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Facts
The assessee, M/s. Iomedia India Pvt. Ltd., a KPO providing software and 3D visualization services, opted for Safe Harbour Rules for AY 2016-17, applying a 25% markup on expenses for services rendered to its US Associated Enterprise (AE). Despite this, the TPO/AO made an Arm's Length Price (ALP) adjustment of Rs. 4,70,258/- by imputing interest on outstanding receivables from the AE at LIBOR + 400 basis points, which the assessee disputed.
Held
The Tribunal held that the transaction of interest on outstanding receivables is not an 'Eligible International Transaction' under Rule 10TC, thus the ALP adjustment is not subsumed by the Safe Harbour markup. However, following Tribunal precedents, the interest rate for imputing interest on outstanding receivables should be LIBOR + 200 basis points, not LIBOR + 400 basis points.
Key Issues
1. Whether Safe Harbour Rules cover ALP adjustments for interest on outstanding receivables. 2. Determination of the appropriate interest rate for imputing interest on outstanding receivables from an Associated Enterprise.
Sections Cited
Section 92CB, Rule 10TA, Rule 10TG, Section 234B, Section 234C, Section 271(1)(c), Section 271AA, Rule 10TD(2)(iii), Rule 10TC
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH “I”: NEW DELHI
Before: SHRI M. BALAGANESH & SHRI YOGESH KUMAR US
O R D E R PER M. BALAGANESH, A. M.:
1. 1. The appeal in AY 2016-17, arises out of the order of the National e-Assessment Centre, Delhi [hereinafter referred to as „ld. CIT(A)‟, in short] in Appeal No. ITBA/AST/S/143(3)/2020-21/1031897072(1) dated 30.03.2021.
2. At the outset, there is a delay of 86 days in filing of appeal by the assessee before us. We find that the appeal was filed during Corona Period and in view of the relaxation granted by the Hon‟ble Supreme Court considering the Covid 19 Pandemic, we are inclined to condone the delay and admit the appeal of the assessee for adjudication.
3. The assessee has raised the following grounds of appeal before us:-
1. On the facts and in circumstances of the case and in law, the final assessment order passed after considering directions of the Hon'ble Dispute Resolution Panel ('DRP') proposing an adjustment of Rs. 4,70,258/-, is bad in law. Page | 1
The Ld. AO have erred, on facts and in law, by referring the case of the Assessee to the Ld. TPO for determination of ALP on the fact that the Assessee has opted for the safe harbor regulations in accordance to Section 92CB of the Act read with Rule 10TA to Rule 10TG of the Rules which is bad in law and void ab initio and the DRP erred to uphold the same.
Without prejudice to the above, the Ld. AO and the Ld. TPO have erred, on facts and circumstances of the case and in law, in erroneously charging arbitrary interest rate on alleged delayed payment in collection of receivables. 4. Based on the facts and circumstances of the case and in law, the Ld. AO has erred in proposing to charge interest under section 234B, section 234C. 5. Based on the facts and circumstances of the case and in law, the Ld. AO has erred in issuing penalty notice under section 271(1)(c) of the Act against the Assessee 6. Based on the facts and circumstances of the case and in law, the Ld. AO has erred in proposing to initiate penalty notice under section 271AA of the Act against the Assessee.”
We have heard the rival submissions and perused the materials available on record. The assessee company had filed its return of income for the Asst Year 2016-17 on 25.11.2016 declaring total income of Rs 3,81,65,380/- by offering income by adopting Safe Harbour Rules in terms of Rule 10TD(2)(iii) of the Income Tax Rules. The assessee company is engaged in the business of outsource services for software and 3D visualization services. The said services are in nature of Knowledge Process Outsourcing (KPO) . For executing the work, the company has a team of technical software artist / developers who has specialization in web designing and 3D visualization software skills. The assessee is a 100% captive service provider to its Associated Enterprise Iomedia Inc. US. The assessee had filed the audit report in Form 3CEFA stating that the assessee had opted for the Safe Harbour Regime for a period of 5 years starting from Asst Year 2013-14 to Asst Year 2017-18. The assessee raised invoices for the services rendered to its US Based AE by taking a mark up of 25% on the total expenses (including depreciation) incurred during the year as per the Safe Harbour. The assessee has entered into an intercompany agreement with its AE Page | 2 with respect to provision of web designing and 3D visualization software services. The invoice wise details raised by the assessee to its AE together with the details of agreed credit period, date of realization of each invoice was sought for by the ld. TPO and the same were duly furnished by the assessee. The ld. TPO / AO had made an addition on account of transfer pricing adjustment to Arm‟s Length Price (ALP) by imputing interest on outstanding receivables from the AE in respect of invoices which had been realized beyond the agreed credit period of 60 days as granted by the ld. DRP. Pursuant to the directions of the ld. DRP, the ld. AO / TPO adopted interest rate calculated at LIBOR + 400 basis points and made an ALP adjustment of Rs 4,70,258/- which is in dispute before us.
Before us, the ld.AR vehemently argued that since the assessee had offered the income by having a mark up of 25% which is the rate prescribed under the Safe Harbour Rules, no other ALP adjustment could be made by the revenue. We are unable to accept to this proposition in view of the fact that if an item falls under the definition of „Eligible International Transaction‟ as defined in Rule 10TC of the Income Tax Rules (hereinafter referred to as the Rules). For the sake of convenience, the definition of „Eligible International Transaction‟ as per Rule 10TC is reproduced below:- “Eligible international transaction. 10TC. "Eligible international transaction" means an international transaction between the eligible assessee and its associated enterprise, either or both of whom are non-resident, and which comprises of :— (i) provision of software development services; (ii) provision of information technology enabled services; (iii) provision of knowledge process outsourcing services; (iv) advance of intra-group loan; (v) provision of corporate guarantee, where the amount guaranteed,— (a) does not exceed one hundred crore rupees; or (b) exceeds one hundred crore rupees, and the credit rating of the associated enterprise, done by an agency registered with the Securities and Exchange Board of India, is of the adequate to highest safety; (vi) provision of contract research and development services wholly or partly relating to software development; (vii) provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs; (viii) manufacture and export of core auto components; 1[***] (ix) manufacture and export of non-core auto components 2[; or] 2[(x) receipt of low value-adding intra-group services from one or more members of its group,] by the eligible assessee.”