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Before: Shri Bhavnesh Saini & Shri L.P. Sahu
ORDER Per L.P. Sahu, A.M.: This is an appeal filed by the assessee against the order of the AO/TPO passed u/s. 143(3)/92CA/144C/ r.w.s. 154 of the IT Act dated 15.01.2015 passed in pursuance to the direction of the DRP dated 16.12.2014 on the following grounds of appeal :
On the facts and circumstances of the case and in law, the learned Assessing Officer (“AO”) has erred in passing the assessment order under Section 143(3) read with section 144C of the Income-tax Act, 1961 (“the Act”) after considering the adjustments proposed by the Additional Commissioner of Income-tax, Transfer Pricing Officer - 2(2), New Delhi (“TPO”) in his order passed under Section 92CA(3) of the Act and subsequently confirmed by the Hon’ble Dispute Resolution Panel (“DRP”). However, a subsequent order under section 154 of the Act dated 4
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February 2015 was issued by the learned AO rectifying certain errors apparent from record.
Each of the ground is referred to separately, which may kindly be considered independent of each other and without prejudice to each other.
That on the facts and circumstances of the case and in law,
Transfer Pricing grounds: 1. The learned AO / TPO / DRP has erred in making an addition of INR 11,432,576 to the total income of the appellant on account of a transfer pricing adjustment
The learned AO/TPO/DRP have erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 (“the Rules”).
3. The learned AO / TPO / DRP have erred in making an adjustment under Section 92CA(3) of the Act without returning a finding about existence of any of the circumstances specified in clauses (a) to (d) of sub- section (3) of Section 92C of the Act.
4. The learned AO / TPO / DRP have erred by considering outstanding receivables as a separate international transaction and benchmarking the same using CUP as the Most Appropriate Method.
5. The learned AO / TPO / DRP have erred by considering outstanding receivables as a loan extended by the appellant to its associated enterprise and imputing interest on the same, thereby making an adjustment of INR 11,432,576 to the returned income of the appellant.
6. The CUP analysis undertaken by the TPO and upheld by DRP is flawed and does not represent an uncontrolled transaction.
7. The learned AO / TPO / DRP failed to appreciate that once working capital adjustment is granted, no separate adjustment is required on account of interest on outstanding receivables.
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8. The learned AO/TPO/DRP have erred in re-computing the arm’s length margin of international transaction pertaining to IT-enabled services.
9. The learned AO has grossly erred in initiating penalty proceedings under section 271 (1 )(c) of the Act. 10. The learned AO has erred in levying interest under section 234B of the Act while completely disregarding the provisions of the Act and the judicial precedence. 2. The brief facts of the case are that the assessee filed return of income on 30.09.2010 declaring income of Rs. 15,47,056/-. The case was selected for scrutiny and statutory notices were issued to the assessee. During the course of scrutiny proceedings the ld. AO observed that the assessee has entered in the international transactions with its Associate Enterprises worth Rs. 1,15,84,12,481/-. Therefore, the same was forwarded to the ld. Transfer Pricing Officer (TPO) for determination of Arm’s Length Price (ALP). The assessee, Metlife Global Operations Support Center Pvt. Ltd. (MGOSC) is a private Ltd. Co. and incorporated on 11.04.2008 which is a wholly owned subsidiary company of MSPL and renders the following business process outsourcing and information technology (IT) enabled services to MSPL :
• Actuarial data compilation and analysis • Administration services • Finance accounting and administrative corporate services • Investment analysis and reporting • Case implementation services • Transcription services • Financial Control and reporting process • Correspondence services • Quality assurance functions • Billing and remittance process • Pre-and post underwriting review
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• Claims reporting services and clinical consultation process for claim administration • Broker operations • Account management • Distribution support and • Other relevant services
Before us, the main issue involved is regarding receivables. The other issues are consequential. The Ld. authorised representative argued only for the adjustment regarding receivables and alternatively on working capital adjustment. On perusal of the details submitted by the authorised representative of the assessee, the Ld. transfer pricing officer observed that the payment on account of sales to associate Enterprises is realised after significant time period and that the realisation of payment will rise to more than a year which is non-realisation of payments from AEs within the period specified in the agreement. He further observed that such type of realisation in trade practice carries some kind of penal rate of interest depending on case to case and no independent enterprises would have allowed the 3rd parties to make late payments or else would have charged higher prices for delayed payments. The Ld. TPO referred to the agreements regarding charges and terms of payment and noted that all invoices, shall be based on the projects and shall be payable to service provider within 30 days from the date of receipt of invoice by associate Enterprises. Therefore any delay in realisation of payment beyond 30 days should attract penal interest. This very description clearly shows that the payment is to be made within 90 days from the date of receipt of invoice. However, no penal interest has been specified in the invoices. The Ld. TPO calculated trade interest on delayed payments as per table below.
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Delay Interest on in Total billed (in delayed time reallsa Invoice Realisation INR) Party due date (@14.88%) Particulars Date date tion ITES for Apr 09 28-05-2009 7,34,72,840 27-06-2009 01-07-2009 4 1,11,77 1TES for May - June 09 08 07-2009 15,11,04,098 07-08-2009 24-09-2009 48 27,81,79 ITES for ]uly09 06-08-2009 8,35,70,771 05-09-2009 04-12-2009 90 29,07,93 ITES for Aug09 Z2-09-2009 8,70,41,545 22-10-2009 04-12-2009 43 14,34,12 ITES for Sept 09 22-10-2009 9,64,78,867 21-11-2009 20-01-2010 60 22,25,27 TTES for 0ct 09 22-11-2009 11,22,29,550 20-12-2009 20-01-2010 31 13,30,05 ITES for Nov 09 28-01-2010 20 01-2010 29-12-2009 11,82,21,795 0 ITES for Dec 09 20-01-2010 12,02,66,821 19-02-2010 05-03-2010 14 6,41,60 ITES for Jan 10 19-02-2010 13,03,64,371 20-04-2010 05-03-2010 0 ITES for Feb 10 24-03-2010 8,31,72,979 23-05-2010 12-04-2010 0 Accrual for March 10 10,34,18,820 1,15,93,42.457 1,14,32,576 The assessee had submitted Transfer Pricing Study Report before the Transfer Pricing Officer (TPO). After examination of documents submitted by the assessee, the TPO excluded some of the comparables and included some new comparables either on account of functional dissimilarity or insufficient financial information or different financial years etc., passed his order on 20.01.2014 directing the Assessing Officer to enhance the income of the assessee by Rs. 9,00,86,343/- on account of difference in the Arm’s Length Price (ALP) of international transaction of provision of IT Enabled Services ( Rs. 7,86,53,767) and Receivables ( Rs. 1,14,32,576) . The AO accordingly, made draft assessment order on 12.03.2014. Against the draft assessment order, the assessee filed objections before the ld. Dispute Resolution Penal (DRP), who rejected the objections of the assessee vide order dated 16.12.2014. Accordingly, in compliance to the directions of DRP, the AO made final assessment order on 06.01.2015. On rectification application filed by assessee u/s 154 dated 05.01.2015, the ld. TPO, however, restricted the addition only with respect to Receivables to the extent of Rs. 1,14,32,576/-
ITA No. 826/Del./2015 6 and deleted the addition of Rs.7,86,53,767/- with respect to provision of IT Enabled Services. The AO accordingly also made rectification vide order dated 04.02.2015 u/s. 154 in final assessment. Aggrieved, the assessee is in appeal before the Tribunal.
The LD. Authorised Representative reiterated the submission made before the lower authorities and submitted that the lower authorities are not justified to make addition as per provisions of section 92CA (3) of the Income Tax Act, 1961. He also objected regarding application of CUP method adopted by the TPO for addition on Receivables. The ld. TPO did not concur with economic analysis undertaken by the assessee and modified the list of comparables companies for determining the ALP of the impugned transactions. The ld. TPO did not agree with the assessee’s contentions and in view of expended definition of “international transaction” inserted retrospectively, proceeded to benchmark the interest on inter-company outstanding receivables (arising on account of provision of IT-enabled services) by treating it as advancing of unsecured loan to its AE and computed notional interest thereon. Accordingly, while preparing TP documentation, the assessee did not report outstanding receivables as a separate international transaction. However, the Finance Act, 2012 the definition of “international transaction” was retrospectively amended to include “inter-company receivables” as a separate international transaction.
It was next submitted that a person cannot be expected to do what he cannot reasonably perform. This is also known as the Principle of “Impossibility of performance” (also known as the maxim of ‘lex non cogit ad impossibilia), which implies that if it appears that performance of the ITA No. 826/Del./2015 7 formalities prescribed by a statute has been rendered impossible by circumstances over which the persons interested had no control, then these circumstances will be taken as a valid excuse, as also held in various decisions. The ld. AR has relied on the following decisions in this context.
(i). Supdt. of Taxes, Dhubri & Others v. Onkarmal Nathmal Trust & Others (1975) 4 CTR 172 (ii). South Eastern Coalfields Ltd. v. JCIT (2002) 260 ITR 1 (iii). Income Tax Officer v. LIC of India (2001) 79 ITD 278 (iv). ACIT v. Jindal Irrigation Systems Limited (1996) 56 ITD164 (v). Mafatlal Apparel Mfg. Co. Ltd. v. DCIT (1998) 61 TTJ 323
It was therefore, submitted that that early or late realization of sale/ service proceeds is incidental to the transaction of sale/ service, and not a separate transaction in itself. In other words, these represent the consequence of an international transaction and not an international transaction per-se. If the ALP in respect of an international transaction of sale is determined, then there can be no question of treating non-receipt of interest in such transaction as separate international transaction warranting any further adjustment. Once ALP is determined in respect of the sale/service transaction, it would be deemed to be covering all the elements and consequences of such transaction of sale/service. This is more relevant in view of the fact that the assessee had entered into inter-company agreement governing the provision of the aforesaid services and the terms and conditions of the agreement were concluded on arm’s length basis upon detailed negotiations by the assessee with its AE. Hence, after having determined the ALP in a sale/service transaction, it cannot be assumed that separate adjustment is required in respect of interest there from, since outstanding receivables emanate from the service transaction itself, which has already been benchmarked. The ld. AR,
ITA No. 826/Del./2015 8 therefore, submitted that determination of ALP in respect of outstanding receivables from inter-company transactions is not required, once ALP of inter-company transactions has been already determined and no separate adjustment is necessary in this regard.
Regarding re-characterization of outstanding receivables as unsecured loan advanced to AE, it was submitted that the learned TPO has erroneously re-characterized outstanding receivables as unsecured loans advanced by the assessee to its AE, ignoring the facts and circumstances of the case and without understanding and appreciating the bona-fide nature of terms of Agreement entered into by the assessee with its AE. The learned TPO has failed to understand and appreciate the bona fide nature of terms of the written agreement between the assessee and the AE regarding credit period allowed to the AE. In this respect, he drew our kind attention to the decision of the jurisdictional Delhi bench of the Hon’ble ITAT in the case of Sony India Private Limited (2008) 114 ITD 448 wherein it was held that form and substance of a transaction should be respected as long as there is a written agreement in place. In the absence of information to the contrary, the business and commercial substance of a transaction should not be challenged. The relevant extracts of the decision are provided for ready reference as under: "We are, therefore, of the view that TPO and other revenue authorities were not justified in equating this reimbursement with equity or windfall gain or subsidy or some ad hoc payment. The AE had chosen to fund the advertising campaign for products launched under the brand name “Sony”. The genuineness or bonafide of the agreement has not been doubted or disputed at any stage of the proceeding. In fact it has been accepted that the agreement has been given effect to and reimbursement received by the taxpayer from Sony Pacific as per agreement...” (Emphasis supplied)
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In the instant case, it was submitted that since outstanding balances arise in the course of regular dealings with its AE (and not from advancing of money, indicating an intent to lend), it would be improper and beyond jurisdiction of the learned TPO to re-characterize outstanding receivables (arising in course of regular dealings of business) as advancing of money (in the nature of unsecured loan). This view is also stated to be supported by Para 1.64 of the OECD Guidelines, which lay emphasis on the fact that it is desirable for income-tax authorities to recognise and appreciate the actual transactions undertaken by a taxpayer and the same should not be disregarded barring exceptional circumstances. The relevant extracts of the guidelines are extracted as under : “D.2 Recognition of the actual transactions undertaken A tax administration’s examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapter II. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured.” (Emphasis supplied)
In this context, reliance is also placed on the decision in the case of Evonik Degussa India Private Limited (ITA No. 7653/MUM/2011) and Abhishek Auto Industries Limited (2010) 136 TTJ 530. On the strength of these decisions, it is submitted on behalf of the assessee that it was necessary for the Income-tax authorities to accept and recognise a transaction as such and not to dictate or govern the terms thereof. Several other decisions of ITAT are also relied by the ld. AR of the assessee. He further submitted that the case
ITA No. 826/Del./2015 10 laws relied by the Revenue are on different footings, therefore, the same are not applicable in the present facts of the case.
On the other hand the Ld. DR relied on the order of the lower authorities and submitted that the lower authorities are justified to make addition on receivables. Therefore, the order of the authorities below should be restored. He further submitted that the assessee has received payments beyond the prescribed period as per agreements made between the parties regarding sales realization. The ld. TPO has rightly re-characterized it as unsecured loan to AEs without charging any interest. They have rightly selected the comparables which are functionally similar with the assessee’s business and economic analysis of the comparables has been done correctly. The Finance Act, 2012 has made amendment in the definition of International transactions which includes “inter-company receivables” as a separate international transaction with retrospective effect. Therefore, the assessee has committed mistake while preparing the TP Study Report and did not include the receivables. The decisions relied by the ld. AR are not applicable to the present case.
After hearing both the sides and perusing the entire material available on record, we find that the assessee has not charged any interest on the inter- company receivables which have been received beyond the period of agreement. The case of assessee pertains to A.Y. 2010-11, during which the inter-company receivables were not included in the category of international transaction. The inclusion of such receivables in international transaction was made by Finance Act, 2012 with retrospective effect. Therefore, it was not possible for the assessee to perform the formalities enunciated by the Finance
ITA No. 826/Del./2015 11 Act, while preparing the TP study report for the year under consideration. In other words, it was not open for the assessee to include inter-company receivable in the international transactions in the TP study report and thus, the assessee had a good excuse for the same, as also held in various decision relied by the ld. AR. Moreover, the case of the assessee stands on parallel footings as the decision of ITAT Mumbai Bench in the case of Evonik Degussa Inida Private Limited (supra), wherein, the co-ordinate Bench of Tribunal in para 28 of the order has observed as under :
“28. After carefully considering the rival submissions and the orders of the TPO as well as the direction of the DRP, we find that the assessee has no interest liability and it does not have any external borrowings. Even if the payments have been made by the A.E. beyond the normal credit period, there is no interest cost to the assessee. Moreover, there is no such agreement whereby interest is to be charged n such a delayed payment. From the summary of payment submitted by the learned Counsel, it is seen that the billing is done on quarterly basis and, accordingly, the payment is being received. Therefore, the delay is not wholly on account of late payment by the A.Es only. Moreover, the T.P. adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. Thus, on the facts and circumstances of the case, we are of the opinion that addition on account of notional interest relating to alleged delayed payment in collection of receivables from the AEs, is uncalled for on the facts of the present case and is, accordingly, deleted.”
In the case in hand, there is no interest liability or any external borrowings. In the agreement too, there is no condition to charge any interest for delayed payments by the AEs. The Revenue could not be able to adduce any contrary material against the aforesaid decision. Therefore, respectfully following the decision of co-ordinate Bench, the ld. Authorities below are not justified to make addition on inter-company receivables, as computed by ITA No. 826/Del./2015 12 them. Accordingly, the appeal of the assessee deserves to be allowed on this count. The other grounds raised by the assessee are consequential to this issue and therefore, the same do not need separate adjudication.