M/S.IBS SOFTWARE SERVICES P. LTD,TRIVANDRUM vs. THE DCIT, TRIVANDRUM

(b) Loss on onerous contracts of INR.5,66,26,572/-

(c) Disallowance under Section 36(1)(va) of the Act of INR.77,71,759/-

(d) Disallowance under Section 36(1)(iii) of the Act of 2 Assessment Year 2013-2014 INR.12,68,911/- The Assessee has now preferred the present appeal challenging Final Assessment Order. The Assessee has raised 17 Grounds of Appeal which are taken up in seriatim hereinafter.

Ground No.1

1. That the order of the learned Assistant Commissioner of Income-tax, Circle 1(1), Thiruvananthapuram (Assessing Officer' or learned AO') pursuant to the directions of the learned Dispute Resolution Panel -II (learned Panel), to the extent prejudicial to the Appellant, is bad in law and liable to be quashed.

3.1. Ground No.1 raised by the Assessee does not require specific adjudication and is dismissed as being general in nature.

Ground No.2

2. That the directions of the learned Panel and the consequent assessment order is bad in law and on facts while upholding the action of the learned Additional Commissioner of Income- tax, (Transfer Pricing). Kochi (learned Transfer Pricing Officer' or 'learned TPO) of making an adjustment of INR 310,952.334 to the transfer price of the Appellant's international transaction with its associated enterprises ('AEs').

4.1. The above ground raised by the Assessee does not require specific adjudication and is dismissed as being general in nature.

Ground No.3 to 7

3 Assessment Year 2013-2014 “Imputation of notional interest “3. On the facts and circumstances of the case and in law, the learned AO erred in making and adjustment of INR.292,487,928/- to the income of the Appellant in respect of notional interest on delay in collection of trade receivables from Associated Enterprises ("AEs") and INR.16,092,646/- to the income of the Appellant in respect of notional interest on delay in collection of loans and advances from AEs.

4. In doing so, the learned AO/TPO erred in: 4.1. considering overdue receivable from the AEs as a separate international transaction under the provisions of section 92B of the Income-tax Act, 1961; 4.2. disregarding the fact that the Appellant has not charged any interest to its non-AEs for the delay in collection of dues.

5. Without prejudice to ground nos. 3 & 4, the learned AO/TPO erred in not restricting the time period to 31 March while computing the notional interest on overdue receivable of the relevant financial year. 6 Without prejudice to ground nos. 3 & 4. the learned AO/TPO erred in ignoring that, if at all transfer pricing adjustment to be sustained with respect to notional interest on overdue receivables, it should be restricted to AEs outstanding for more than 150 days.

7. Without prejudice to ground nos. 3 & 4, the learned AO/TPO erred in ignoring that, if at all transfer pricing adjustment has to be sustained with respect to notional interest on overdue receivables, it has to be restricted at an interest rate of LIBOR as against SBI PLR rate.”

5.1. We have heard both the sides on the grounds under consideration and have perused the material on record.

5.2. We are of the considered view that the loans/advances to AEs as well as outstanding receivables fall with the definition of term ‘International Transaction’ as defined in Section 92B of the Act. The Finance Act, 2012 extended the definition of expression ‘International Transaction’ to include capital financing, loans, advances, deferred payments, and receivables. After the retrospective amendment introduced by the Finance Act, 2012 in the 4 Assessment Year 2013-2014 definition of expression ‘International Transaction’ the issue raised by Assessee is no longer res-Integra. The amendment explicitly included ‘receivables’ as part of ‘International Transactions’. Therefore, we reject the contention of the Assessee that overdue receivable from the AEs do not constitute a separate international transaction under the provisions of Section 92B of the Act. We also reject the contention of the Assessee that continuing debit balance of short term advances did not constitute an ‘International Transaction’. Therefore, Ground No. 4.1 raised by the Assessee is dismissed.

5.3. During the assessment proceedings the TPO noted that the Assessee was providing loans and advances to its AEs and was not charging any interest. When the Assessee was asked to provide explanation it was submitted on behalf of the Assessee that no interest should be charged on the loans/advances to AEs. The Assessee contended that the loans/advances given to the AEs were of temporary nature given in the ordinary course of business. The same were given either on account of commercial expediency or represented payments made on behalf of AEs to be recovered from AEs within a reasonable period of time. Assessee contended that no notional interest needs to be charged on interest free loans/advances to AEs. Without prejudice to the aforesaid contention, the Assessee submitted that loans to its AEs are in foreign currency (i.e., USD and GBP) and therefore, the LIBOR Rates for the said currencies should be considered as a suitable benchmark for determining the ALP of rate of interest to be charged. The aforesaid contentions were examined and rejected by the TPO. The TPO computed notional interest taking SBI Prime Lending Rate (14.475%) as the basis with Mark-up of 3%. TPO observed that the source of funds was from India and therefore, LIBOR Rate could not be adopted. Since the Assessee had aggregate Loans/ Advances to AEs amounting to INR.9,20,89,535/-, the TPO proposed adjustment of INR.1,60,92,646/- [INR.9,20,89,535/- x 5 Assessment Year 2013-2014 17.475%] in respect of notional interest on loans/advances.

5.4. Adopting identical reasoning, the TPO also proposed transfer pricing adjustment of INR.29,24,87,928/- in respect of interest on outstanding receivables [INR.167,37,50,666/- x 17.475%]. Before the TPO the Assessee had contended that no notional interest was required to be imputed as (a) the Assessee was following a consistent policy of not charging interest on outstanding receivables from AEs & non-AEs, and (b) the primary transaction was benchmarked and accepted by the TPO as being at arm’s length.

5.5. The Assessing Officer incorporated the above transfer pricing adjustments on account of notional interest in the Draft Assessment Order. The filed objections before the DRP which were rejected. Resulting into addition of INR.1,60,92,646/-, and INR.29,24,87,928/- on account of notional interest in Loans/Advances and Outstanding Receivables, respectively.

5.6. Before us, both sides reiterated their respective submission/stand before the authorities below.

5.7. Perusal of the orders passed by the authorities below show that the Assessee has consistently contended that the Assessee as followed a policy of not charging interest on receivables from AEs and non-AEs. In our view, the aforesaid contention has been rejected by the authorities below without examining the policy. We are of the view that in case the Assessee is able to establish that in case of independent third parties for similar transaction with similar credit period of similar goods no interest has been charged by the Assessee, then the same would constitute as an internal CUP. Given the fact view of the fact that the TPO has accepted the primary international transaction as being a arm’s length, no adjustment on account of notional interest would be warranted. Accordingly, we deem it appropriate to set aside the Transfer Pricing Addition of 6 Assessment Year 2013-2014 INR.29,24,87,928/- and restore the issue back to the file of TPO/Assessing Officer for denovo adjudication in terms of our observations. The Assessing Officer/TPO is directed to ascertain whether the Assessee had consistently followed the policy of not charging interest from AEs and non-AEs for delayed realization of receivables. For the aforesaid the Assessee is directed to place before the Assessing Officer/TPO, all the relevant material show that in case of similar transaction with similar credit period of similar goods no interest was charged by the Assessee on outstanding receivables from a non-AE. In terms of the aforesaid Ground No. 4.2 raised by the Assessee is allowed for statistical purposes.

5.8. Since we have restored the issue of notional interest on outstanding receivables as aforesaid, Ground No. 5 & 6 are dismissed as having been rendered infructuous at this stage. However, before parting we would like to observe that the TPO/Assessing Officer erred in computing the notional interest in receivables by applying the interest rate of 17.475% for the whole year taking the outstanding receivables at the end of the year as the basis. In our view the notional interest, if any, can only be charged on the outstanding receivables from AE for the period for which the respective receivable from the AE was overdue beyond the normal period of credit provided to a non-AE by the Assessee for a comparable transaction.

5.9. As regards interest rate on which notional interest has been charged on Loans and Advances is concerned, we find merit in the contention advanced on behalf of the Assessee that in case of loans and advances denominated in foreign currencies, LIBOR Rates would be more suitable for benchmarking. In the case of Commissioner of Income-tax -I vs. Cotton Naturals (I) (P.) Ltd. : [2015] 231 Taxman 401 (Delhi)/[2015] 276 CTR 445 (Delhi)[27-03-2015], it was held by the Hon’ble Delhi High Court held that when loans or trade 7 Assessment Year 2013-2014 receivables are denominated in foreign currency, the arm’s length interest rate should reference the international market rate (such as LIBOR) plus an appropriate basis point spread, not Indian domestic rates. Accordingly, we direct the Assessing Officer/TPO to benchmark the international transaction of Loan/Advances to AEs using applicable LIBOR Rate. Accordingly, in terms of the aforesaid the transfer pricing addition of INR. is set aside with the direction to compute the ALP and transfer pricing addition, if any, afresh using LIBOR Rates. Thus, Ground No.7 is partly allowed.

5.10. In terms of above, Ground No. 3 is partly allowed, Ground No. 4.1 is dismissed, Ground No. 4.2. is allowed for statistical purposes, Ground No. 5 & 6 are dismissed (as being infructuous) and Ground No. 7 is partly allowed.

Ground No.8

Recovery of expenses “8. That the directions of the learned Panel and the consequent assessment order is bad in law and on facts while upholding the learned TPO's action in concluding that the recovery of expenses is not on cost to cost basis”. 6.1. In this regard, it was submitted by the Assessee that these expenses were not part of normal business operations. The same were in the nature of reimbursements of third party expenses incurred by the Assessee on behalf of its AEs involving no element of profit. Therefore, not requiring any mark-up.

6.2. Perusal of the order passed by the TPO, on which reliance was placed by the Learned Departmental Representative, shows that notional interest has been computed at the rate of 17.475% on cost 8 Assessment Year 2013-2014 recovery of INR.1.357 Crores. In our view, the aforesaid approach adopted by the TPO cannot be countenanced. At the same time we note that the TPO has noted that the Assessee had failed to establish that the INR.1.37 Crore represented reimbursement of expense received from AEs on cost to cost basis. No third party evidence were furnished by the Assessee. The DRP has also concurred with the TPO on this issue. Before us, the Learned Authorised Representative for the Assessee reiterated that the expenses were recovered from AEs on cost to cost basis and did not have any element of profit. Keeping in view the overall facts and circumstances of the case, we deem it appropriate to set aside the transfer pricing adjustment of INR.23,71,760/- and restore this issue back to the file of Assessing Officer/TPO for denovo adjudication. The Assessee is directed to produce all relevant documents/detauks before the Assessing Officer/TPO to substantiate that transaction under consideration were on cost to cost basis and did not include any mark up. Thus, Ground No. 8 raised by the Assessee is allowed for statistical purposes.

Ground No.9 to 11

Disallowance of Loss on Onerous Contracts “9. That on the facts and circumstances of the case, the learned AO and the learned Panel erred in disallowing INR 566,26,572/- representing anticipated loss on onerous contracts entered into by the company.

10. That on the facts and circumstances of the case, the learned AO and the learned Panel erred in treating the provision for loss on onerous contract as contingent in nature.

11. That on the facts and circumstances of the case, the learned AO and learned Panel erred in not appreciating the facts of the 9 Assessment Year 2013-2014 case by holding that the loss on onerous contracts claimed in the Profit and Loss account is in the nature of provision for expenses not allowable as deduction for the year under consideration.

“6.1 This is a new ground before the DRP and did not exist in the previous years. On a perusal of the facts and circumstances indicate that this is only a provision make for the F.Y.2012-13 on anticipated loss in the subsequent years.

6.2 As per the evidence submitted by the assesse in the form of settlement deed the following facts are noticed a. The settlement deed was signed with Make My Trip India Private Limited on 12-06-2014 b. The settlement deed was signed with Shanghai Bertelsmen Commercial Services Co., Ltd on 30-06-2015. 6.3 The perusal of the above settlement deed would indicate that the loss on onerous contract has crystalized only in the F.Y 2014- 15 & 2015-16 and therefore the anticipated loss debited for the account for the F.Y 2012-13 cannot be allowed in the hands of the assessee as contended by the AO in the para 3 of his order. Therefore we are in agreement with the AO on this ground. The objection of the assessee is not accepted and the grounds are rejected.”

Ground No.12 to 13

“Disallowance of Employees Contribution to Provident Fund("PF") and Employee State Insurance("ESI") under section 36(1)(va) 12. That on the facts and circumstances of the case, the learned AO and the learned Panel erred in disallowing an amount of INR 77,71,759/- on the ground that Employees contribution to PF and ESI has been made after the due date specified in the governing Acts.

12 Assessment Year 2013-2014 13. That on the facts and circumstances of the case, the learned AO and the learned Panel erred in not considering the facts of the case Le. even though the amounts were paid after the due date specified in the respective governing Acts, however for the purpose of claiming deduction under the Act, the amounts were paid within the due date of filing return of income and hence allowable as deduction under the provisions of section 36(1) (va) of the Act.

Ground No.14 & 15

Disallowance of Interest Expenditure under section 36(1)(iii)

14. That on the facts and circumstances of the case, the learned 13 Assessment Year 2013-2014 AO and the learned Panel erred in disallowing the proportionate interest of INR 12,68,911/- relating to certain expenses incurred by the appellant on behalf of the subsidiary/ group company/associated enterprise.

15. That on the facts and circumstances of the case, the learned AO and the learned Panel erred in holding that the appellant has not produced any basis to substantiate its claim that expenses incurred by the appellant on behalf of the subsidiary/ group company/ associated enterprise were made in the ordinary course of business and out of commercial expediency.

The facts relevant for the grounds under consideration are that as at the end of the relevant previous year 2012-2013, the Assessee had outstanding loan of INR.10,602,772/- given to IBS Technologies Private Limited, a wholly owned subsidiary of the Assessee- Company. The Assessing Officer was of the view that the Assessee had utilized interest bearing funds to grant interest free loans to its subsidiary. Therefore, the Assessing Officer disallowed proportionate interest expenses of INR.12,68,911/-.

The DRP concurred with the Assessing Officer and rejected the objections raised by the Assessee.

Before us it was contended on behalf of the Assessee that loans were granted on account of commercial expediency and out of interest free funds. However, we note that the Assessing Officer/DRP has returned concurrent finding that no supporting documents were filed by the Assessee. Therefore, we do not find any infirmity in the order passed by the authorities below. Ground No. 14 and 15 raised by the Assessee are dismissed.

Ground No.16

14 Assessment Year 2013-2014 Ground No.17