2016 (7) TMI 243 - AT - Income Tax

Tribunal orders re-examination of fund classification, export treatment, profits, and interest charges

The Tribunal directed the AO to re-examine various issues, including the classification of funds advanced to an associated enterprise as loans or equity, ... Transfer pricing adjustment and arm's length price - Nature of advances (loan versus equity) - International transaction - Deduction under Section 10A - Deemed receipt of export proceeds under RBI guidelines - Notional interest on delayed realisation of export receivables - LIBOR+2% as benchmark rate for interest in international transactionsTransfer pricing adjustment and arm's length price - Nature of advances (loan versus equity) - International transaction - LIBOR+2% as benchmark rate for interest in international transactions - Levy of interest under transfer pricing on interest-free advances to the assessee's associated enterprise - HELD THAT: - The Tribunal examined whether the amounts advanced to the AE were loans or quasi-equity/investments, noting that records do not clearly establish the nature of advances (opening balances, classification in accounts, conversion timing and requisite statutory approvals). Because the factual matrix was unclear and several decisions relied upon by parties were not directly in the transfer pricing context, the Tribunal declined to adjudicate the levy on merits. The Tribunal directed the AO/TPO to verify primary records (account heads, share application/ investment entries, board resolutions, RBI/other approvals), determine whether transactions qualify as international transactions, and then re-determine both the applicability of transfer pricing adjustment and the appropriate rate of interest (observing that LIBOR+2% is a commonly accepted benchmark by coordinate benches), affording the assessee an opportunity to substantiate its contentions. [Paras 4]Matter set aside to AO/TPO for fresh factual examination and re-determination; grounds 1 & 2 allowed for statistical purposes.Deduction under Section 10A - Deemed receipt of export proceeds under RBI guidelines - Notional interest on delayed realisation of export receivables - Claim for deduction under Section 10A including treatment of (a) export realisations received within extended time permitted by RBI, (b) receivables converted into equity with RBI/FEMA approval, and (c) 'on site consultancy through branches' for computing export and total turnover - HELD THAT: - The Tribunal observed that the DRP had largely accepted the assessee's contentions but the AO failed to implement DRP directions and did not examine the matters. Given the materials placed (details of export turnover, realizations within extended RBI timelines, conversion of receivables into equity with requisite permissions, and contention on inclusion/exclusion of branch/on site consultancy receipts), the Tribunal directed the AO to verify each export realisation against invoice dates and RBI guidelines, to re-work the Section 10A computation in light of DRP directions and relevant case law, and to give the assessee an opportunity to substantiate its claims. Consequently the Tribunal did not decide the merits but remitted the matter for fresh consideration by the AO. [Paras 7]AO directed to re-examine and re-determine Section 10A deduction after implementing DRP directions and verifying export realisations; grounds 3-6 allowed for statistical purposes.Notional interest on delayed realisation of export receivables - Deduction under Section 10A - Levy of notional interest on belated realisations of export receivables (AO's interest on receivables beyond two months) - HELD THAT: - The Tribunal accepted the assessee's contention that it does not levy interest on overdue receivables either from AEs or non-AEs and that there is no uniform policy of charging interest; RBI allows up to one year (with further extensions) for realisation of export proceeds. The Tribunal found the AO's imposition of a two month credit limit arbitrary, and that the AO had charged interest for a period extending beyond the relevant assessment year. Considering invoices and realisation dates falling within a reasonable credit period in the year under consideration, the Tribunal held that no interest should be levied and cancelled the notional interest charged. [Paras 11]Interest levied on receivables cancelled; grounds in respect of interest on receivables allowed.Final Conclusion: Appeal allowed for statistical purposes. Transfer pricing addition relating to interest on advances remitted to AO/TPO for fresh factual verification and re-determination; deduction under Section 10A remitted to AO to implement DRP directions and verify export realisations and RBI/FEMA regularisations; notional interest on delayed realisations cancelled in favour of the assessee. Issues Involved:1. Addition of Rs. 47,25,188 under Section 92CA on investment made in AE.2. Re-categorization of 'Investment' as 'Loan' under Section 145.3. Non-consideration of foreign exchange received within a specific period for deduction under Section 10A.4. Non-consideration of export receivables converted into equity for deduction under Section 10A.5. Non-consideration of 'Onsite Consultancy through branches' as foreign exchange received under Section 10A.6. Deduction of 'Onsite Consultancy through branches' from 'Export turnover' without deducting from 'Total turnover' for Section 10A.7. Charging of notional interest on delayed realization from sundry debtors.Detailed Analysis:1. Addition of Rs. 47,25,188 under Section 92CA on investment made in AE:The assessee advanced Rs. 30,18,54,791 as interest-free funds to its AE, M/s. GSS America Inc, with the outstanding balance as on 31-03-2010 being Rs. 73,31,22,791. The assessee argued that the funds were quasi-equity, converted into equity in FY 2011-12, similar to the ITAT decision in Mascan Global Limited. However, the TPO did not accept this and determined the interest at 4.06% p.a., leading to an addition of Rs. 47,25,188. The DRP upheld this decision, treating the amounts as loans and advances requiring adjustment under transfer pricing provisions. The Tribunal found the facts unclear regarding whether the amounts were loans or equity and directed the AO to re-examine the nature of advances, verify the relevant accounts, and decide accordingly.2. Re-categorization of 'Investment' as 'Loan' under Section 145:The Tribunal noted that the AO and TPO treated the advances as loans without clear evidence. It directed the AO to ascertain the nature of the advances, whether they were loans or equity, and verify the necessary approvals from RBI, SEBI, and other authorities. The issue was set aside for re-examination.3. Non-consideration of foreign exchange received within a specific period for deduction under Section 10A:The AO restricted the deduction under Section 10A due to non-receipt of foreign exchange. The assessee provided details showing export realization within the permissible period, including amounts converted into equity with RBI approval. The Tribunal directed the AO to verify these details and allow the deduction as per the Act and relevant case law.4. Non-consideration of export receivables converted into equity for deduction under Section 10A:The assessee argued that Rs. 12,23,68,351 converted into equity should be considered for deduction under Section 10A, as permitted by RBI. The Tribunal directed the AO to verify this and allow the deduction accordingly.5. Non-consideration of 'Onsite Consultancy through branches' as foreign exchange received under Section 10A:The assessee contended that profits from onsite consultancy through branches should be considered as deemed profits for export of computer software. The Tribunal directed the AO to examine this issue and allow the deduction as per the provisions of the Act and relevant case law.6. Deduction of 'Onsite Consultancy through branches' from 'Export turnover' without deducting from 'Total turnover' for Section 10A:The Tribunal noted that the AO did not follow the DRP's directions to exclude onsite consultancy from both export and total turnover. It directed the AO to re-examine and allow the deduction as per the Act and relevant case law.7. Charging of notional interest on delayed realization from sundry debtors:The AO charged notional interest of Rs. 21,78,647 on delayed realization of Rs. 5,31,09,900. The assessee argued that it did not charge interest on delayed payments from any debtor and that the transactions were at arm's length under TNMM. The Tribunal found the AO's calculation arbitrary, noting that the invoices were outstanding only for three months by the end of the accounting year. It canceled the interest levied, allowing the assessee's contentions.Conclusion:The Tribunal allowed the appeal for statistical purposes, directing the AO to re-examine the issues afresh, verify the facts, and allow the deductions as per the provisions of the Act and relevant case law.