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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI G.S. PANNU & SHRI RAM LAL NEGI
The captioned appeal by the assessee is directed against the order of CIT(A)-15, Mumbai dated 19.09.2014, pertaining to the Assessment Year 2010-11, which in turn has arisen from the order passed by the Assessing Officer, Mumbai under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’).
In this appeal, assessee has raised the following Grounds of appeal :-
2 M/s. Agilisys IT Services India Pvt. Ltd.
“1. On the facts and in circumstances of the case and in law, the ld. CIT(A) erred in confirming the action of Income-tax officer – 9(1)(1) *“the AO"+ by treating the outstanding debtors balance as at the year-end as an ‘international transaction’ u/s 92B and thereby computed arm’s length price u/s 92C(3) by making addition of notional interest.
2. The ld. CIT(A) failed to appreciate and ought to have held that the continuing debit balance with the Associate Enterprises (“AE”) does not constitute an “international transaction” as defined u/s 92B of the Act.
Without prejudice to the above, since the Appellant does not have a practice of charging interest on overdue payments from third parties, there is no requirement for charging the same from its AE.
Without prejudice to the above, the ld. CIT(A) failed to appreciate and ought to have held that even if the outstanding receivables constitutes an ‘international transaction’, after making a downward adjustment, of notional interest to be charged to AE, to the ratio of Operating Profit to Operating Expenses of the Appellant, the said ratio is much higher than the ratio of Operating Profit to Operating Expenses of the comparable company and hence, no further addition is called for.
5. The Appellant humbly prays that the order of the ld. CIT(A) be set aside and the adjustment on account of arm’s length adjustment be deleted.”
3. As the Grounds of appeal reveal, the solitary grievance of the assessee is with respect to an addition of Rs.12,83,550/- made by the Assessing Officer on account of notional interest on the outstanding debtor balances with associated enterprises by treating the same as an ‘international transaction’ within the meaning of Sec. 92B of the Act.
4. It was a common point between the parties that similar addition, though of different amounts, was made under identical circumstances
3 M/s. Agilisys IT Services India Pvt. Ltd. in the Assessment Years 2008-09 and 2009-10, which has since been deleted by the Tribunal vide its orders in & 7755/Mum/2012 and 1145 & 1136/Mum/2014 dated 8.10.2014 and 31.10.2016 respectively. In particular, reference has been made to the decision of Tribunal for Assessment Year 2009-10 dated 31.10.2016 (supra) wherein the addition has been deleted based on an alternate plea of the assessee that even if the overdue receivables from the associated enterprises constitute an ‘international transaction’ within the meaning of Sec. 92B of the Act, if the margin of the assessee is calculated after reducing the notional interest, the resultant margin still compares favourably with the average margin of the comparables and thus, no further addition is required to be made. In this context, the following discussion in the order of Tribunal dated 31.10.2016 has been referred to :-
“8. At the time of hearing, the learned representative for the assessee also furnished a working whereby it is shown that if the notional interest calculated on the outstanding receivables of associated enterprises is reduced from assessee’s margin of 9.19%, the resultant margin compares favourably with the average margin of the comparables selected. In this context, the plea of assessee is that without admitting that non-charging of interest on continuing debit balances of associated enterprises is an ‘international transaction’, the arm’s length interest on such debit balances be adjusted/reduced from the assessee’s margin of 9.19% and the resultant margin would also be favourable in comparison to the average margin of the comparables selected. It has been explained that assessee has given credit period of 45 days to its associated enterprises and with respect to the payments received beyond the credit period, the Assessing Officer had made the adjustment on account of notional interest. The assessee-company has given a working whereby it has adjusted its operating margin of 9.19% by 4 M/s. Agilisys IT Services India Pvt. Ltd. such notional interest calculated either @ 7%, as done by the Assessing Officer, and/or at LIBOR + 200 basis points, as held by the CIT(A). In the former case, the entity level margin would reduce from 9.19% to 7.61% and in the latter case, the entity level margin would reduce from 9.19% to 7.25%. Thus, it is pointed out that in both the situations, the margin of assessee-company is much higher than the comparable concerns, i.e., 3.53% and, therefore, the transaction can be said to be at arm’s length and no separate adjustment is required to be made on this count. We find that such a plea of assessee was very much before the Assessing Officer also, as is evident from a copy of communication dated 21.12.2011 addressed to the Assessing Officer, a copy whereof is placed at pages 43 to 46 of the Paper Book. At pages 47 to 49 of Paper Book, the working of notional interest on delayed payment from associated enterprises and also the working of operating profit to operating income of the assessee and the comparable concerns have been placed. The aforesaid material brings out the assertions of assessee that even if the outstanding receivables from the associated enterprises constitute an ‘international transaction’, after reducing the adjustment on account of such notional interest out of its margin, the resultant margin of assessee is still more than that of the comparables thereby revealing that no further adjustment is required.
The ld. DR has not assailed the factual matrix asserted by the assessee with respect to the alternate plea though he has reiterated that the instant transaction is to be construed as an ‘international transaction’ within the meaning of Sec. 92B of the Act. In our considered opinion, without going into the controversy as to whether the overdue receivables from associated enterprises constitute an ‘international transaction’ within the meaning of Sec. 92B of the Act or not, the assessee deserves to succeed on its alternate plea. The aforesaid discussion clearly shows that after factoring in the notional interest calculated with respect to the overdue receivables from associated enterprises, the reduced margin of assessee is more than the average margin of the comparables selected thereby showing that no further adjustment is required to be made to the stated transactions. It is also quite clear that allowing of extended credit
5 M/s. Agilisys IT Services India Pvt. Ltd. period to the associated enterprises is otherwise closely linked to the determination of sale price, which in-turn is the basis to arrive at the margins of the assessee. Thus, on the aforesaid limited aspect, we hold that the addition of Rs.15,82,891/- on account of notional interest chargeable on the outstanding debtors (associated enterprises) balances is not tenable and is directed to be deleted. Thus, assessee succeeds on this aspect.”
In the above background, the learned representative for the assessee has referred to the fact-situation in the instant assessment year. It is pointed out that in this year too, assessee has given credit period of 45 days to its associated enterprises and its is only for the payments received from the associated enterprises beyond the period of 45 days the Assessing Officer has made an adjustment on account of notional interest @ 6.19%, being short term deposit rate of State Bank of India, which was restricted to LIBOR + 200 basis points by the CIT(A). Similar was the situation in Assessment Year 2009-10 also. At the time of hearing, it is pointed out that if the notional interest calculated @ LIBOR + 200 basis points is reduced from the margin earned by the assessee, the entity level margin will reduce from 21.29% to 21.17% and if the notional interest calculated @ 6.19%, as taken by the Assessing Officer, is reduced from the margin of assessee, the entity level margin would reduce from 21.29% to 19.65%. It is pointed out that in both the situations, the reduced margin of assessee is much higher than the margin of the comparable concerns accepted by the TPO, i.e., 8% and, therefore, the transactions with the associated enterprises can be accepted to be at an arm’s length and no separate adjustment is required to be made. The aforesaid factual matrix is similar to that considered by the Tribunal in Assessment Year 2009-10 (supra) and,
6 M/s. Agilisys IT Services India Pvt. Ltd. therefore, following the precedent, in the instant year also, it has to be held that the addition of Rs. 12,83,550/- made on account of notional interest chargeable on the outstanding debtor (i.e. associated enterprises) balances is not tenable and is directed to be deleted.
In the result, appeal of the assessee is allowed, as above.
Order pronounced in the open court on 11th November, 2016.