DCIT, NEW DELHI vs. M/S. DELHI CALL CENTERS PVT. LTD., NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘I-2’, NEW DELHI BEFORE SH. AMIT SHUKLA, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER Assessment Year: 2009-10 Vs. M/s. Delhi Call Centers Pvt. DCIT, Circle -10(1), New Delhi Ltd., I-10, Lajpat Nagar –II, New Delhi PAN : AABCD9233C (Appellant) (Respondent) Department by Sh. Sanjay Kumar Yadav, Sr.DR Assessee by Sh. Tarun Rohatagi, CA Date of hearing 14.11.2017 Date of pronouncement 30.11.2017 ORDER PER O.P. KANT, A.M.:

This Appeal by the Revenue is directed against order dated 15/08/2014 of the Ld. Commissioner of Income-tax (Appeals)-XX, New Delhi for assessment year 2009-10, raising following grounds:

1. On the facts in the circumstances & the case has erred in directing to charge the LIBOR rate of interest instead of interest rate of 16% on receivable for determining the adjustment in respect of delayed receipts from AEs.

raised above at the time of hearing.

3. The order of the learned CIT(A), being contrary to the facts on record and the settled position of law, be set aside and that of the Assessing Officer be restored.

2. The facts in brief of the case are that the assessee company was engaged in providing call Centre services to companies outside India. For the year under consideration, the assessee filed return of income on 26/09/2009 declaring total income of Rs.3,36,510/-. 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. The Ld. Assessing Officer noticed international transactions of providing call centre outbound services by the assessee to the associated enterprises (AEs) and made a reference to the Ld. Transfer Pricing Officer (TPO) for determination of arm’s length price of the international transaction. The learned TPO accepted the arm’s length price of the said transaction of call Centre services determined by the assessee, however, he treated the pending receivables of the assessee from its AEs as another international transaction and benchmarked it on comparable uncontrolled price (CUP) method. The learned TPO allowed credit period of six months and decided that any receivables pending beyond six-months period should be treated as loan to the AE and he applied an interest rate of 16% in view of the prime lending rate of State Bank of India (SBI) + 300 basis point (to take into account various factors/risk etc) and proposed an adjustment of Rs.50,22,173/-. The Ld. AO included the said adjustment in the draft assessment order passed under section 144C read with section 143(3) of the Act. The assessee filed appeal against the final order of the Assessing Officer before the Ld. the CIT(A) . Before, the Ld. CIT(A), the assessee argued that ‘London Inter-Bank Offered Rate’ (LIBOR) of interest should be applied for computing the adjustment on delayed receipt. The assessee further argued that credit period of 270 days should be allowed, however the Ld. CIT(A) found the credit of six months allowed by the Assessing Officer as reasonable and sufficient in the present case. The Ld. CIT(A) following the decision of the Tribunal, Delhi bench in the case of Kohinoor Foods Limited Vs. ACIT in 68, 69, 90, 91/2012 directed the AO/TPO to charge LIBOR rate of interest on the receivables determining that adjustment in respect of the delayed receipt from the AEs. 2.1 Aggrieved, the Revenue is in appeal before the Tribunal raising the grounds as reproduced above. 3. The only effective ground raised

is in respect of the rate of interest which would be applicable on delayed receipt from the AEs.

4. The learned Sr. DR, relying on the order of the learned AO/TPO, submitted that loan has been deemed to be granted by the Indian entity and therefore, the rate of interest on loans applicable in Indian market has rightly been applied by the learned TPO for determining arm’s length price of the transaction.

5. The Ld. counsel of the assessee on the other hand relied on the finding of the learned CIT-A and submitted that LIBOR rate has been accepted as arm’s length price in case of interest on overseas receivables pending for a period more than the period agreed. In support of his contention he relied on the decision of the Mumbai Tribunal in the case of Dy. CIT Vs. Tech Mahindra Ltd., (2011) 12 taxmann.com 13 (Mum.) and decision of the Hon’ble Delhi High Court in the case of CIT Vs. Cotton Naturals (I) (P) Ltd, (2015) 55 taxmann.com 523 (Delhi).

6. We have heard the rival submission and perused the relevant material on record. In this case, the only dispute raised before us is in respect of the rate of interest for the purpose of computation of arm’s length price. There is no dispute on the issue whether the receivables more than the period agreed is an international transaction are not.

“8.1 The advancing of loan in commercial circles to advance to AEs own business in foreign countries and inter se AE’s transactions Chartered Accountant cannot be akin to financial institutions. Therefore, in our considered view, TPO has erred in summarily applying the comparable of financial institutions as uncontrolled comparable transaction. We have no issue of the TPO applying the CUP method. But the problem arises when in the name of applying CUP method; a wholly inapplicable comparable model applied which leads to distorted results. In our considered view, a significant sector of multi-national corporate set up involves creation of subsidiaries and associate enterprises for advancement of their overseas business. They help them in terms of finance by offering soft loans and subsidiary loans; they are primary focused to spread the business of the principal unit. It would have been very reasonable, judicious and appropriate on the part of the TPO to have looked into such type of transactions and applying it as uncontrolled transactions. In our view, re-coursing straightaway to CRISIL, which deals in hardcore institutional finance transactions that too with clear commercial object of earning out of loans bereft on other considerations, is wholly inapplicable. There is no dispute on the issue that the real income theory has no application to a fictional working as provided by section 92 but this being part of the Income-tax Act, the valid consideration for properly assessing a transaction cannot be given a go by. Every fiction has limits to its application. In view thereof, we hold that the rate of 13.49% applied solely relying upon a third party opinion by applying on uncontrolled set of transaction is factually not correct and cannot be accepted. 68.2 In consideration of the contentions, case laws and foregoing observations, we are of the view that the correct comparable which can be applied in these facts and circumstances is of LIBRO rate which is internationally recognized. It is the most appropriate comparable for the relevant periods and being reasonable and scientific uncontrolled comparable to be applied to the assessee’s loan transactions. We direct the AO/TPO to work out the TP adjustment accordingly depending on the LIBOR rate applicable to year from year. In view thereof, the grounds raised by the assessee on this issue are partly allowed.”

8. Similar finding has been given by the Tribunal in following decisions:

“39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters.

Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:- “The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt-at least within the framework of free capital markets (subject to the arbitrage). In regard to the question as to whether the level of interest rates in the lender's State or that in the borrower's is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt.B1. II 725 (1994), re. 1 § AStG). A differentiation between debt-claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt-claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no ‗special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Art. 11(6), at least its wording, allows the authorities to ‗eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money.”

10.1. Preamble by the Subcommittee on Transfer Pricing: Practical Aspects 10.1.1. In the first nine chapters of this Manual, the Subcommittee has sought to provide practical guidance on the application of transfer pricing rules based on Article 9(1) of the UN Model Tax Convention and the arm's length principle embodied in that Article. With regard to chapters one through nine, the Subcommittee has discussed and debated the merits of the guidance that is provided and, while there may be some disagreement on certain points, for the most part the Subcommittee is in agreement that the guidance in those chapters reflects the application of the arm's length principle as embodied in the UN Model Tax Convention. 10.1.2. The Subcommittee recognizes that individual countries, particularly developing and emerging economies, struggle at times with the details of applying these treaty-based principles in a wide variety of practical situations. It therefore seemed appropriate to allow representatives of individual countries an opportunity to set out their individual country viewpoints and experiences for the information of readers. Those individual country views are contained in this chapter. It should be emphasized that it does not reflect a consistent or consensus view of the Subcommittee.

The decision is pronounced in the open court on 30th Nov., 2017.