SATYAM VENTURE ENGINEERING SERVICES PRIVATE LIMITED ,SECUNDERABAD vs. ASSISTANT COMMISSIONER OF INCOME TAX ,CENTRAL CIRCLE -3(2), HYDERABAD

Three issues need adjudication in this appeal. One is determination of the most appropriate method to benchmark the international transaction in respect of IT enabled Services (ITeS), second one is related to the Transfer Pricing (TP) adjustment in respect of the interest on trade receivables and the third one relates to the disallowances under section 40(a)(ia) of the Act.

Briefly stated relevant facts are that the assessee is into the business of providing computer-aided design and computer aided engineering solutions to automotive parts using commercially available software tools like Catia V5, Unigraphics, Hyper mesh, Nastran etc. During the relevant assessment year, the assessee provided engineering services such as product design, to design and computer aided engineering simulation services to automotive industry across the Globe. Assessee reported international transaction in respect of ITeS stating that the assessee has been providing such services to both Associated Enterprises (AEs) and also non-Associated Enterprises (non-AEs), assessee used internal Transactional Net Margin Method (TNMM) by comparing the ratio of operating profit and operating cost of the AE segment with the non-AEs segment. On a perusal of the annual report and from the form 3CEB, learned Transfer Pricing Officer (TPO) found that there are trade receivables from the AE’s.

Learned TPO made the adjustment in respect of ITeS services, following the TNMM by adopting external comparables, disregarding the transfer pricing study conducted by the assessee by following TNMM adopting the internal comparables. The segmental results of the assessee between the AE’s and non-AEs segments were also disregarded by the ITA-TP No. 192/Hyd/2021 learned TPO. On the aspect of transfer pricing adjustment in respect of the interest on the receivables, learned TPO made the adjustment by adopting SBI short term deposit rates after granting a grace period of 30 days. This approach of the learned TPO was upheld by the learned DRP by way of the impugned order. Apart from these two additions, learned Assessing Officer made addition under section 40(a)(i) of the Act by disallowing payments made to three foreign entities.

At the outset, learned AR submitted that for the assessment year 2009-10, an issue similar to the adjustment in respect of ITeS services had arisen in assessee’s own case before the Tribunal in and by order dated 29/12/2017, a Co-ordinate Bench of the Tribunal directed the learned AO/learned TPO to consider only the operating profit/operating cost of a transactions and also to consider internal TNMM where the services rendered by the assessee are similar both to the AEs and non-AEs.

Per contra, learned DR submitted that there is no material on record to show that the view taken by a Co-ordinate Bench of the Tribunal in the case of assessee for the assessment years 2009-10 and 2010-11 was brought to the notice of the Revenue authorities. She strongly supported the view taken by the Revenue authorities and submitted that the learned DRP is justified in upholding the findings of the learned TPO on this aspect.

We have gone through the record in the light of the submissions made on either side. On the aspect of adoption of the most appropriate method, in assessee’s own case for the assessment year 2009-10, a Co-ordinate Bench of this Tribunal held that:-

“10. Having regard to the rival contentions and the material on record, we find that where the assessee has both the AE as well as non-AE transactions, the operating profit and operating cost relating to the AE transactions alone ought to be considered for arriving at the ALP and thereafter the fixed cost attributable to both the transactions ought to be apportioned. When the TPO has adopted the TNMM as the most appropriate method and the assessee has rendered similar services to both the AEs and non- AEs, and the non- AE transaction satisfy the internal TNMM. The AO, therefore, ought to have considered them for arriving at the ALP. Therefore, we deem it fit and proper to remit this issue to the file of the AO with a direction to consider only the operating profit/operating cost of AE transactions and also to consider internal TNMM where the services rendered by the assessee are similar both to AEs and non-AEs. Accordingly, grounds of appeal

Now, coming to the issue of interest on receivables, learned AR submitted that the assessee is a debt free entity, working capital adjustment is not given and also that the assessee has not been charging any interest to non-AEs. He, therefore, submitted that there cannot be any TP adjustment in respect of the interest on trade receivables. He, however,

He, however, submitted that in respect of the loans and advances in foreign currency, the interest should be the market determined rate applicable to the currency concerned in which the loan has to be repaid, but not on the basis of the currency or legal tender of the place or country of residence of either of the parties. Learned AR argued at length stating that this particular transaction is not covered in the definition of international transaction as defined under section 92B of the Act; that the receivables are consequential/closely linked to the principal transaction of provision of services; that the re-characterising the outstanding receivables as unsecured loan extended by the assessee to its AEs is improper; that the assessee is fully funded by its AEs and does not bear any working capital risks; that the assessee does not charge any interest on outstanding receivables from third party customers as well; and that the assessee has outstanding payables due to AEs on which no interest has been levied by the AEs as well.

Learned AR in the alternative submitted that in the case of Afton Chemical India Private Limited vs. ITO in by order dated 05/09/2022 had taken a view that in these sorts of cases, the ends of justice would be met by accepting the interest rate on similar foreign

Per contra, learned DR submitted that the question - whether or not the interest on trade receivables is an international transaction - does not leave any scope for any discussion in view of the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Patni Computer Systems (2013) 215 Taxmann 108 (Bom), wherein the amendment to Section 92B of the Act by Finance Act, 2012 with retrospective effect from 01/04/2002 was considered. Basing on the view taken in a number of decisions of the Tribunal of various Benches, learned TPO held that it is incumbent upon the taxpayer to separately benchmark the arm’s length price of the international transaction relating to interest on overdue receivables from the AE by way of analysis of functions, assets and risks. While following the view taken by the Tribunal in the case of M/s. Logix Microsystems Ltd. Vs. ACIT in dated 07/10/2010, learned TPO thought it proper to consider the SBI short term deposit rate as ITA-TP No. 192/Hyd/2021 appropriate CUP to determine the ALP of the interest on outstanding receivables.

We have considered the submissions on either side. In view of the view taken by the Hon'ble Bombay High Court in Patni Computer Systems (supra), on the amendment to Section 92B of the Act by way of Finance Act, 2012 with retrospective effect from 01/04/2002, it is not open for the assessee to agitate the question as to whether or not the interest on outstanding receivables is an international transaction requiring separate benchmarking. Hence, the only issue now remains to be considered is in respect of the rate of interest, in the light of the decisions reported in Tecnimont ICB House Vs. DCIT [2015] 60 taxmann.com 143 (Mumbai - Trib.), Hon'ble Bombay High Court in PCIT Vs. Tecnimont (P) Ltd., (supra) and CIT Vs. CottonNaturals (I) (P.) Ltd. [2015] 55 taxmann.com 523 (Delhi), since this aspect is no longer res integra and dealt with by the Mumbai Bench of the Tribunal in the case of Tecnimont ICB House (supra) and confirmed by the Hon'ble Bombay High Court. CottonNaturals (I) (P.) Ltd. (supra) is also on the same aspect.

On this aspect, Mumbai Bench of the Tribunal, in the case of Tecnimont ICB House (supra), considered the view taken in Everst Kanto Cylinder Ltd. v. Asstt. CIT (LTU) [2014] 52 taxmann.com 395 (Mum.); PMP Auto Components (P.) Ltd. v. [IT Appeal No. 1484 (Mum.) of 2014, dated 22-8-2014]; Hinduja Global Solutions Ltd. v. Addl. CIT [2013] 145 ITD 361/35 taxmann.com 348 (Mum.); Tata Autocomp Systems Ltd. v. Asstt. CIT [2012] 52 SOT 48/21 taxmann.com 6 (Mum.); CIT v. Tata Autocomp Systems Ltd. [2015] 56 taxmann.com 206 (Bom.); Four Soft Ltd. v. Dy. CIT [2011] 142 TTJ 358 (Hyd.); and Everst Kanto Cylinder Ltd. v. Asstt. CIT

In the case of CIT Vs. CottonNaturals (I) (P.) Ltd. [2015] 55 taxmann.com 523 (Delhi) the Hon'ble Delhi High Court considered 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, observed that such a question must be answered by adopting and applying a commonsensical and pragmatic reasoning and held that the interest rate should be the ITA-TP No. 192/Hyd/2021 market determined interest rate applicable to the currency concerned in which the loan has to be repaid; that the 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. It is further observed that the 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; that the interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable; that 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. While referring to the Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115, the Hon'ble High Court held that the PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate and the PLR rates are not applicable to loans to be re-paid in foreign currency. Hon'ble Court accordingly held that whatever the principle that is applicable to the case of outbound loans, would be equally applicable to inbound loans given to Indian subsidiaries of foreign AEs, that the parameters cannot be different for outbound and inbound loans, and a similar reasoning applies to both inbound and outbound loans.

Respectfully following the judicial opinion stated supra, we are of the considered opinion that the ends of justice would be met by accepting the interest rate on similar foreign currency receivables/advances as LIBOR+200 points. We direct the learned Assessing Officer / learned TPO to adopt the same. Grounds are partly allowed accordingly.

Adverting to the disallowance under section 40(a)(i) of the Act, it comprises of three additions, namely, Rs. 8,46,35,315/- paid to Techno Support Co. Ltd., Rs. 44,19,715/- paid to Adecco Bangna Recruitment Ltd., and Rs. 37,27,534/-paid to TechM, Gmbh. In respect of payments to Techno Support Co. Ltd., assessee pleaded that due to some technical reasons it could not send its employees to Japan and, therefore, entered into an agreement with Techno Support Co. Ltd., to take the employees of assessee as a seconded on its rolls and the assessee reimburse their salaries. Learned Assessing Officer on verification of the agreements found that the Techno Support Co. Ltd., is a mediator for certain services and as a matter of fact no employees were sent to Japan, but for the smooth functioning of the assessee company, the Japanese company provided some groundwork.

In respect of Adecco, Thailand, plea of the assessee was that the payments were made to it in respect of certain services obtained by the assessee through the employees of Adecco, Thailand. Learned Assessing Officer found that the assessee company while making payment to the Thailand company, deducted TDS on an amount of Rs. 33,60,944/- out of the total payment of Rs. 77,80,659/- and failed to deduct TDS on the balance amount of Rs. 44,19,715/- and therefore disallowed the said expense.

In respect of the German company also the plea of the assessee before the learned Assessing Officer was that its employees were deputed to work at the client’s location and due to work permit issues they were seconded to the German company and the salaries were reimbursed with a Markup of 6%. Learned Assessing Officer on verification of the ITA-TP No. 192/Hyd/2021 agreement, as a matter of fact found that the assessee company was taking all the risk and responsibility on providing the services to the clients, the source of income is the location of the assessee company where it resides and, therefore, non-deduction of TDS on the amount transferred to the entities attracted disallowance.

It was pleaded before the learned DRP that there was no profit element to the non-resident vendors on the salary cost reimbursable by the assessee, and these payments were merely reimbursement of salary expenses of employees are seconded and, therefore, there is no requirement to deduct TDS. learned DRP found that the assessee did not produce any evidence to demonstrate that the assessee ever seconded employees to the vendors and the impugned payments were made towards reimbursement of salary paid to those vendors.

In respect of the payments to the Techno Support, Japan learned DRP found that there is no reference in the agreement as to any secondment of employees by the assessee to the said company, the assessee did not produce any other documents to show the employees were seconded to Techno Support, Japan and the purpose of such secondment, if any. Learned DRP, therefore, did not believe the version of the assessee as to the secondment of employees.

Before us the assessee produced the employment contracts for the employees whose salaries are paid by cheque to Techno Support, Japan and reimbursed by the assessee, working for reimbursement of the salary cost for each month raised by the Techno Support, Japan and the invoices that were already submitted in scrutiny proceedings, as additional

Having regard to the facts and circumstances of the case, we are of the considered opinion that by granting an opportunity to the assessee no prejudice is caused to the case of the Revenue and in the interest of justice, the additional evidence is received and the issue is restored to the file of the learned Assessing Officer to examine them and to take a view after affording an opportunity to the assessee. With this view of the matter, we restore the issue covered by Ground No. 15 in respect of the payments made to Techno Support, Japan for examining the material and to take a view according to law, after affording an opportunity to the assessee.

In respect of the payment to Thailand entity, learned DRP recorded that such payments amounted to Fee for Technical Services (FTS), and in the absence of FTS clause in the India -Thailand Double Taxation Avoidance Agreement (DTAA), the same have to be taxed as other income under Article 22 of DTAA, and for non-deduction of tax on such payments, disallowance under section 40(a)(i) of the Act is justified.

It is, therefore, clear that there is no dispute that the payments made by the assessee to the Thailand entity are to be classified as FTS, and there is no FTS clause in India-Thailand DTAA. In the circumstances, a ITA-TP No. 192/Hyd/2021 Co-ordinate Bench of the Delhi Tribunal in the case of Solvay Asia Pacific (P.) Ltd., vs. DCIT [2024] 159 taxmann.com 90 (Delhi – Trib.) considered the issue in the light of the decision is of Co-ordinate Benches in the case of Bangkok Glass Industry Co. Ltd., vs. ACIT [2013] 34 taxmann.com 77 and Bharti Airtel Ltd., vs. ITO [2016] 67 taxmann.com 223 (Delhi – Trib) and reached a conclusion that when a non-resident receives certain amounts fall in the category of FTS and there is no FTS clause in India-Thailand DTAA, such receipts have to be treated as business income in the hands of the Thailand entity, but not as miscellaneous income under any residual clause. Since the decision is applicable to the facts of the case on hand, we hold that in such situation the provisions of section 40(a)(ia) of the Act cannot be invoked. Learned Assessing Officer is directed to delete the addition to the tune of Rs. 44,19,715/- by invoking the provisions under section 40(a)(i) of the Act. Ground No. 16 of the appeal is accordingly allowed.

Coming to the payments made to the German entity, according to the assessee such payments represent reimbursement of salary of the seconded employees, with a Markup of 6%. For want of evidence on this aspect, the authorities did not believe that these payments were made towards reimbursement of the salary of the seconded employees. On the other hand, as a matter of fact, learned DRP found that these payments were made in consideration for the software development services provided by the German entity to the assessee, and for provision of technical personnel, all of which clearly fall within the purview of FTS under article 13(4) of the India-Germany DTAA, requiring tax to be deducted on the said payments.

As against these findings of the learned DRP, absolutely there is no material produced before us to return a different factual finding. Further even in respect of the assessee having any income through its branch in Germany, there is no evidence produced before us nor our attention is drawn to any such material. In these circumstances, we do not find any reason to interfere with the findings of the authorities and we uphold the addition of Rs. 37,27,534/- made by the learned Assessing Officer, invoking section 40(a)(i) of the Act. Ground No. 17 of the appeal is accordingly dismissed.

In the result, appeal of the assessee is partly allowed and for statistical purpose.