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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’, NEW DELHI
ORDER
PER ANIL CHATURVEDI, AM:
This appeal filed by the assessee is directed against the order dated 11.07.2017 of the Additional Commissioner of Income Tax, Special Range-9, New Delhi (‘AO’) passed u/s 143(3) r.w.s 144C(13) for Assessment Year 2013-14.
The relevant facts as culled from the material on records are as under:
Assessee is a company stated to be engaged in the business of services, data processing, data analysis, computational services, actuarial services, data collation, report preparation, reconciliation, property/casualty underwriting, reinsurance administration and operations investment reconciliation and reporting, outside India. The company provides services as a unit for business process outsourcing for companies engaged in the aforesaid activities (including insurance and reinsurance companies).
Assessee electronically filed its return of income for A.Y. 2013-14 declaring total income at Rs. 24,54,19,872/-. The case was selected for scrutiny and notice u/s 143(2) and 142(1) of the Act was issued and served on the assessee. On pursuing the details filed by the assessee, AO noticed that assessee had entered into international transaction with its Associated Enterprises (AEs). He therefore, in accordance with the provision of Section 92CA of the I.T. Act referred the matter to the TPO for determining the Arm’s Length Price (ALP) of the international transactions. Thereafter, the TPO vide order dated 18.10.2016 passed u/s 92CA(3) suggested upward adjustment in ALP by Rs. 51,15,652/- on account of net interest chargeable on delayed receivables. Based on the recommendation of the TPO, addition of Rs. 51,15,652/- was made to the income of the assessee in the draft assessment order dated 29.12.2016 passed u/s 143(3) r.w.s 144C of the I.T. Act, 1961 and the total income proposed to be assessed at Rs. 25,05,35,524/-.
5. Aggrieved by the draft assessment order passed by the AO, assessee approached DRP and raised his objections to the proposed addition. DRP vide directions u/s 144C(5) dated 11.07.2017 upheld the TP adjustment made by AO/ TPO. Accordingly in line with the DRP directions, AO vide order dated 30.08.2017 passed u/s 143(3) r.w.s 144C(13) of the Act determined the total income of the assessee at Rs.25,05,35,524/- by inter alia making addition of Rs.51,15,652/- on TP issues. Aggrieved by the aforesaid order, assessee is now in appeal before us and has raised the following grounds: “
These grounds of appeal represent the grievances of the Appellant against order dated
30. August 2017 passed by the Learned Additional Commissioner of Income Tax, Special range- 9, (“Learned AO”) pursuant to the directions of the Hon’ble Dispute Resolution Panel (“Hon’ble DRP”) under Section 143(3) read with section 144C of the Act in the appeal filed by the Appellant against the draft assessment order dated
29. December 2016 issued by the Learned AO, in accordance with the order of the Deputy Commissioner of Income Tax, Transfer Pricing Officer - (3)(3)(2), New Delhi- (“Learned TPO”). That the order of the Learned AO pursuant to the DRP directions, to the extent upholding the additions/ disallowances made in the draft assessment order issued by the Learned AO, is erroneous and bad in law.
1. The learned TPO/AO/Hon’ble DRP have erred, in law and on facts and circumstances of the case, in making an adjustment of INR 51,15,652 to the total income of the Appellant in respect of interest on the outstanding receivables. The assessment order and the addition made is illegal, bad in law and without jurisdiction.
2. The learned TPO/AO/Hon’ble DRP have erred, in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with Income Tax Rules, 1962 (“the Rules”), and accordingly, determining of the ALP of the impugned international transaction.
3. That on facts and in law, by charging interest on delayed receipts of receivables from the Associated Enterprise (“AE”), the learned TPO/AO/Hon’ble DRP have grossly erred by: Delinking the inter-company receivables arising from the main international transactions i.e. provision of Information Technology enabled services (“main service transaction”) which has been determined to be at arm’s length after considering working capital adjusted margins of comparable companies for adjusting the difference in receivable days of the appellant and the comparable companies. Re-characterising outstanding receivables as loan advanced to AE and attributing notional interest thereon, thereby not appreciating that re-characterizing a transaction is not permitted in Transfer Pricing Not appreciating that interest on receivables is not ‘international transaction as per the provision of Section 92B of the Act. The primary transaction is of provision of Information Technology enabled services, which is duly benchmarked and interest on receivables is only incidental to the same. 4. The learned TPO/AO/Hon'ble DRP have erred, in law and in facts, in following no criteria or reasoning for choosing Comparable Uncontrolled Price Method (“CUP”) as the most appropriate method to benchmark the outstanding receivables and rejecting the other five methods. Further learned DRP/TPO/AO have erred in applying the CUP.
The learned TPO/AO/ Hon’ble DRP have erred, in law and in facts of the case, in making a TP adjustment for inter-company receivables realization despite the fact that the Appellant is a debt free company.
The Hon’ble DRP have erred, in law and in facts of the case, in making a TP adjustment for inter-company receivables realization without appreciating the fact that the inter-company receivable days of 63 days in relation to provision of IT enabled services to AE for FY 2012-13 was less than the receivable days of comparable companies selected by the Appellant as well as learned TPO for determining the arm's length price of provision of IT enabled services to AE. 7. The Hon’ble DRP has erred, in law and in facts of the case, in upholding the TP adjustment made by the learned TPO without appreciating that inter-company receivable days for provision of IT enabled services was 63 days which is less than the period of 90 days as prescribed under Section 92CE of the Ac. read with Rule 10CB of the Rules. The above grounds of appeal are mutually exclusive and without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant prays for appropriate relief based on the said grounds of appeal and the facts and circumstances of the case.”
6. Before us, at the outset, Learned AR submitted that though the assessee has raised various grounds but the solitary grievance of the assessee is with respect to the addition of Rs. 51,15,652/-.
The TPO has noted that on examination of the Balance Sheet it was revealed that assessee had receivables which according to him implied that the payment for the invoices raised by the assessee had not been received within the stipulated time as provided in the service agreement with the AE. The TPO show- caused the assessee and asked to furnish the details and also show-caused as to why the delayed payment not be treated as unsecured loan advanced to AE’s and the interest be computed on such unsecured loans to which assessee furnished the details and also inter alia submitted that no adjustment on account of interest is called for. The submissions made by the assessee was not found acceptable to AO/TPO. AO/TPO thereafter characterized the outstanding amount of receivable (beyond the credit period mentioned in the agreement) due to the assessee from its AE as unsecured loan. TPO held that the receivables from the assessee’s AEs which arose on account of international transaction pertaining to provision of IT enabled services were akin to extending of an unsecured loan by the assessee and should, accordingly, carry an interest cost to be charged from the AEs for delay in payment beyond the stipulated date. The TPO thereafter, benchmarked the international transactions using CUP method on the delayed payment made by its AEs using LIBOR plus 400 basis points and computed interest at the rate of 4.45% and thereby made an upward adjustment of Rs.51,15,652/- to the total income of the assessee.
Before us, Learned AR reiterated the submissions made before the lower authorities and further submitted that working capital adjustments had made by the assessee in TP study report.
Learned AR submitted that in its TP documentation the outstanding receivables arising from inter-company service transactions were duly benchmarked by the assessee by undertaking working capital adjustment, wherein the difference in the working capital deployed by the assessee and comparables were adjusted and already factored into. In support of her contention that working capital adjustments has been considered in the TP study report, she pointed to the relevant pages placed in the paper book. She thereafter submitted that once working capital adjustment is accounted for/ factored in then no addition by treating the outstanding receivable as unsecured loans can be made and for this proposition she placed reliance on the decision of Hon’ble Delhi High Court in the case of PCIT vs. Kusum Healthcare Pvt. Ltd. in dated 25.05.2017 and the decision of ITAT Delhi Bench in the case of Barco Electronic Systems (P) Ltd. vs. DCIT in ITA No.1531/Del/2016 dated 11.11.2020 which are placed in the paper book. She thereafter pointing to the copies of the audited financial statement which were placed in the paper book, submitted that assessee is a debt free company and for this reason also, no addition can be made on account of interest on receivables and for this proposition she relied on the decision of Hon’ble Delhi High Court in the case of PCIT vs. Bechtel India Pvt. Ltd. in ITA No.379/2016 dated 21.07.2016. She further submitted that the SLP filed by the Revenue against the order of Hon’ble Delhi High Court in the case of Bechtel India Pvt. Ltd. (supra) was dismissed by Hon’ble Apex Court in SLP (C) CC No.4965/2017. She pointed to the relevant copy of the order placed in the paper book. She thereafter submitted that the Hon’ble DRP had relied on the decision of Delhi High Court in the case of Cotton Natural. She submitted that the decision of Hon’ble Delhi High Court in the case of Cotton Naturals (supra) is not applicable to the case of the assessee for the reason that the issue involved in that case was pertaining to interest of loan and not interest on receivables. She further pointed that in the case of Cotton Natural (supra), the issue was whether SBI rate is applicable or LIBOR rate. She therefore, submitted that since the issue involved in the case of Cotton Naturals (supra) is different from that in the case of assessee, the ratio of decision in the case of Cotton Naturals (supra) is not applicable to the present case and therefore, also in the present case, no addition on account of interest is called for.
Learned DR on the other hand supported the order of lower authorities and also the order of DRP.
We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to adjustment made to international transaction on account of charging interest on delayed receipts of receivable from AE’s by treaty it as unsecured loan.
11. Before us, Learned AR has pointed to the fact that in the TP study report, the outstanding receivable arising from inter- company service transactions have been duly benchmarked by undertaking working capital adjustment. We find that Hon’ble Delhi High Court in the case of Kusum Healthcare Pvt. Ltd. (supra) has observed that when the assessee has already factored in the impact of the receivables in the working capital adjustment 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 transaction which was clearly impermissible in law. To arrive at the aforesaid conclusion, Hon’ble High Court also referred to the decision of Delhi High Court in the case of CIT V. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi). The relevant observation of the High Court are as under: 8. “Aggrieved by the said order, the Assessee filed an appeal before the ITAT. By the impugned order dated 31th March 2015, the ITAT set aside the assessment order. The ITAT noted that the Assessee had undertaken working capital adjustment for the comparable companies selected in its transfer pricing report. It was further noted that “the differential impact of working capital of the Assessee vis-a-vis its comparables had already been factored in the pricing/profitability” which was more than the working capital adjusted margin of the comparables and, therefore, “any further adjustment to the margins of the Assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified.” 9. Mr. Raghvendra Singh, learned counsel appearing for the Revenue submitted that the ITAT overlooked the fact that the expression “international transaction” as defined in Explanation (i)(c) to Section 92B of the Act included “payments or deferred payment or receivable or any other debt arising during the course of business”, and therefore, the outstanding receivables could by themselves constitute an international transaction. He further referred to the OCED Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Paras 3.48 & 3.49 under Chapter III para A.6.1 of the said Guidelines titled “Different types of comparability adjustments” spoke of the need to eliminate differences that may arise from different accounting practices between controlled and uncontrolled transactions. In particular, it was noted under para 3.49 that “a significantly different level of relative working capital between the controlled and uncontrolled parties may result in further investigation of the comparability characteristics of the potential comparable.” Mr. Singh submitted that the ITAT erred in disagreeing with the TPO, who had characterised the outstanding receivables as an international transaction by itself which required benchmarking.
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 characterised 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.
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-characterised the transaction. This was clearly impermissible in law as explained by this Court in CIT v. EKL Appliances Ltd. (2012) 345ITR 241 (Delhi).”
We further find that against the order of Delhi High Court in the case of Kusum Healthcare (supra) Revenue preferred SLP before the Hon’ble Apex Court and the same was dismissed in SLP No.5239/2019. In view of the aforesaid decision of Delhi High Court, we are of the view that when the assessee has already taken in to account the impact of outstanding receivables on profitability while making working capital adjustment of the tax payer vis-à-vis of its comparables, then any further adjustment on account of delay payment outstanding to AE cannot be re- characterized as unsecured loan.
From the perusal of the audited Balance sheet of the assessee which is placed in the paper book filed we find that assessee has no debts on account of secured or unsecured loans meaning thereby that it is a debt free company. We find that Hon’ble Delhi High Court in the case of PCIT vs. Bechtel India Pvt. Ltd. (supra) has upheld the order of ITAT wherein the Tribunal had held that when the assessee is debt free company the question of receivable does not arise.
Before us, Revenue had relied on the decision of Hon’ble Delhi High Court in the case of Cotton Natural (supra). We find that the facts in the case of Cotton Natural are different and the question before the Hon’ble High Court was different and in such a situation, we are of the view that the ratio of the aforesaid decision in the case of Cotton Natural (supra) will not be applicable to the case of the assessee in the present case.
Before us, Revenue has also not pointed to any contrary binding decision in its support. We therefore, relying on the decision cited and for the reason stated hereinabove hold that the Revenue was not justified in making the addition. We therefore set aside the action of AO/TPO. Thus the ground of the assessee is allowed.
In the result, appeal of the assessee is allowed
Order pronounced in the open court on 17.02.2021