2020 (3) TMI 1494 - AT - Income Tax

Remand directs TPO to treat AE interest as s.92B international transaction with FIFO; s.40(a)(ia) disallowance remitted pending s.194J tax verification

ITAT remitted two issues. First, it directed the TPO to treat interest on outstanding receivables/payables with the AE as an international transaction ... TP Adjustment - interest on the outstanding receivables and payables from the AE while determining the Arm’s Length Price - as pleaded that directions may be given to the Ld. AO to consider the same while determining the ALP because it amounts to cross border transaction as per section 92B - HELD THAT:- On this issue, in the previous occasion in the case of M/s. Kony India Private Limited [2019 (11) TMI 1550 - ITAT HYDERABAD] as find that the amendment to section 92B covers interest on outstanding receivables as international transaction and hence, we do not find merits in the argument advanced by the ld. AR that interest on outstanding receivables is not an international transaction as per section 92B of the Act. In respect of the application of FIFO method on realization of outstanding receivables with advance received towards certain other transaction with AE, we agree with the Ld. AR’s argument that primarily the advance received has to be adjusted against any advance received and thereafter, the interest has to be charged on the outstanding receivables. This methodology shall result in the exact outstanding invoices against which payment is not received. Since the facts of the above referred case is identical to the case of the assessee, we hereby remit the issue back to the file of TPO with similar direction. Addition u/s 40(a)(ia) - reimbursement of salary invoking the provisions of section 194J - HELD THAT:- In the assessee’s own case for the AY 2012-13 in [2019 (7) TMI 2072 - ITAT HYDERABAD] held that if the recipient has offered the receipt as its income, then the disallowance u/s 40(a)(ia) of the At cannot be made. The assessee has filed the relevant details before the DRP and the DRP has called for a remand report, wherein the A.O has supported the disallowance on the ground that the proviso to Sec. 40(a)(ia) of the Act is applicable prospectively. As commented that certain part of the expenditure is not allowable and the DRP confirmed the order of the A.O only on the ground that the proviso is applicable prospectively. Thus, we find that the AO has already considered evidence filed by the assessee but has not given any finding as to whether the recipient has offered the said income to tax. Therefore, we deem it fit and proper to remand the issue to the file of the A.O with a direction to the assessee to file the relevant evidence before the A.O and the A.O shall then verify if the recipient had paid taxes on such sum and if it is found to be paid then no disallowance u/s 40(a)(ia) of the Act shall be made in the hands of the assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether interest on outstanding receivables and payables between the assessee and its associated enterprises constitutes an international transaction under section 92B and therefore must be considered in determining the Arm's Length Price (ALP) for transfer pricing purposes. 2. If interest on outstanding receivables/payables is an international transaction, whether advances received from associated enterprises must be adjusted on a FIFO basis against receivables before computing interest on outstanding invoices. 3. Whether reimbursement of salary paid to employees of a related resident entity is subject to withholding under section 194J read with disallowance under section 40(a)(ia), and whether the proviso to section 40(a)(ia) (as held curative/retrospective in attendant precedent) precludes disallowance where the recipient has offered the receipt to tax. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Interest on outstanding receivables/payables as an international transaction (s. 92B) Legal framework: The amended definition of 'international transaction' under section 92B includes interest on outstanding receivables/payables between associated enterprises; ALP determination must take into account cross-border transactions affecting pricing. Precedent treatment: The Tribunal, in a prior decision involving identical facts, held that amendment to section 92B covers interest on outstanding receivables as an international transaction and rejected the contention that such interest is outside s. 92B. Interpretation and reasoning: The Tribunal applied the statutory amendment literally to classify interest on outstanding receivables/payables with associated enterprises as an international transaction for transfer pricing. The court rejected arguments based on the assessee being debt-free or otherwise, noting that the statutory coverage controls. The Tribunal remitted the matter to the Transfer Pricing Officer (TPO) for fresh consideration consistent with this legal characterisation. Ratio vs. Obiter: Ratio - interest on outstanding receivables/payables between associated enterprises falls within s. 92B and must be considered for ALP determination; remand to TPO for computation/consideration constitutes operative direction. Obiter - ancillary factual points (e.g., debtor's overall debt position) were noted but did not alter the statutory conclusion. Conclusion: The Court holds interest on outstanding receivables/payables is an international transaction under s. 92B and remits the issue to the TPO for fresh consideration and computation of interest in accordance with the Tribunal's prior observations. Issue 2 - Adjustment of advances (FIFO) before computing interest on outstanding receivables Legal framework: In computing interest on outstanding receivables for transfer pricing, internal accounting/payment application principles determine which invoices remain outstanding; statutory treatment under s. 92B and ALP principles require accurate identification of unpaid invoices. Precedent treatment: The Tribunal accepted the assessee's contention that advances received from associated enterprises should be applied against outstanding receivables (on a FIFO basis) before computing interest, to identify the actual unpaid invoices on which interest is chargeable. Interpretation and reasoning: The Tribunal reasoned that adjusting advances against receivables yields the correct outstanding invoice positions and hence the correct base for interest computation. This methodology ensures that interest is charged only on amounts genuinely outstanding after accounting for payments/advances. Ratio vs. Obiter: Ratio - advances from associated enterprises must be adjusted against receivables (FIFO) prior to charging interest for transfer pricing computations; the direction to remand for computation is operative. Obiter - manner of FIFO application was suggested but left to the TPO to implement with provided computations. Conclusion: The Court directed remand to the TPO with instructions that advances be adjusted (FIFO) against receivables and directed the assessee to furnish computations so the TPO can determine interest on the proper outstanding balances. Issue 3 - Reimbursement of salary: withholding under s. 194J and disallowance under s. 40(a)(ia); retrospective applicability of proviso Legal framework: Section 194J prescribes withholding tax on fees for professional/technical services; section 40(a)(ia) disallows expenditure where tax is not deducted as required, subject to a proviso (whose retrospective/curative effect has been judicially considered). Whether an expense described as reimbursement for services rendered by employees of a resident related entity attracts TDS under s. 194J is a question of characterisation and withholding obligation; disallowance under s. 40(a)(ia) depends on non-deduction absent applicability of proviso. Precedent treatment: A coordinate Bench of the Tribunal and decisions of higher courts (noted reliance on a High Court decision holding the proviso to s. 40(a)(ia) curative/retrospective) have granted relief where the recipient has offered the receipt to tax. The Tribunal relied on its earlier decision in the assessee's own case for a succeeding year, which remanded the issue to verify whether the recipient had offered the receipts to tax. Interpretation and reasoning: The Tribunal treated the payments as for technical/services rendered by employees of a related resident entity, implying a withholding obligation under s. 194J. However, the Tribunal acknowledged precedent holding the proviso to s. 40(a)(ia) to be curative and applicable retrospectively, such that if the recipient has offered the receipts to tax, the disallowance under s. 40(a)(ia) should not be made. Because the assessing officer had not made a finding whether the recipient had paid tax on such receipts, the Tribunal remanded the matter to permit the assessee to produce evidence and for the AO to verify payment of tax by the recipient; if found, disallowance shall not be made. Ratio vs. Obiter: Ratio - where the recipient has offered the receipt to tax, the proviso to s. 40(a)(ia) precludes disallowance; remand for factual verification on whether recipient paid tax is an operative direction. Obiter - characterization that payments constituted technical services requiring TDS under s. 194J is treated as the factual/legal posture but the final outcome depends on remand findings. Conclusion: The Court remitted the issue to the assessing authority with directions to verify documentary evidence that the recipient offered the receipts to tax; if verified, no disallowance under s. 40(a)(ia) shall be made. The Tribunal followed its earlier coordinate decision and applied the retrospective effect of the proviso as controlling where recipient taxation is proved. Overall Disposition The Tribunal allowed both the Revenue's and the assessee's appeals for statistical purposes to the extent of remanding (a) the transfer pricing issue regarding interest on outstanding receivables/payables (with FIFO adjustment of advances) to the TPO for fresh consideration and computation, and (b) the reimbursement-of-salary/TDS disallowance issue to the assessing authority to verify whether the recipient has offered the receipts to tax and to act accordingly.