DCIT CORPORATE CIRCLE 3(2), CHENNAI vs. VERIZON DATA SERVICES PVT. LTD., CHENNAI

The Revenue filed this appeal against the order of the Commissioner of Income Tax (Appeals)-11, Chennai in dated 31.08.2017 for the assessment year 2013-14.

M/s. Verizon Data Services India (P) Ltd., the assessee, is engaged in development of maintenance of software for telecom operations and business support services. While making the assessment for the assessment year 2013-14, the Transfer Pricing Officer mentioned in the transfer pricing order that the assessee was due to receive remuneration of services within a specified due date. However, it has not enforced payment and legal right provided thereby. Therefore, the TPO came to the conclusion that the action of the assessee was a willful choice to keep the funds with its associated enterprises ("AEs") which is nothing but an act of financing or funding of AEs. The TPO has also drawn support from the amendment made by way of Finance Act 2012 to the term, 'International Transaction' where the scope of definition is made wide enough to include receivables as separate international transactions. Capital financing includes receivables also as per the amendment in Finance Act, 2012. According to the TPO, the assessee, instead of providing loan or funding out of surplus funds available with the company, alternatively chose not to collect money on due date which is nothing but indirect giving of loan or funding. Had the AEs taken loan from the assessee, it would have paid an interest to the assessee but by way of keeping funds they are enjoying an interest free loan. Therefore, the TPO concluded that the overdue receivables would partake the character of activity of providing loan or funding by the assessee. The TPO also contended that imputing interest on the re-characterization of the receivables is not notional. In response to the assessee's submission that it is a zero debt company, the TPO observed that while that may be true but the same cannot be said for the parent company. In support of the view that the imputed interest income is not a notional income, the TPO relied upon the judgments of the Special Bench of ITAT, Kolkata, in the case of Instrumentarium Corporation Ltd., in & 1549/Kol/2009 dated 15/07/2016 and also the judgment of ITAT in the ·case of Techbooks International. Therefore, the TPO made an upward adjustment of Rs.12.14 crores. Aggrieved against that order, the assessee filed an appeal before the CIT(A). The ld.CIT(A) after considering the decision of the Bombay High Court in the case of Patni Computer Systems Ltd., 33 taxmann.com 3 held that the overdue receivables are international transactions. However, since the Delhi High Court in the case of Bechtel India Pvt. Ltd., in ITA No 379/2016 dt 21.7.2016 held that where the assessee is a debt free company, the question of receiving any interest on receivables did not arise, which position was also confirmed by the Hon’ble Supreme Court while dismissing the SLP filed by the Department. In the circumstances, the ld.CIT(A) held that the fact of whether the assessee is a debt free company is to be ascertained. If the assessee is a debt free company, then ld CIT(A) held that the Hon’ble Supreme Court’s dismissal of SLP will be a binding precedent and accordingly no adjustment is required against the overdue receivables by determining the interest due on such receivables. Therefore, ld CIT(A) directed the AO to verify whether the assessee is a debt free company and if so, the adjustment will stand deleted. If the assessee is not a debt free company, then ld CIT(A) held that the position will be different after amendment to Explanation (1)(c) to Section 92B(1) by Finance Act 2012 with retrospective effect from 01/04/2002. Since, the provisions are very clear that receivables or any other debt arising during the course of business falls in the category of international transaction as held by the Bombay High Court in the case of Patni Computer Systems Ltd., the interests must be charged on the overdue receivables in accordance with Arms Length Price (ALP).

Aggrieved against that order, the Revenue filed this appeal with the following grounds:- 1. The order of the learned CIT(A) is contrary to law and facts and circumstances of the case.

The ld.DR presented the case on the above lines and submitted that the interest on delayed realization of receivables is a separate international transaction and, therefore, requires separate benchmarking. It has nothing to do with the operations of the assessee company being with the debt free funds only. The ld.CIT(A) failed to consider that the Delhi Tribunal has reversed its own decision in its later decision in the case of M/s. Bechtel India Private Limited reported in 85 taxmann.com 121(2017) and facts of this case is similar to that decision and hence pleaded to allow the appeal. Per contra, the ld.AR submitted that the impugned transactions are not international transactions, invited our attention to the decision of the ITAT in the case of Bechtel India Pvt.Ltd. Vs. DCIT in for the assessment year 2010-11, dated 21.12.2015 and the decision of the Hon’ble Delhi High Court in the case of PCIT Vs. M/s. Bechtel India Pvt. Ltd., in ITA 379/2016, dated 21.07.2016. Thereafter, the ld.AR invited our attention to the Paper- book and submitted that the assessee was having as on March 31,2013, ‘cash and bank balances’ of Rs.1,252,692,948 and that the assessee has not incurred ‘interest expenses’, the working capital adjustment made subsumes therefore, it was pleaded that the Revenue’s appeal may be dismissed. The ld.DR rebutted by inviting our attention to the ground No.2.3, supra.

We heard the rival submissions. Based on the Hon’ble Delhi High Court’s decision in the case of Bechtel India Pvt. Ltd., supra, which was upheld by the Hon’ble Supreme Court, the assessee is pleading that the Revenue’s appeal be dismissed, if it is a debt free company. However, the Revenue pleads that the Hon’ble Delhi ITAT in the case of Bechtel India Pvt. Ltd., itself, in its subsequent decision, upheld the Revenue’s stand, therefore irrespective of whether the assessee is a debt free company or not, interest on delayed realization of receivables is a separate international transaction and, therefore, it requires separate benchmarking, it has nothing to do with the operations of the assessee company being with the debt free funds only. In order to appreciate the issue, the relevant portion of the order of the Delhi Bench of this Tribunal in order dated 16.05.2017 is extracted as under : 17. We have considered the submissions of both the parties and perused the record of the case. The assessee’s grievance is two-fold. Firstly, when working capital adjustment has been made, then, no separate adjustment is required to be made in respect of accounts receivables because the same gets subsumed in the working capital adjustment. The second plea of the assessee is that since its funds are entirely debt free, therefore, no adjustment is warranted in regard to late realisation of proceedings from receivables. The assessee’s reliance as noted earlier, is on the decisions in its own cases for assessment year 2010-11 and 2011-12. The issue has been elaborately considered in the case of Ameriprise India Pvt. Ltd. (supra) and, again, in the case of Mckinsey Knwledge Centre Pvt. Ltd. (supra). In the case of Techbooks India International Pvt. Ltd. vs. DCIT (supra), taking note of the Explanation inserted by the Finance Act, 2012 to Section 92B, it was observed that there remained no doubt that apart from any short-term or long-term borrowing, etc., or even advance payments or deferred payments, ‘any other debt arising during the course of business’ had also been expressly recognized as an international transaction. In the said decision, the decision of the Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems was also considered, wherein Hon'ble Bombay High Court set aside the view taken by the Tribunal in view of amendment to section 92B. The decision in the case of Kusum Healthcare Pvt. Ltd. was duly considered in the case of Ameriprise India Pvt. Ltd. and it was observed from para 20 to 23as under:

In view of the above observations, the reliance placed by the ld. counsel for the assessee on earlier decisions cannot be accepted.

In the case of Ameriprise (supra), it has been observed that the working capital adjustment is in respect of international transaction of rendering services to the AE. Interest for credit period allowed as per the agreement is given in the price charged for rendering of services. Whereas the non-realisation of invoice value beyond the stipulated period is a separate international transaction whose ALP is required to be determined. Granting of working capital adjustment is confined to the international transaction of rendering of services, whose ALP is separately determinable. On the other hand, the international transaction of interest receivable from its AEs for late realization of invoices beyond such stipulated period is a separate international transaction. Allowing working capital adjustment in the international transaction of rendering of services can have no impact on the determination of ALP of the international transaction of interest on receivables from AEs beyond the stipulated period allowed as per agreement. In the case of Mckinsey Knwledge Centre Pvt. Ltd. (supra), again, the Tribunal reiterated this reasoning and, inter alia, observed that: “……. In our considered opinion, whereas, the international transaction of purchase/sale of goods from/to AE contemplates comparison of the price charged/paid for such goods by impliedly including the interest for the period allowed for realization of invoices as per the terms of the agreement, the international transaction of charging interest on late recovery of trade receivable covers the period which starts with the termination of the period of credit allowed under the agreement, which is subject matter of the international transaction of purchase/sale of goods.”

The Tribunal also explained that if an invoice is raised during the year and the proceeds are realized within the year, but, beyond the stipulated period of agreement, then, the same will not come within the working capital adjustment because working capital adjustment is made with reference to the opening and closing balances as on 1st April and 31st March. Therefore, respectfully following the decision of the Tribunal noted above, we reject the assessee’s contention that the interest on delayed payment of receivables get subsumed in the working capital adjustment allowed to the assessee. The ld. counsel has also advanced an argument that since it was debt free fund company, which finding is not disputed, therefore, no interest could be attributable on the late realization of receivables. In our opinion, this plea is to be rejected at the threshold because, as noted earlier, interest on delayed realization of receivables is a separate international transaction and, therefore, requires separate benchmarking. It has nothing to do with the operations of the assessee company being with the debt free funds only.

In the result, the appeal of the Revenue is allowed.