TaxTMI 
TaxTMI 
2024 (7) TMI 1687
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....icing Officer (Ld. TPO) in making an adjustment of INR 32,12,006 by levying notional interest on trade receivables arising out of provision of software consultancy and support services. 3. On the facts and in the circumstances of the case and in law, the Ld. DRP/NeAC/Ld. TPO have erred in treating the receivables due from the AE, as a separate international transaction and benchmarking the same separately. 4. On the facts and circumstances of the case and in law, Ld. DRP/NeAC/Ld. TPO have erred in re characterizing the overdue amount on receivables due from the AE as an unsecured interest- free loan. 5. On the facts and circumstances of the case and in law, Ld. DRP/NeAC/Ld. TPO failed to appreciate that cost considered for pricing the international transactions is subsumed in the credit period extended to the AE. 6. On the facts and circumstances of the case and in law, Ld. DRP/NeAC/Ld. TPO erred in disregarding the aggregation approach adopted by the Appellant wherein, the outstanding receivables have been aggregated with the primary transaction of rendering services by claiming an adjustment for differences in working capital levels between the....
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....ief arising from the grounds of appeal mentioned supra and all consequential efforts relief thereto. 16. The appellant craves leave to alter, amend, rescind, modify or withdraw all or any of the grounds of appeal contained herein or add any further grounds as may be discussed necessary either before or during the hearing of the appeal". 2.1. The assessee has raised the following additional grounds : "1. On the facts and circumstances of the case and in law, the ld. DRP erred in issuing DRP directions under section 144C(5) of the Act dated 14 June 2022, without a valid Documentation Identification Number ("DIN") and in contravention of the CBDT Circular No. 19/2019 dated August 14, 2019. 2. On the facts and circumstances of the case and in law, the final assessment order datd 29 July 2022 under Section 143(3) read with section 144C(13) and section 144B of the Act passed by the Assessing Officer, pursuant to the invalid directions passed by the ld. DRP under section 144C(5) of the Act, is illegal, thus, making the final assessment order bad in law, null and void and thus, liable to be quashed." 3. Facts of the case, in brief, are that the assessee TES....
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....nd cess is nowhere mentioned in it. Reliance has also been placed on some very old circulars and judgments to stress that cess is not part of tax and hence there is no reason why the same be not allowed. However, it is to be noted that all the business expenses are to be allowed only as per the provisions of the Income Tax Act contained in section 28 to 43. The assessee has not clarified under which provision this deduction is being claimed. It cannot be denied that it is not an expenditure incurred for the carrying out of the business and it is only an obligation on the part of the assesssee to be paid to the government just like the tax paid by the assessee. Hence, this expenditure of Rs. 23,85,335/- is being disallowed and penalty proceedings u/s 270A were initiated for under reporting of income. 6. As per assessment order for the A.Y. 2017-18 it is noticed that the assessee had entered into a business purchase agreement with M/s Allegis Services India Pvt. Ltd., which is a part of the same group as the assessee. In the purchase agreement a goodwill of Rs. 2,63,50,570/- was created and depreciation of Rs. 33,46,509/- was claimed on it. As per detailed discussions made in the ....
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....ry of the arguments presented before the Hon'ble Bench. 1. The Appellant claimed depreciation on the Opening Written Down Value ("WDV") of its block of intangible assets, comprising of Goodwill recorded in its books in the preceding AY, i.e., AY 2017-18, pursuant to the acquisition of the IT Service division from Allegis Services India Private Limited ("Allegis India"/ "the Seller") in a slump sale, on a going concern basis, in terms of the business transfer agreement ("BTA") dated 28.03.2017. 2. In the assessment proceeding concluded in the case of the Appellant for the said preceding AY, the lower authorities disallowed the depreciation claimed on the said Goodwill as a consequence of disregarding the said Goodwill. 3. In light of the above, the disallowed the depreciation claimed in the Impugned AY, on the opening WDV of the block of intangible assets comprising of the said Goodwill. In this back around, the key submissions made during the hearing before Your Honours is summarized below: 4. The disallowance of the said depreciation for the Impugned AY merely stems from and is consequential to the disregarding of the Goodwill in AY 2017-18.....
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....." 9. Per contra, the ld. DR relied upon the orders passed by the lower authorities. 10. We have heard the rival arguments and perused the available material on record. The Coordinate Bench in the case of the assessee in Para 13 & 14 for the A.Y 2017-18 had held as under: "13. It remains an undisputed fact that the seller company is assessed to tax and the capital gains offered by it are accepted without any adjustment. Assessee placed reliance on the decision of the Hon'ble High Court of Delhi in the case of Triune Projects Private Limited 77 taxmann.com 40 and the view taken by the Co-ordinate Bench of the Bangalore Tribunal in the case of I&B Seeds Pvt. Limited., 142 taxmann.com 274 for the principle that once the department accepted the capital gains in the hands of the seller, the said transaction cannot be doubted in the hands of the purchaser. These decisions bind us. 14. Viewing from any angle, the circumstances cited by the authorities to hold that the BTA is a colourable device created only to reduce the tax, does not hold water. We, therefore, while disagreeing with the authorities, return a finding that it is legitimate for the assessee to go....
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....ia Advisors (P.) Ltd. [398 ITR 120] Delhi HC Pg. 52 of the case law compendium - Para 28 & 29 c. Hackett Group (India) Ltd. [I.T.A NO. 2039/Hyd/2017] ITAT, Hyderabad Annexure 1 - Para 15 to 17 d. Devi Sea Foods Limited [I.T.A. No. 156/ Viz/2022] ITAT, Vishakapatnam Annexure 1 to this synopsis - Para 5 to 7 e. Gimpex Pvt. Ltd. [IT(TP)A. No. 57/ Chny/2019] ITAT, Chennai Annexure 2 to this synopsis Para 7 & 8 f. Avnet India (P.) Ltd [65 taxmann.com 187] ITAT - Bangalore Pg. 36 of the case law compendium - Para 8 & 9 g. Goldstar Jewellery Ltd. [42 ITR(T) 112] ITAT - Mumbai Pg. 42 of the case law compendium - Para 8 5.5. Without prejudice, even if such addition is to be made, the said notional interest shall be computed by considering the 'average collection period' which is reflective of the position of the overall collections (i.e., collections in advance as well as deferred), as against the selective invoice- wise approach adopted by the Ld. TPO where only the selective invoices where the realization was delayed, resulting in a skewed position. 5.6. In the case of the Appellant, the average....
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....f interest in respect of the AE receivables shall also be considered at NIL. 5.10. Without prejudice to the above, the Appellant submits that the said benchmark rate ought to be pegged to the average LIBOR rate, being the commercial borrowing rate in the country where the alleged loan is availed/ consumed, as against the SBI short-term deposit rates adopted by the Ld. TPO. 5.11. It is a well-settled position of law that the arms' length price in relation to a loan availed by a foreign AE shall be benchmarked against the borrowing rates prevalent in the market of the country of the foreign AE where the loan is consumed. In light of this, the Appellant submitted that the said interest, if applicable, ought to be computed using the average yield of the 12-month LIBOR applicable for the Impugned AY plus 200 basis points (i.e., Avg. LIBOR + 200 bps), being the appropriate spread to cover the risks involved in an unsecured loan. 5.12. The Appellant relies on the following judicial precedents in support of above position: Case Law Judicial Forum Reference a. Cotton Naturals (I) (P.) Ltd. [55 taxmann.com 523] - while this decision was rendered ....
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....and also no objection of the taxpayer, had computed the interest by applying interest at 12%. The said rate of 12% was reduced to 8% by the Ld. CIT (A). ii. The Hon'ble Tribunal remarked that the application of 8% interest, though in strict sense, would be contrary to the principles of TP analysis as the transfer pricing officer was required to bring the comparable either internal comparable or the external comparable by applying CUP method and then fix the rate of interest on the delayed receivables from the AE. iii. However, it was opined that 6% shall be applied instead of the 8% interest rate with a view to give a quietus to the issue. iv. In such peculiar facts, the applicability of LIBOR + 200 bps, as upheld by a plethora of judicial precedents, was distinguished and held as not applicable. b. Satyam Venture Engineering Services Private Limited [ITA No. 222 & 250/Hyd/2016] - The Ld. DR's reliance on this decision is misplaced, as the same does not deal with the applicable rate of interest - the adjustment was set-aside back to the file of the Ld. TPO to consider the amounts realized in advance as well as the delayed collections for ....
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.... iv) Vivimed Labs Ltd vs. ACIT (ITA No. 428/Hyd/2022) v) Kantar GDC India (P) Ltd VS. DCIT (ITA No.484/Hyd/2022) vi) Cotiviti India P Ltd vs. DCIT (ITA No.2117/Hyd/2017) 14. We have heard the rival arguments and perused the material available on recording including the written submission filed before us. At page 87 of the order passed by the TPO, the TPO has mentioned as under: "2.6 Ground of objection No. 6: Objection No. 6(a): On the facts and circumstances of the case, and in law, learned TPO/learned AO erred in not granting working capital adjustment. 2.6.1 Having considered the submissions, we note that Rule 10B provides for making reasonably accurate adjustment to the uncontrolled comparable transaction to eliminate the material effects of differences on the price, cost or profits. The assessee has argued for working capital adjustment contending that there exist differences in the payable and receivable position between the assessee and the comparables. However, it was not demonstrated with any data or information as to the impact of such difference on the price, cost or profits, and as to whether such difference materially aff....
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....d merit in the same, as the taxpayer also to an extent bear credit and collection risk. If the AE fails to make the payment within the credit period it will have a direct and heavy impact on the sustenance of the assessee. If the employees were not paid in time, it will affect the existence of the taxpayer itself, and its performance in the long run. In addition to the reasons given by the TPO, in the order passed under section 92CA(3) of the Act, we are of the view that as the three-year weighted average margin of the various comparables and the defined median was only considered for ALP determination, such differences on account of risks, if any gets evened out. Further, no such adjustment is permissible unless the assessee establishes that such difference has a material effect on the margin of the comparable companies and such computation could be made based on reliable data, in view of sub-rule 10B of Income Tax Rules. In view of these, we reject the pleas raised. 2.6.3 In this regard, it is relevant to refer to para 218 of the judgment in case of Alberta Printed Circuits Ltd V Queen (2011 TCC 232) (Tax Court of Canada), wherein it was held that the fact that the sub-c....
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....bt arising during the course of business .. "and hence non-charging or under-charging of interest on the excess period of credit allowed to the AE for the realization of invoices would amount to an international transaction. This view finds support in various judicial decisions, including that of many High courts. 2.7.2 The Honourable ITAT Delhi in the case of Bechtel India Pvt Ltd (in ITA No. 6530/Del/201l6 dated 16 May 2017), deviating from its earlier order in the same case, held that deferred receivables would constitute an 'international transaction'. The relevant discussion holding 'deferred receivables' would constitute international transaction' is as under: "21. After considering the rival submissions and perusing the relevant material on record, it is noticed as highlighted above, that the assessee argued before the TPO that interest on receivables is not an international transaction. At this stage, it to would be apposite to note that the Finance Act, 2012 has inserted Explanation section 92B with retrospective effect from 1.4.2002. Clause (i) of this Explanation, which is otherwise also for removal of doubts, gives meaning to the ex....
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....ng question of law: "(c) Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?" 24. While answering the above question, the Hon'ble High Court noticed that an amendment to section 92B has been carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside the view taken by the Tribunal, the Hon'ble High Court restored this ITA No. 6530/Del/ 2016 issue to the file of the Tribunal for fresh decision in the light of the legislative amendment. 25. The foregoing discussion discloses that non-charging or under- charging of interest on the excess period of credit allowed to the AE for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be det....
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....e-serve (India) Private Limited (dated 30.10.2017) (87 taxmann.com 251) held that "receivable or any other debt arising during the course of business is included in the definition of 'capital financing' as an international transaction' as per Explanation 2 to section 92B w.e.f 2002 inserted by Finance Act 2012. Even outstanding receivable partake the character of capital financing and consequently overdue outstanding is an international transaction". 2.7.5 We further note that the Hon'ble Karnataka High Court in the case of DCIT Vs. AMD India Private Limited in ITA No. 274/2018 dated 31.08.2018 (TS-993-HC 2018-Kar-TP) held that the transaction of extending extra credit period would constitute an independent international transaction. The relevant extract is as under: "We first decide this aspect as to whether this is an independent international transaction or not. In our considered opinion, in respect of agreed credit period which is 30 days in the present case, there is no independent international transaction because the effect of the credit to that extent is factored in the agreed prices. But for extra credit, the effect of the credit to that e....
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...."32. Further, to address the contention of the Assessee that early or late realization of sale/ service proceeds is incidental to the transaction of sale/ service, and that there can be no question to benchmark the interest separately, in calculating the ALP in an international transaction, we refer to the amendment brought under Explanation to section 92B of the Act vide Finance Act, 2012, w.e.f. 01.04.2012. Clause (i) of this Explanation, gives www.taxguru.in ITA 461/2017 & connected matters Page 26 of 38 meaning to the expression international transaction" in an inclusive manner. Sub-clause (c) of clause (i) of this Explanation, states as follows: "Explanation, -- For the removal of doubts, it is hereby clarified that- (i) the expression "international transaction" shall include (a) ...... (b) .......... (c) capital financing, including any type of long-term or short term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business ;.... " This explanation was explained in Ameriprise India Pvt. Ltd. V. ACIT (supra)as follows: ....
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.... is a case of determination of arm's length price of a transaction. Undoubtedly the receivable or any other debt arising during the course of the business is included in the definition of 'capital financing' as an 'international transaction' as per explanation 2 to section 92B of the Act w.e.f. 01.04.2002 inserted by the Finance Act 2012. Therefore, even the outstanding receivable partake the character of capital financing and consequently, overdue outstanding is an international transaction', The natural corollary would be of imputing interest on such 'capital financing', if same is not charged at arm's length, Therefore, we reject the contention of the assessee that outstanding receivable is not an 'international transaction' and therefore, hence, according to us, interest on it requires to be imputed." Thus, this is a redundant contention, because as has been highlighted by the ITAT, by a plain reading of the (retrospectively applicable) amendment that introduced the Explanation to section 92B of the Act by Finance Act, 2012, it/is determinable that if there is any delay in the realization of a trading debt arising from the sa....
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....its AE does not provide for any charging of interest and, hence, there can be no question of any notional/ hypothetical interest income as has been determined by the TPO. To support the non-charging of interest, he relied on the judgment of the Hon'ble Bombay High Court in the case of Vodafone India Services Put. Ltd. Vs. Union of India and Others (2014) 368 1ITR 1 (Bom.). He buttressed the same argument by relying on the judgment of the Hon'ble jurisdictional High Court dated 27.3.2015 in CIT Vs. Cotton Naturals Put. Ltd. (Del.). 13.3. We are not persuaded to accept this argument. The argument that the Agreement does not provide for charging. any. interest on late realization of invoice value and hence no interest can be charged, deserves the fate of dismissal under the transfer pricing provisions. Chapter X of the Act has been enshrined to determine the income from an international transaction at ALP, being in the same manner as is determined between two independent parties. It means that if an income i not charged or under charged by an Indian entity from its foreign AE, which ought to have been properly charged if the transaction had been between two independen....
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...., 'any other debt arising during the course of business' has also been expressly recognized as an international transaction. That being so, the payment of interest or receipt of interest on the loans accepted or allowed in the circumstances as mentioned in this clause of the Explanation, also become international transactions, requiring the determination of their ALP. If the payment of interest is excessive or there is no or low receipt of interest, then Such interest expense/income needs to be brought to ALP. The expression 'debt arising during the course of business' in common parlance encompasses, inter alia, any trading debt arising from the sale of goods or services rendered in the course of carrying on the business. Once any debt arising during the course of business has been ordained by the legislature as an international transaction, it is, but, natural that if there is any delay in the realization of such debt arising during the course of business, it is liable to be visited with the TP adjustment on account of interest income short charged or uncharged. 2.7.13 Further, it is trite law that the real income theory is not applicable in the c....
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....f tax laws in general, whereas, transfer pricing provisions, being anti abuse provisions with the sanction of the statute, come into play in the specific situation of certain transactions with the associated enterprise. The general provisions of the law have to give way to these specific anti abuse provisions. While a notional interest income cannot indeed be brought to tax in general, the arm's length principle requires that income is computed, in certain situations, on the basis of certain assumptions which are inherently notional in nature. When the legal provisions are not in parimateria, as the provision of normal |.T.A. Nos. 1548 and 1549/Kol/2009 Assessment years: 2003 04 and 2004-05 computation of income and the provision of computation of income in the case of international transactions between the associated enterprises, what is held to be correct in the context of one set of legal provisions has no application in the context of the other set of legal provisions." 2.7.14 Further, it is already discussed that the Honourable Karnataka High court in the case of DCIT VS. AMD India Private Limited in ITA No. 274/2018 dated 31.08.2018 (TS- 993-HC-2018-Kar-TP) held ....
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.... to be determined. Granting of working capital adjustment is confined to the international transaction of rendering of services, whose ALP is separately determinable. On the other hand, the international transaction of interest receivable from its AEs for late realization of invoices beyond such stipulated period is a separate international transaction. Allowing working capital adjustment in the international transaction of rendering of services can have no impact on the determination of ALP of the international transaction of interest on receivables from AEs beyond the stipulated period allowed as per agreement. In the case of Mckinsey Knowledge Centre Put. Ltd. (supra), again, the Tribunal reiterated this reasoning and, inter alia, observed that: " ... In our considered opinion, whereas, the international transaction of purchase/sale of goods from/to AE contemplates comparison of the price charged/ paid for such goods by impliedly including the interest for the period allowed for realization of invoices as per the terms of the agreement, the international transaction of charging interest on late recovery of trade receivable covers the period which starts with the termina....
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....come. As the SBl short term deposit rate is an index rate adopted under lndian conditions to charge interest it is not an adhoc rate as contended by the assessee. Therefore, we reject the plea of the assessee to adopt LIBOR rate at the purpose of computing interest on outstanding receivables. 2.7.18 The SBI short term deposit interest rate is as under: "DOMESTIC TERM DEPOSIT RATES OF SBI AS ON: Duration 18.02.2 014 18.07.2 014 18.09.2 014 07.10.2 014 01.11.2 014 08.12.2 014 Revised for Public w.e.f. 10.04.201 5 Revised for Public w.e.f. 11.05.2015 Revised for Public w.e.f. 08.06.2 015 7 days to 45 days 7.5 7 7 6.00 5.00 5.00 6.00 6.00 5.5 46 day to 90 days 7.5 7 7 7.00 7.00 7.00 6.00 6.00 5.5 91 days to 179 days 7.5 7 7 7.00 7.00 7.00 7.00 7.00 6.75 180 days to 210 days 7 7 7.25 7.25 7.25 7.25 7.25 7.25 7.25 211 days to less than 1 year 7.5 7.5 7.5 7.50 7.50 7.50 7.50 7.50 7.50 1 year to 455 days 9 9 8.75 8.75 8.75 8.50 8.25 8.00 8.00 456 days to less than 2 ye....
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....and LIBOR + 300 basis points with the credit period of 30 days. 17.1. In our view, the applicability of LIBOR+200 / LIBOR+300 basis points is a question of fact that is required to be applied based on the credit rate of the assessee company as well as the AE. Further, once the amount is to be received by the assessee in India for the supply of goods and services to its AE and in the absence of non-receipt of the amount within the reasonable period, the assessee had been deprived from the outstanding amount and might have been approach to the financial institution for borrowing the similar amount and further, in case, the assessee having surplus amount, then the assessee as a prudent business man will keep this surplus amount in the bank and earn the interest thereon. 17.2. In case the amount is not paid by the AE and utilized by the AE for its business operations, in that eventuality, the AE is using the funds/resources of the assessee without any obligation to pay the interest or in other words, the amount is available to the AE without borrowing it from the institution or from the market and in our view, this is nothing but a mode of financing by the assessee to its AE or s....