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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’, NEW DELHI
Before: SH. BHAVNESH SAINI & SH. O.P. KANT
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘I-1’, NEW DELHI BEFORE SH. BHAVNESH SAINI, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER Assessment Year: 2013-14 Vs. Addl. CIT, Special Range-3, M/s. D.E. Shaw India Advisory Services Private Ltd., E-20, 1st & New Delhi 2nd Floor, Main Market, Hauz Khas, New Delhi PAN : AABCE6097P (Appellant) (Respondent) Appellant by Sh. Ved Jain, Adv. Respondent by Mrs. Vatsala Jha, CIT(DR) Date of hearing 04.01.2018 Date of pronouncement 18.01.2018 ORDER PER O.P. KANT, A.M.:
This appeal by the assessee is directed against order dated 10/10/2017 passed by the Ld. Additional Commissioner of Income Tax, Special Range -3, New Delhi (hereinafter will be referred as ‘the Assessing Officer”) for assessment year 2013-14. The impugned assessment order has been passed by the Assessing Officer in compliance to the direction dated 22/09/2017 of the Ld. Dispute Resolution Panel (DRP). The grounds of appeal raised by the assessee are reproduced as under:
“On the facts and circumstances of the case and in law, the learned Additional Commissioner of Income-tax, Special Range - 3, New Delhi (“AO”) has erred in passing the assessment order under Section 143(3) of the Income-tax Act, 1961 (“the Act”) after considering the adjustments proposed by the Deputy Commissioner of Income-tax, Transfer Pricing Officer 1(2)(1) and 1(2)(2) (“TPO”) in his order passed under Section 92CA(3) of the Act as confirmed by the Hon’ble Dispute Resolution Panel (“DRP”). Each of the ground is referred to separately, which may kindly be considered independent of each other and without prejudice to each other. Transfer Pricing grounds:
1. 1. That on the facts and circumstances of the case and in law, the order of assessment framed by the learned Additional Commissioner of Income-tax, Special Range - 3, New Delhi (hereinafter referred to as ‘the learned AO’) pursuant to the directions of the Hon’ble Dispute Resolution Panel - I (hereinafter referred to as ‘the Hon’ble DRP’) under section 144C(5) of the Act, is a vitiated order, arbitrary and is thus bad in law and void ab-initio.
2. That the Hon’ble DRP directions are bad in law to the extent the same are prejudicial to the Appellant.
3. That the learned AO/ learned TPO/Hon’ble DRP have erred, in facts and in law, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Income-tax Act, 1961 (“the Act”) read with the Income-tax Rules, 1962 (“the Rules”), and considering the outstanding receivables from associated enterprise (“AE”) as separate international transaction (“impugned transaction”) and accordingly, determining of the Arm’s Length Price (“ALP”) of the impugned international transaction. 3.1. That the learned AO/ learned TPO/ Hon’ble DRP have erred, in facts and in law, in making the transfer pricing adjustment of INR 10,183,581 by erroneously re-characterizing the outstanding receivables from AEs of the Appellant as unsecured loan and computing notional interest on alleged delays in realization of payment from the AEs against the invoices raised for provision of investment advisory services.
3.1.1. That, without prejudice, the learned AO/ learned TPO/ Hon’ble DRP have inadvertently erred, in facts and in law, by not considering that the impact of delayed AE-receivable is subsumed in working capital adjustment and no further adjustment is required on account of interest on outstanding receivables. This has been upheld by Hon’ble ITAT in Appellant’s own case in ITA 1681 /Del/2015, ITA 1018/Del/2016 and ITA No. 75/Del/2017. 3.2. That the learned TPO/ Hon’ble DRP have erred, in facts and in law, in applying arbitrary interest rate of 13.00 percent while determining the notional interest on the alleged delays in collection of receivables from the AEs against the invoices raised for the provision of investment advisory services. 3.3. That, without prejudice, the learned AO/ learned TPO/ Hon’ble DRP have inadvertently erred, in facts and in law, by considering gross instead of net outstanding receivables while determining the adjustment towards interest on receivables. 3.4. Without prejudice, the learned TPO/Hon’ble DRP have erred, in facts and in law, in considering the SBI base rate instead of London Interbank Offered Rate (“LIBOR”) while calculating notional interest on alleged delays in realization of payment from the AEs as the invoices were raised on the AEs in foreign currency i.e. USD.
4. That the learned AO/ Hon’ble DRP have erred, in facts and in law, on the circumstances of the case and in law by alleging that the Appellant has furnished inaccurate particulars of income, thereby proposing to initiate penalty proceedings under section 271 (1 )(c) of the Act.
5. The learned AO erred, in facts and in law, by proposing to levy consequential interest under section 234B and 234C of the Act mechanically and without.”
The briefly stated facts of the case are that the assessee is a wholly-owned subsidiary of D.E. Shaw & Co. (Mauritius) and during the year under consideration it was engaged in providing services in the nature of investment advisory services to its associated enterprises (AEs). The assessee filed return of income on 27/11/2013, declaring total income of Rs.7,80,08,923/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short “the Act”) was issued and complied with. 2.1 During the year under consideration, the assessee entered into following international transactions with its AEs:
Total value of Method selected No. Type of international transaction MAM PLI transaction (Rs.) Provision of financial and i. investment advisory services TNMM OP/OC 502,954,339 Availing of business support ii. TNMM OP/OC 90,647,577 services iii. Reimbursement of expenses TNMM OP/OC 7,175,000 Payment of managerial iv. TNMM OP/OC 66,322,205 remuneration 2.2 The assessee benchmarked the international transactions using Transactional Net Margin Method (TNMM) with operating profit /operating cost (OP/OC) as Profit Level Indicator (PLI). The assessee computed its PLI (OP/OC) at 21.09%. The assessee took average OP/OC margin of five comparable companies using multiple year data at 12.37%. According to the assessee, the margin of the assessee being higher than the comparables, the international transactions carried out by the assessee were at arm’s length price. 2.3 The Assessing Officer referred the matter for determination of arm’s length price of those international transactions to the Ld. Transfer Pricing Officer (TPO). The Ld. TPO recomputed the operating profit/operating cost margin of the assessee at 17.22%. The learned TPO selected nine comparables and computed average OP/OC at 27.63%.
The Ld. TPO allowed working capital adjustment and computed adjusted average OP/OC of the comparables at 2.08%. In view of the adjusted margin of the comparable being less than the margin of the assessee, no adjustment was proposed by the Ld. TPO to the international transactions carried out by the assessee. 2.4 During the transfer pricing proceedings, the Ld. TPO found that there was delay in realization of the various invoices raised by the assessee i.e. receivable and according to him the transaction of the assessee of extending prolonged interest free credit to its AEs was in the nature of international transaction and need to be benchmarked separately. 2.5 According to the Ld. TPO receivables constituted international transaction due to following reasons:
1. 1. As per amended Explanation (1)(c) to section 92B of the Act which has been inserted by the Finance Act, 2012 w.e.f. 01/04/2002, the term international transaction includes capital financing including any type of receivables.
2. As per the provision of section 92B(1) of the Act, the arrangement between two AEs for allocation or apportionment of or any contribution to, any cost or expense incurred or to be incurred in connection with the benefit, service or facility provided or to be provided to anyone or more of such enterprises is an international transaction. In the instant case, the assessee has provided benefit to its AE by way of advancement of interest free loan in the garb of delayed receipt of receivables.
3. Delay in receipt of receivable is an international transaction under section 92B(1) read with clause (v) of section 92F of the Act.
2.6 The Ld. TPO in support of his finding relied on the decision of the Tribunal Mumbai bench in the case of Tecnimont ICB Ltd. Vs. DCIT (2013) 32 taxman.com 357. 2.7 The Ld. TPO applying the Comparable Uncontrolled Price (CUP), proposed interest rate of 14.55% per annum as arm’s length level of interest, as under:
It is very difficult to get other tax payers in the similar circumstances. So, the interest rate that would have been charged in similar circumstances or the interest rate that the tax payer could have got by lending such money to private persons in India or interest rate the company could have got from independent third party in India by lending such surplus money under comparable circumstances i.e. without any security and margin money is considered. The basic principle, to be followed, is that the currency in which the loan has originated must be considered along with the country of origin for e.g., if the Indian parent is lending to another party, important consideration would be the interest rate expected by the lender, which would be the interest prevalent in India or opportunity cost of such funds if they were invested either in the business, or other forms of investment. Thus, one needs to find a CUP rate based on cost of funds or opportunity cost of funds blocked in such intra-group loans. If any Indian entity had invested such sums in India with Banks, then the deposit rate would be that from India. If the same were invested in any other investment e.g. stocks, mutual funds or real estate, the return would still be with reference to interest rates in India. If the Indian entity did not have sufficient surplus funds to lend, it may borrow such funds from banks or others, then cost of borrowings in India would also be relevant. Also if the surplus funds were to be invested in existing business or expansion into new businesses, the return also would be linked with domestic interest rates. So, the entire cost to the Indian entity or opportunity cost to the Indian entity will always be with reference to the interest rates prevailing in India. The CUP therefore being used is the prime lending rate of SBI.
2.8 The Ld. TPO computed interest at the rate of 14.5% per annum in respect of the invoices where amount remained outstanding for more than 60 days. In this manner, the Ld. TPO computed the adjustment to Rs.1,52,70,594/- in his order dated 10/10/2016 passed under section 92CA(3) of the Act. 2.9 After incorporating the adjustment proposed by the Ld. TPO, the Assessing Officer issued a draft assessment order. The assessee filed objections against the adjustment proposed in the draft assessment order before the Ld. DRP and challenged that the receivables is an international transaction as well as challenged the benchmarking of the transaction applying SBI base rate of 14.55%. The Ld. DRP upheld the receivable as international transaction. On the issue of benchmarking, the Ld. DRP observed that receivables are denominated in Indian Rupees (INR) and not in foreign currency and, thus, following the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Cotton Naturals (I) Pvt. Ltd., dt. 27th March, 2015, the interest rate of SBI base rate applicable to the currency concerned (i.e. Indian rupees) was held as arm’s length interest rate. The Ld. DRP further directed to apply the SBI rate on 30th June of relevant previous year + 150 basis points if the receivable do not exceed Rs. 50 crore and + 300 basis points if the receivable exceeds 50 crore, in accordance to the safe harbour rules. The relevant finding of the Ld. DRP is reproduced as under:
“5. The TPO has applied the SBI base rate of 14.55%. As per the Safe Harbour Rules, the base rate of SBI as on 30th June of the relevant previous year + 150/300 basis points depending on whether the receivables exceed Rs. 50 Cr., is the arm’s length price. The Safe Harbour Rules are not applicable, however, they do represent the result of considerable analysis of the correct rate of interest to be taken as the arm's length price. There is no bar to benefitting from this analysis and deciding the issue, considering the facts of the case and fee Safe Harbour Rules. Considering the facts, the AO/TPO is directed to apply the SBI base rate on 30th June of fee relevant previous year, +150 basis points if fee receivables do not exceed Rs.50 Cr., and +300 basis points if the receivables exceed Rs.50 Cr., in accordance with the Safe Harbour Rules.
2.10 Aggrieved with the above finding of the Ld. DRP, the assessee is in appeal before the Tribunal, raising the grounds as reproduced above.
The Ld. counsel of the assessee, at the outset, submitted that similar adjustment was made in preceding years in the case of the assessee for assessment year 2010-11, 2011-12 and 2012-13, whereby the Tribunal, in its order dated 04/09/2017 in 1018/Del/2016 and 75/Del/2017, holding that no adjustment on account of receivables is needed if the adjustment on account of working capital has already been made by the TPO, restored the matter to the file of the TPO to recalculate the interest. According to the learned counsel, the issue in dispute in the year under consideration is squarely covered by the above order of the Tribunal.
4. The written submission of Ld. counsel, on the merit of the issue, are reproduced as under: “6. Even otherwise, on merits, it is submitted as under: • The services agreement entered between the assessee and AE for provision of investment advisory services does not contain any specific time period within which AE is required to make payment to the assessee in respect of outstanding receivables, if any. The copy of service agreement is placed at PB 232 – 247 • Early or late realization of service proceeds is incidental to the transaction of service, and not a separate transaction. • Further, the TP adjustments 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.
• The ‘Payment’ paragraph in the service agreement between the assessee and AE (PB 235) does not provide for any fixed payment period within which AE is required to make payment to the assessee. • Further, it is important to mention here that the aassessee company is a debt-free company, as is evident from its Balance Sheet at PB 203. Therefore, since the funds have not been borrowed by the assessee company, there is no question of charging any interest further on its receivables. • Also, the TPO had carried out detailed analysis of working capital adjustment to the international transactions carried out by the assessee, which is evident from Page 23 - 24 in Para 14 of its order. Since the adjustment of working capital has been analyzed by the TPO, any adjustment on account of receivables, if it is to be done, will be subsumed in the working capital adjustment, and no further adjustment in this regard is to be done. Reliance in this regard is placed on the judgment of jurisdictional High Court in the case of Kusum Health Care Pvt. Ltd. (supra). Further, reliance is placed on following judgment: (a) ITAT Hyderabad in the case of EPAM Systems India Pvt. Ltd. v. ACIT in dated 24.10.2017.”
In support of the contention, the Ld. counsel also relied on the decision of the Tribunal in the case of Global Logic India Ltd. Vs. DCIT in ITA No. 1104/Del/2015 and ITA No.1115/Del/2017 and decision in the case of Bain Capability Centre India Private Limited Vs. DCIT in ITA No. 404/Del/2017 dated 13/11/2017.
The Ld. counsel also submitted that average collection period of comparable companies was more than that of the assessee company and thus the transaction does not call for any adjustment in this regard. The Ld. counsel distinguished the decision of the Tribunal in the case of Bechtel India private limited in ITA No. 6530/Del/2016 relied upon by the Ld.DRP. The Ld. counsel submitted that in the case of Bechtel India (supra) the service agreement entered into between the parties, duly disclosed the period within which the payment should be made, in the absence of which interest was to be charged. However, in the case of the assessee company there was no such clause in the service agreement entered into by the assessee company with its AE.
In the alternative, on the issue raised in ground No. 3.2 to 3.4 of the appeal, the Ld. counsel submitted that if any adjustment on account of interest on receivables is to be made, it should be restricted to net outstanding receivables during the year and not on the gross outstanding receivables and appropriate LIBOR rate of interest should be applied. The written submission filed on the issue is reproduced as under: “1. During the year, assessee had receivables of Rs.50,29,54,341/- on account of provision of investment advisory services to its AE, whereas it had payables to AE of Rs.9,06,47,577/- on account of availing certain business support services from the AE. This fact is evident from the TP study of the assessee company enclosed at PB 7.
2. Assessee submitted the invoice-wise details of receivables and payables from/to AE vide its letter dated 22.08.2016, which are enclosed at PB 248 – 272 3. Now, even if an adjustment on account of interest on receivables is to be made, it should be restricted to net outstanding receivables during the year, and not on the gross outstanding receivables.
Reliance is placed on the judgment of this Hon’ble Tribunal in the case of Bentley System India Pvt. Ltd. v. ACIT in dated 04.11.2015, where similar view has been upheld by the Hon’ble ITAT. The relevant findings in this regard are as under: "11. We have heard the rival submissions and perused the material available on record. On a consideration of the entire factual matrix where the issue of Amendment by Finance Act, 2012 in terms of insertion of Explanation to Section 92B with retrospective effect from 01.04.2003 as considered by the Co-ordinate Bench in the decision of Ameriprise India Pvt. Ltd. is relied upon by the Id. CIT DR and considering the proposition of law as laid down by the Hon’ble Bombay High Court in the case of Vodafone Shell 268 ITR 1 and followed in Shell India Markets Pvt. Ltd. 369 ITR 516 (Bom.) which issue has not been argued by the Ld. AR and consequently not addressed by the Ld. DR accordingly in the facts of the present case, we deem it appropriate to restore the issue back to the TPO allowing the alternate prayer of the assessee directing the TPO to restrict the addition if any to the net outstanding receivables and not gross outstanding receivables.”
5. The use of SBI prime lending rate as a benchmark is inappropriate, since an alleged foreign currency loan in the international market would be LIBOR based which are internationally realized and adopted and not the domestic rates.”
The Ld. CIT(DR), on the other hand, relied on the order of the lower authorities and submitted that working capital adjustment subsumes receivables outstanding for normal credit period, which the Ld. TPO in the case has allowed for 60 days. According to her, there is no finding by the Ld. TPO or by the Ld. DRP that average collection period of the comparable was more than the average collection period of the assessee from its AEs. She accordingly, requested to restore the matter to the file of the Ld. TPO for deciding in accordance with law.
We have heard the rival submission and perused the relevant material on record. The Ld. counsel has submitted that adjustment on account of receivables is subsumed in the working capital adjustment made by the Ld. TPO and, therefore, no separate adjustment is required on account of receivables following the decision of the Tribunal dated 04/09/2017 in preceding years in 1018/Del/2016 and 75/Del/2017. The Tribunal (supra) decided the issue as under:
“10.9 The next issue before is the issue of adjustment on account of interest on outstanding receivables. This issue is also common in all the three assessment years. It has been the submission of the assessee that the outstanding revenue is not a separate international transaction and that the outstanding receivables cannot be re-characterised as a loan. It has also been submitted that TP adjustment cannot be made on a hypothetical and notional basis unless and until there is some material on record that there has been undercharging of real income. It is undisputed that the assessee has been following a consistent policy with respect to the receivables and payables from/to the AEs. It is also seen that while making the adjustment, TPO has not calculated the notional interest by considering the average time taken by the AE for making the payment to the assessee. Hon’ble Delhi High Court in the case of Principal Commissioner of Income Tax vs Kusum Health Care Pvt. Ltd. in vide judgment dated 25th April, 2017 has laid down in Paras 10, 11 and 12 as under:-
“10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression ‘receivables’ does not mean that de hors the context every item of ‘receivables’ appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterized as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studied. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way.
11. The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re- characterized the 1018/D/2016, 75/D/2017 Assessment year: 2010-11, 11-12, 12-13 70 transaction. This was clearly impermissible in law as explained by this Court in CIT v. EKL Appliances Ltd. (2012) 345ITR 241 (Delhi).
12. Consequently, the Court is unable to find any error in the impugned order of the ITAT giving rise to any substantial question of law for determination. The appeal is, accordingly, dismissed.” 10.10 It is seen that the TPO has considered a period of 30 days to be normal for the realization of receivables and has calculated notional interest on period/number of days exceeding 30 days while making the upward adjustment, however, as the Hon'ble Delhi High Court has held in Kusum Health Care Pvt. Ltd. (supra) that there might be a delay in calculation of money even beyond the agreed limit due to a variety of factors which have to be investigated on a case to case basis. The Hon'ble High Court has also observed that the impact on the working capital of assessee will also have to be studied. Hon'ble High Court went on to conclude that there has to be a proper inquiry by the TPO by analyzing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis receivables for the supplies made to AE, the arrangement reflected international transaction intended to benefit the AE in some way. Hon'ble High Court has also observed that if the entire focus of the 1018/D/2016, 75/D/2017 Assessment year: 2010-11, 11-12, 12-13 71 Assessing Officer is only of one Assessment Year, the figure of receivables in relation to that AY could hardly reflect a pattern that would justify the TPO to reach a conclusion that the figure of receivables beyond prescribed number of days constituted an international transaction by itself. In the present appeals before us, no such in-depth analysis of the receivables has been made by the TPO. Accordingly, we deem it appropriate to restore the issue of interest on receivables in all the three years to the file of Assessing Officer/TPO for recalculating the interest on receivables in conformity with the ratio of judgment of the Hon'ble Delhi High Court in the case of Kusum Health Care Pvt. Ltd. (supra). The assessee will be given due opportunity by the Assessing Officer/TPO before such an adjustment is recalculated. This ground stands allowed for statistical purposes in all three Assessment Years.”
We note that in the preceding years decided by the Tribunal (supra) normal credit period of 30 days was allowed by the Ld. TPO for realization of the receivables and calculated the interest on period exceeding 30 days while making the adjustment for interest. In the instant case the Ld. TPO has allowed credit period of 60 days for computing interest on outstanding receivables (debtors). In the instant case, the Ld. TPO has also allowed working capital adjustment and did not propose any adjustment in the international transactions carried out by the assessee.
The Hon’ble High Court in the case of Kusum Healthcare Private Limited (supra) has observed that the impact of working capital of the assessee would also have to be studied. We find that the Tribunal (supra) has further noted the finding of the Hon’ble High Court that there has to be a proper Inquiry by the learned TPO by analyzing the statistics over a period of time to discern a pattern which would indicate that viz-a- viz receivables further supplies made to the AE, the arrangement reflected international transaction intended to benefit the AE in some way. The Tribunal (supra) has restored the matter to the file of the Ld. Assessing Officer/TPO for a calculating the interest on receivables in conformity with the ratio of the judgment of the Hon’ble Delhi High Court in the case of Kusum Healthcare Private Limited (supra). Though in the instant assessment year, the working capital adjustment has already been allowed to the assessee, but in the order of the Ld. TPO, it is not clear at what point of time the receivables, inventory and payables are compared for computing working capital adjustment. Their level should be compared on average throughout the year. Further, it is also not evident from the order of the Ld. TPO what appropriate interest rate has been used for computing working capital adjustment.
In view of above facts, we feel it appropriate to restore the issue to the matter of the Ld. Assessing Officer/TPO for analysing the working capital adjustment given by the Ld. TPO and decide the issue in the light of the direction given by the Tribunal in order dated 04/09/2017 in 1018/Del/2016 and 70/Del/2017. The assessee shall be afforded adequate opportunity of being heard. The ground Nos. 3 and 3.1 of the appeal are accordingly allowed for statistical purposes. 13. Since Ground Nos. 3 and 3.1 have already been restored to the file of the Assessing Officer, Ground Nos. 3.2 to 3.4 are rendered only academic and, thus, we are not required to adjudicate those ground at this stage. Accordingly, those grounds are dismissed as infructuous. 14. The ground Nos. 1 and 2 are general in nature. The grounds No. 4 and 5 were not pressed before us being consequential in nature. Accordingly, these grounds are also dismissed as infructuous. 15. In the result appeal of the assessee is allowed partly for statistical purposes. The decision is pronounced in the open court on 18th Jan., 2018.