering sales dues was 57 days in the case of A.Es, whereas, in the case of non-A.E. it was 66 days. It was also explained that non-charging of interest from A.Es. as well as non-A.E. on interest receivables was that it being pre-dominantly involved in the provision of services to it's A.Es. as well as third parties. The contention of the assessee have not been disputed by the authorities below. It may also be noted here that all international transactions were accepted by the TPO to be at arm's length, except, payment of interest on loan. The authorities below have treated the delayed payment beyond 30 days as loans. In fact, no loan have been extended by the assessee. It was the amount ‘due' against the A.Es. as well as non-A.E. on which interest have been charged by considering the deemed loans. Therefore, the decision of ITAT, Delhi Bench in the case of M/s. Kusum Healthcare Pvt. Ltd., (supra), squarely apply in the case of the assessee, since the assessee earned significantly higher margin than the comparable companies, which have been accepted by the TPO, therefore, there was no justification to charge interest on outstandings. The decision of Hon'ble jurisdictional Delhi High Court in the case of Pr. CIT vs. Kusum Healthcare Pvt. Ltd.,(supra), squarely apply to the facts and
23 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
circumstances of the case. The assessee also explained that there are similar delays in collection of outstanding receivables from both A.Es and non-A.Es which is due to business and commercial reasons. Therefore, there is uniformity in act of assessee in not charging interest from A.Es and non-A.Es. Therefore, the decision of the Hon'ble Bombay High Court in the case of CIT vs. Indo American Jewellery Ltd., (supra), squarely apply to the facts of the case. 5.1. Considering the nature of business of assessee and the facts explained above, we are of the view that there was no justification for the authorities below to make adjustment to the income declared by assessee. Recently, the ITAT, I-2 Bench in the case of Terradata India Pvt. Ltd., vs. ACIT in ITA.No.7885/Del./2017 vide order dated 21st February, 2018, following the order in the case of same assessee, in which the decision of Hon'ble jurisdictional Delhi High Court in the case of Pr. CIT vs. M/s. Kusum Healthcare Pvt. Ltd., (supra), have been relied upon, allowed the appeal of assessee on the similar ground. In view of the above discussion and in the light of various decisions above and facts of the case, we are of the view that the adjustment to the income of the assessee is wholly unjustified on account of interest on receivables. We, accordingly, set aside the orders of the authorities below and delete the entire addition. 6. In the result, appeal of the assessee is allowed. The department has not made out case of systematic planning of allowing the undue credit to the AE. Further Ld.AR relied on the decision of Pr.CITvsB.C.Management Services (P) Ltd, (2018) 164 DTR (Del)299 where in Hon’ble Delhi High court held that delayed payment made by AE cannot be treated as part of income. For ready reference we extract the relevant part of the order of the Hon'bleDeIh High court which reads as under: 9. With respect to the treatment of notional interest by the TPO/AO, the Court is of the opinion that no question of law arises. In an identical situation, in Principal Commissioner of Income Tax Vs. Bechtel India Pvt. Ltd. ITA 379/2016, decided on 21.07.2016, the Court had held that such notional income on account of delayed payment made by the AO cannot be treated as part of the income and made the subject matter of the adjustments.
While rendering the judgement the Hon'ble High court has considered the decision in the case of Bechtel India (P) ltd. Therefore, placing reliance on the decision of MothersonSumiJnfotech& Designs Limited Vs. DCIT (supra) and the decision in the case of B.C.Managemerit services (P) Ltd we hold that the revenue has not made out case of disallowance of notional interest on delayed payments and accordingly, we set aside the orders of the authorities below and delete the addition. The appeal of the assessee on this ground is allowed.
24 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
17.1. In the instant case the PLI is higher than comparable cases and the TPO held that no ALP adjustment is required with regard to profit margin. The assessee contended that having accepted that the PLI is higher than the comparable cases the potential loss of interest is taken care and embedded in the sale price.The department has not given the specific details such as what was the period of recovery, what was the delay, what was the reasonable delay etc.,thus the department has not made out a case for charging the interest on dealy. The revenue also did not controvert the submission of the assessee that due to higher margins and the long term relations and business considerations the right of interest is waived. In the case of M/s Cura Technologies supra Hon’bleITAT , Hyderabad bench has held that no interest required to be charged on trade advances. Similar view was taken by the ITAT, Hyderabad in the case of M/s Bartronics supra. Therefore respectfully following the decisions cited supra, we hold that there is no justification for charging the interest on receivables in the case of the assessee, accordingly, we delete the interest levied on receivables and allow the appeals of the assessee for the assessment year 2011-12 and 2012-13.
25 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
The next issue for the assessment year 2012-13 is the disallowance of Rs.9,77,039/- u/s 36(1)(va) r.w.s. 2(24)(x) of the Act towards delayed payment of employees contribution to Provident Fund. The AO found that the assessee has remitted the Employers contribution to employees provident fund beyond the specified date of 15th of the subsequent month in contravention to the provisions of section 2(24)(x) and accordingly disallowed a sum of Rs.9,77,039/- u/s 36(1)(va) r.w.s. 2(24)(x) of the Act. The Ld.DRP upheld the addition made by the AO on objection filed before the DRP.
Aggrieved by the order of the AO, the assessee is in appeal before this Tribunal. During the appeal hearing, the Ld.AR submitted that the issue is squarely covered by the decision of Hon’ble Supreme Court in the case of CIT Vs. Alom Extrusions 227 CTR 417(SC). In this case, though the assessee has not remitted the employers contribution before the stipulated date of 15th of succeeding month, the assessee had remitted the entire amount before filing the return of income. Therefore, we hold that the assessee is entitled for deduction if the employer contribution is paid before filing the
26 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
return of income before the due date. Accordingly, appeal of the assessee on this ground is allowed.
The next issue is additional Ground No.2 raised by the assessee with regard to granting exemption u/s 10A on enhanced profits on account of additions made by the AO on domestic front in respect of of Rs.10,00,000/- towards disallowance u/s 40(a)(ia) and Rs.2,04,215/- towards foreign travel expenses for the assessment eyar 2011-12. Similarly, for the assessment year 2012-13, the AO made the addition o fRs.9,77,039/- u/s 36(1)(va) r.w.s. 2(24)(x) of the Act but not granted exemption u/s 10A of the Act on the enhanced profits. The assessee raised the additional ground during the appeal hearing to grant exemption u/s 10A on the enhanced profits. The Ld.AR argued that due to inadvertence, the said ground was not raised in the appeal filed along with Form 36. Since the issue is purely legal and the facts are available on record, the additional ground raised by the assessee vide petition dated 30.07.2018 is admitted.
The Ld.AR during the appeal hearing argued that as per section 10A, the assessee is entitled for reduction of 100% profits as computed as per
27 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
the Act. The Ld.AR argued that there was no restriction to grant exemption u/s 10A like the additions made on ALP adjustments in international transaction, wherein specific restriction was placed as per proviso to section 92C of the Act. The Ld.AR relied on the decision of Hon’ble Bombay High Court in the case of Gem Plus Jewellery India Ltd., 330 ITR 0175 and argued that the assessee is entitled for exemption u/s 10A on enhanced profits due to additions made by the AO on domestic transactions.
On the other hand, the Ld.DR supported the orders of the lower authorities and argued that on the additions made by the AO, the assessee is not entitled for deduction u/s 10A. The Ld.DR argued that even though there is no specific restriction there is no reason to take different view on additions made to the returned income other than ALP.
We have heard both the parties and perused the material placed on record. In this case, the AO made the additions by making the disallowance on account of domestic transactions such as disallowance u/s 40(a)(ia), travelling allowance, and employers contribution to PF etc... As per the Act, there is no restriction placed by the Income Tax Act, not to grant the
28 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
exemption on the total income computed by the AO including additions made by the AO. There was a specific restrictions placed with regard to ALP adjustments not to grant the exemption as per proviso to section 92C of the Act on account of arms length adjustment on international transaction. There is no such embargo on the domestic transaction. The Parliament in its wisdom not placed any restriction with an intention to grant the exemptions on profits including the enhanced profits on account of adjustments. As per the proviso to section 10A, the assessee is entitled for exemption u/s 10A on 100% profits computed as per the Act. For ready reference, we extract sub section 1 of section 10A of the Act which reads as under : “10A. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : 24. As per proviso to sub section 1 of section 10A, the exemption shall not be allowed in case of not furnishing the return before the due date. In this case the return was filed before the due date and the additions were made due to disallowances discussed above. The similar issue has come before the Hon’ble Bombay High Court in the case of Gem Plus Jewellery
29 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
India Ltd. 330 ITR 0175, wherein, the Hon’ble Bombay High Court held the issue in favour of the assessee and against the revenue. We extract relevant part in page No.12 of the order which reads as under : “12. By reason of the judgment of the Supreme Court in CIT vs. Alom Extrusions Ltd. (2009) 227 CUR (SC) 417 (2009) 32 (Sc) DTR 4 (2009) 319 ITR 306 (Sc) the employers contribution was liable to be allowed, since It was deposited by the due date for the filing of the return. The peculiar position, however, as it obtains in the present case arises out of the fact that the disallowance which was effected by the A0 has not, the Court is informed, been challenged by the assesses. As a matter of fact the question of law which is formulated by the Revenue proceeds on the basis that the assessed income was enhanced due to the disallowance of the employers as well as the employees! contribution towards PF/ESIC and the only question which is canvassed on behalf of the Revenue is whether on that basis the Tribunal was justified in directing the AO to grant the exemption under s.10A. On this position, in the present case it cannot be disputed that the net consequence of the disallowance of the employers and the employees' contribution is that the business profits have to that extent been enhanced. There was, as we have already noted, an add back by the AO to the income. All profits of the unit of the assessee have been derived from manufacturing activity. The salaries paid by the assessee, it has not been disputed, relate to the manufacturing activity. The disallowance of the PF/ESIC payments has been made because of the statutory provisions of section 43B in the case of the employer's contribution and s. 36(v) r.w.s. 2(24)(x) in the case of the employees contribution which has been deemed to be the income of the assessee. The plain consequence of the disallowance and the add back that has been made by the AO is an increase in the business profits of the assessee. The contention of the revenue that in computing the deduction under s.10A the addition made on account of the disallowance of the PF /ESIC payments ought to be ignored cannot be accepted. No statutory provision to that effect having been made, the plain consequence of the disallowance made by the AO must follow. The second question shall accordingly stand answered against the Revenue and in favour of the assessee.”
24.1. In the instant case, the facts are identical, hence, respectfully following the decision of Hon’ble Bombay High Court cited supra, we hold
30 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
that the assessee is entitled for deduction u/s 10A on account of the disallowances/additions made by the AO other than ALP adjustments. Accordingly, we direct the AO to grant exemption u/s 10A on the disallowance made by the AO in respect of section 40(a)(ia) and 36(a)(va) and the adhoc disallowance on foreign travel expenses. The appeal of the assessee for the assessment year 2011-12 and 2012-13 are allowed.
The next issue in this appeal is charging of interest u/s 234B, which is mandatory as per the Act. Therefore, this ground of appeal is dismissed for both the assessment years 2011-12 and 2012-13.
In the result, appeals of the assessee are partly allowed.
The above order was pronounced in the open court on 7th Sep, 2018.
Sd/- Sd/- (वी.दुगगा रगव) (डि.एस. सुन्दर ससह) (V. DURGA RAO) (D.S. SUNDER SINGH) न्यगडयक सदस्य/JUDICIAL MEMBER लेखग सदस्य/ACCOUNTANT MEMBER डवशगखगपटणम /Visakhapatnam ददनगांक /Dated : 07.09.2018 L.Rama, SPS
31 I.T.A Nos.67/Viz/2016& 68/Viz/2017 M/s Mahati Software Pvt. Ltd., Visakhapatnam
आदेश की प्रडिडलडप अग्रेडषि/Copy of the order forwarded to:- 1. निर्धाऩरती/ The Assessee-M/s M/s Mahati Software Pvt. Ltd., D.No.10-27- 14A, Sivam, Kailashmetta, Waltair, Visakhapatnam 2. रधजस्व/ The Revenue – Asst. Commissioner of Income Tax, Circle-3(1) Visakhapatnam 3. The Pr.Commissioner of Income Tax-3, Visakhapatnam 4. The Dy.Commissioner of Income Tax (TPO)-1, Hyderabad 5. The ITO (OSD) & Secretary, Dispute Resolution Panel-1, Bengaluru 6. डवभगगीय प्रडिडनडि, आयकर अपीलीय अडिकरण, डवशगखगपटणम /DR, ITAT, Visakhapatnam 7.गगिाफ़गईल / Guard file
आदेशगनुसगर / BY ORDER // True Copy //
Sr. Private Secretary ITAT, VISAKHAPATNAM