TOSHIBA TECHNICAL SERVICES INTERNATIONAL CORPORATION,MUMBAI vs. THE ADIT.,(INTL.TAXN.)-2, AHMEDABAD

PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER Present appeal has been filed by the assessee against order passed by the ld.Assistant Commissioner of Income-Tax, International Taxation-2, Ahmedabad [hereinafter referred to as “Ld.ACIT(IT) under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 ("the Act" for short) dated 9.8.2019 pertaining to the Asst.Year 2015-16.

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“1. Under the facts and circumstances of the case and in law, the Ld AO erred in assessing the income of the Appellant under the normal provisions of the Act at Rs.7,31,10,000 against returned income of Rs.6,92,02,240 based on the directions received from Hon'ble DRP upholding the adjustment to the transfer price proposed by the learned Transfer Pricing Officer ("TPO").

2.1 Under the facts and circumstances of the case and in law, the Ld AO/ TPO erred in proposing and the Hon'ble DRP further erred in upholding an adjustment of Rs. 39,07,760 pertaining to notional interest on outstanding receivables as on 31 March 2015, alleging that the same to be not at arm's length in terms of the provisions of Sections 92C(1) and 92C(2) of the Act read with Rule 10D of the Income-tax Rules,1962 ("Rules").

2.2 Under the facts and circumstances of the case and in law, the Ld TPO/ DRP/ AO erred in disregarding the detailed arguments/ submissions put forth by the Appellant during the course of the DRP/ assessment proceedings while passing its direction under section 144C of the Act.

2.3 Under the facts and circumstances of the case and in law, the Ld TPO/ DRP/ AO erred in imputing interest on the outstanding receivables from the AEs ignoring the fact that the Appellant followed the same policy of not charging any interest on trade receivables from both AEs as well as Non-AEs.

Under the facts and circumstances of the case and in law, the Ld TPO/ DRP/ AO erred in ignoring the fact that the Appellant has done a business transaction (rendering of technical advisory services) with its AE. To benchmark the said transaction, the Appellant has applied Transactional Net Margin Method ("TNMM") as Most Appropriate Method ("MAM"). Accordingly, once the Ld TPO/ DRP/ AO has accepted the TNMM as MAM, the consequential outstanding receivable is covered in the arm's length pricing. Therefore, no separate adjustment for notional interest on delayed payment is required to be adjusted.

2.5 Under the facts and circumstances of the case and in law, the Ld TPO/ DRP/ AO erred in re-characterizing the outstanding receivables/ unbilled revenue from Associated Enterprises ("AEs") of the Appellant as unsecured loan and computing notional interest on delays in realization of payment from the AEs.

2.6 Under the facts and circumstances of the case and in law, the Ld TPO/ DRP/ AO erred in computing interest on unbilled revenue which is the amount accrued to the Appellant and credited to the profit and loss account as income. However, since the services are ongoing as on 31 March, invoice in relation to the same is not raised on the customers. Therefore, in the absence of the actual invoicing to the respective customer, the Ld TPO/ DRP/ AO has erred in characterizing unbilled revenue as 'debtor/accounts receivables'.

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2.7 Without prejudice to the above, under the facts and circumstances of the case and in law, the Ld DRP/ AO erred in computing notional interest on unbilled revenue from Toshiba JSW Power Systems Private Limited as on 31 March 2015 for invoice numbers E04443 and E04445 which were received 85 days before the due date.

The learned AO erred in incorrectly levying surcharge at the rate of 5% instead of levying surcharge at the rate of 2%.

The learned AO erred in levying surcharge and education cess on the tax payable on income chargeable to tax at the rate of 10% as per Article 12(2) of the India-Japan Tax Treaty.

The learned AO erred in levying interest under section 234D of the Act.

The learned AO erred in not correctly granting the interest under section 244A of the Act.

That on facts and circumstances of the case and in law the learned AO erred in proposing the initiation of the penalty proceedings under section 271(1) (c) of the Act.

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i) That the actual outstanding receivables amounted to only Rs.57,17,385/- and the balance of Rs.11,71,68,167/- were outstanding on account of unbilled revenues.

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Therefore, the amount on account of unbilled revenues having not accrued to the assessee itself, there was no question of charging notional interest on the outstanding amount on account of unbilled revenue;

ii) That the assessee had not been identically charging interest with its unrelated parties also, and therefore, non-charging of interest from the AE outstanding receivables was justified to be at arm’s length with internal comparison made by the assessee.

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to the contentions made before the ld.DRP which were summarized at page no.5.2.3 as under:

“5.2.3 In this relation, the assessee stated that the outstanding receivables refer to the amounts which have accrued to the assessee and invoice has been raised by assessee, but not received at the end of the year. Whereas, unbilled revenue is the amount which is accrued to the assessee and credited to the profit and loss account as income: however, invoice in relation to the same is not raised on the customers. Further, the assessee submitted follows mercantile system of accounting. As per this, revenue is recognized when it is accrued. Accordingly, the assessee recognized the income accrued to it in a particular year based on services rendered during that year. There may be cases wherein the services are on-going as on 31 March but invoice has not been raised for such services. However during the process of audit, income from the said services are accrued in the books of account and recognized as revenue from operations and unbilled revenue as an asset as per the relevant accounting standard and accounting principal. Further, in the absence of the actual invoicing to the respective customer, the same is not characterized as "debtor/accounts receivables'. Accordingly, the same is disclosed as unbilled revenue and has been recognised in revenue from operations and shown as an asset in financial statement. Also, the amount of unbilled revenue is duly offered to tax in return of income filed for FY 2014-15.”

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“5.8. As to the contention of the assessee raised vide Ground No. (iii) that interest should not he imputed in respect of unbilled amount, we observe that it is an admitted position that the assessee follows the Mercantile system of accounting. It has been stated that the outstanding receivables refer to the amounts which have accrued to the assessee and invoice has been raised by assessee. but not received at the end of the year. On the other hand, unbilled revenue is the amount which has accrued to the assessee and credited to the profit and loss account as income; however, invoice in relation to the same is not raised on the customers. We fail to understand how the amount which is admittedly accrued to the assessee and credited to the profit and loss account could not be considered as "outstanding'" when the assessee is following mercantile system of accounting. The contention of the assessee that the same should be considered as outstanding only when the invoice is raised to the customers is ex facie contrary to the principles of mercantile system of accounting. Moreover, since we are looking into transactions with AE, it is immaterial when the invoice is raised as the same could easily be arranged and managed between the AEs. The contention of the assessee in this regard is not acceptable. Ground No(iii) is, accordingly, rejected.”

It is an admitted fact that Rs.11,71,68,167/- of the outstanding receivables relate to unbilled amounts; that the bills in relation to these amounts were raised by the assessee on its AE in the subsequent year. The Revenue does not dispute this position.

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Having said so, until bill is raised the assessee has no right to recover any amount from the other party, because it is the bill which notifies the other party of fixing liability on it to pay certain amounts. Until then, the assessee has no right to recover any amount. Therefore, with no right of recovery with the assessee, the amounts outstanding on account of unbilled amounts cannot be said to be outstanding “debtors” since no debt has accrued on the other party on account of these amounts. The other party having neither received the bill and as a consequence not accepted the same also, therefore, there is no debt which is accrued on the other party. In view of the same, these outstanding amounts on account of unbilled revenues cannot be termed as outstanding debtors and there is no question of charging any interest for the delayed recovery of the same. The unbilled revenue amounting to Rs. 11,71,68,167/- is therefore, we hold not to be treated as accounts receivable for the purposes of making any adjustment on account of noyionl interest earned thereon.

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the amount outstanding with respect to AE it is only an amount of Rs.57,17,385/- which is to be considered, being the amount actually billed to the AE and outstanding as at the end of the year. It is a fact on record that with respect to non-AE also the assessee has not charged any interest on the outstanding balance, and again it is a fact that on record that the amount invoiced to non-AE is to the tune of Rs.4.12 crores. Therefore, even going by volume, the billed revenue with non-AE is much more than the AE and the outstanding receivable from AE and non-AE can be reasonably compared, even as per the reasoning of the ld.DRP. In the present case, no interest having been charged by the assessee to the non-AE outstandings, its transaction of outstanding receivables with AE without charging any interest on the same is therefore held to be justified to be at arm’s length. No adjustment, we hold therefore ,is to be made on account of non charging of interest on outstanding receivables of AE. And the adjustment made of Rs.39,07,760/- on account of the same is therefore directed to be deleted.

Ground of appeal No.2 is allowed

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various incomes earned by the assessee which did not reflect the impugned TDS but the assessee was entitled to claim credit of this TDS of Rs.2.29 crores as per provisions of section 199 of the Act read with Rule 37BA of the Income Tax Rules, 1962 which entitled the assessee to credit for TDS on all incomes assessable during the impugned year. He stated that since the assessee had returned income to which the impugned TDS related in the impugned year itself, the assessee was entitled to credit of TDS deducted on the same even though deducted in the subsequent year.

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contentions of the assessee, verify all the documents placed by the assessee in support of its contention and thereafter allow the credit of TDS to the assessee in accordance with law.

Ground of appeal No.4 of the assessee is allowed for statistical purpose.

Order pronounced in the Court on 12th October, 2022 at Ahmedabad.

Sd/- Sd/- (SUCHITRA R. KAMBLE) (ANNAPURNA GUPTA) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad, dated 12/10/2022