TMI Blog2023 (4) TMI 521X X X X Extracts X X X X X X X X Extracts X X X X ..... the T.P. Study and file the same before the TPO to show that the assessee s transactions with it s A.E. were at Arms Length however, nothing has been brought to our notice that the assessee has brought any comparable instance. In these circumstances, the TPO had applied the banking rate as applicable to short term loans - the same is required to be corrected and instead thereof, ALP is to be computed by adding notional interest @ 6% on the receivable. Accordingly, the appeal of the assessee is dismissed. - ITA-TP.No.568/Hyd/2022 - - - Dated:- 16-1-2023 - Shri Rama Kanta Panda, Accountant Member AND Shri Laliet Kumar, Judicial Member For the Assessee : Shri Kuriachan, CA For the Revenue : Shri Rajendra Kumar, CIT-DR ORDER Per Shri Laliet Kumar, J.M. This appeal is filed by the assessee, feeling aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, dated 27.07.2022 for the A.Y 2018-19, on the following grounds : 1. The order of the learned Assessing Officer making an addition of Rs.10,62,036/- towards interest on receivables is without considering the jurisdictional tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Rs. Nil and subsequently, the case was selected for limited scrutiny under CASS. A notice u/s. 143(2) was issued to the assessee on 22.09.2019 which was duly served upon the assessee. Notices u/s 142(1) along with questionnaire were issued on various dates for selection by CASS by AO, National Faceless Assessment Centre. In response thereto, the assessee filed e-submission(s) on 25.02.2021 and 03.09.2021. The information furnished from time to time by the assessee in response to statutory notices had been verified with the return of income and audit report filed by the assessee. Subsequent to issuing of Draft Assessment Order by AO, National Faceless Assessment Centre on 20.09.2021 u/s 143(3) r.w.s 144C(1) and 144B of the Act and conveyed that Penalty proceeding u/s 270A of Act for under reporting of income was being initiated. The assessee objected to the draft assessment order passed under section 144C for adding a notional interest of Rs.10,62,036/- to the total income and filed its objections before the Dispute Resolution Panel-1, Bengaluru. Subsequent to the directions of Hon'ble Dispute Resolution Panel, Bengaluru, the TPO, DCIT, Hyderabad issued order giving effect t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and also as discussed above there is no need to prove the profit shifting in determining the ALP rate of any international transaction. 2.2.17 We note that during the hearing before DRP the AR admitted that there is no information as to credit period in the Intercompany Agreement, entered with the AEs. Even the AR has not produced copy of the agreement in spite of specific query to produce the agreement, if any. The assessee simply relied on the RBI norms of allowing period of one year for realisation of export consideration. In the absence of specific information as to credit period, it is reasonable to allow credit period of 60 days. We also note that the Hon'ble Delhi ITAT in the case of BT e-serve India Private Limited held that where the agreement does not specify any credit period for payment, then adopting a reasonable credit period of 60 days is justified. The TPO proposed by show cause notice as to why interest should not be charged on the realizations received beyond the reasonable credit period of sixty days. The assessee submitted that most of the receivables were received within sixty days and only in few cases the delay has occurred. This explanation of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expressly opposed the above proposal of adoption of SBI short term deposit rate. The assessee during the course of hearing before the DRP, also could not substantiate as to why adoption of SBI prime rate is not correct. Further, in the facts of the case, we consider that, it is pertinent to look into the opportunity costs i.e., the income that the assessee would have earned, had the assessee received the amounts in time. This has to be determined taking into account the Indian market conditions, the assessee being taken as the tested party. Factoring these aspects, we are of the view, that the SBI short term fixed deposit interest rate may be the appropriate ALP rate to measure the interest compensation in these types of transactions. In this regard, we place reliance on the principle held by the Honourable Bangalore ITAT in the case of Logix Microsystems Ltd (ITA No. 423/Bang/2019 dated 07.10.2010) (2010-TI 1-50-ITAT Bang-TP), under similar factual circumstances, wherein it was observed, While adopting the Indian rate, it is not proper to rely on PLR of the State Bank of India. This is because if the funds were brought in time and those funds were properly deployed, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter claiming setoff of brought forward losses. 3. The learned Transfer Pricing Officer (TPO) while completing the assessment under section 92CA of the Income tax Act, 1961 made an addition of Rs. 10,62,036/- by way of notional interest on outstanding export receivables realized beyond 60 days. 4. The learned Assessing Officer passed a draft assessment order U/s 144C read with section 143(3) of the Income tax Act, 1961 on 20/09/2021 making an addition of Rs.10,62,036/- towards notional interest on outstanding export receivables realized beyond 60 days and initiated penalty U/s read with section 270A of the Act. 5. The petitioner filed objection before the learned Dispute Resolution Panel-1, Bengaluru (DRP) against the draft assessment order making an addition of national interest of Rs.10,62,036/- on outstanding export receivables realized beyond 60 days. 6. The learned DRP passed a direction by order dated 16/06/2022 No.ITBA/DRP/S/91/2022-23/1043464259(1) confirming a credit period of 60 days ted by the learned TPO and charging notional interest for the delay in realisation of export receivables and directed the TP to adopt interest rate charged by the State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umed that borrowed funds have been utilized to pass on the facility to its AE. The Hon'ble Delhi High Court confirmed the order of the Hon'ble ITAT and dismissed the appeal filed by the Revenue. The Hon'ble Supreme Court dismissed the SLP filed by the department against the Hon'ble Delhi High Court order in Special Leave to Special Appeal (C ) ... 2017, CC No.4956/2017 [2017(7) TMI 1058- SC Order. 11. The assessee had submitted before the learned DRP that the outstanding receivables in a sale transaction cannot be considered as a financial arrangement, and receivables in an export sale transaction is a part of the transaction of sales only. 12. The assessee most respectfully submits that export sales receivables cannot be presumed to finance the associated enterprise unless it is proved that the petitioner follows a pattern intend to benefit the AE by delaying realisation of export receivables. 13. The assessee further respectfully submits that the delay in realisation of invoices beyond 60 days credit period fixed by the learned TPO ranges from a period of one day to a maximum of 25 days. A delay in realisation of invoices from one day to 25 days, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entity cannot be characterized as an International transaction and further held that there should be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for a supplies made to an AE, the arrangements reflects an international transaction intended to benefit the AE in some way. 18. It is most respectfully submits that the petitioner being a SEZ unit was permitted by the Reserve Bank of India a period of one year towards realisation of export bills, the learned DRP erred in upholding arbitrary fixation of a credit period of sixty days for realisation by the learned TPO. Hon'ble ITAT `A' Bench of Hon'ble Jurisdictional Tribunal in the case of United States Pharmacopeia India Pvt Ltd Vs. Deputy Commissioner of Income Tax , Circle 17-2, Hyderabad in ITA No.1927/Hyd/2017 held that when RBI itself allows one year for realisation of export proceeds, putting a limit of two months of credit period is arbitrary and deleted the interest charged for delayed realisation of export receivables. 19. The petitioner most respectfully prays that the above judgements rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itioner prays that in the light of the submission made above and based on the facts furnished and judicial decisions, the confirmation of addition of interest on delayed realization of export receivables made by the Hon'ble DRP and assessment made by the learned AO be deleted and justice be rendered. 7. In support of his case, ld.AR relied upon the following decisions : a) PCIT Vs. Boeing India Pvt. Ltd., reported in 2022 (10) TMI 498. b) PCIT Vs. Kusum Health Care Pvt. Ltd. reported in 2017(4) TMI 1254. c) M/s. Ominiglobe Information Technologies (India) Pvt. Ltd (Now known as M/s. Sequential Technology International (India) Pvt. Ltd. Vs. ACIT, Special Range 7 reported in 2022(11) TMI 1104- ITAT Delhi. d) Open Text Corporation India Private Limited (Formerly known as Cordys Software India Private Limited) Vs. ITO, Ward 16(3), Hyderabad ITA No.152/Hyd/2017. e) PCIT Vs. M/s. Bechtel India Pvt. Ltd ITA 379/ 2016 dt.21.07.2016. f) M/s. Adama India Pvt. Ltd. Hyderabad Vs. DCIT, Hyderabad ITA No.934/Hyd/2019. 8. Per contra, the ld. DR had submitted that the issue has been settled by the Tribunal in the case of Zeta Infrastructur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . EKL Appliances Ltd.[2012] 209 Taxman 200/345 ITR 241/345 ITR 241(Delhi). 36. In another decision Mckinsey Knowledge Centre India (P.) Ltd. [2018] 96 taxmann.com 237 (Delhi), HIGH COURT OF DELHI held as under :- 33. It was similarly held in BT e-Serv (India) (P.) Ltd. v. ITO [2017] 87 taxmann.com 251 (Delhi - Trib.) as follows: 22 The argument that assessee is an interest free entity and does not pay any interest and therefore no interest shall be imputed in the outstanding invoices is also devoid of merit because it is not a case of allowance of interest expenditure in the hands of the assessee but an 'international transaction' to be benchmarked at arm's length. It 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utstanding receivable by the assessee from its AE, is required to be benchmarked, so as to ensure that they should not be any shifting of profit from assessee to its AE. 39. In the present case, the total turnover of the assessee in respect of Software Development Services was Rs.9,86,90,620/- whereas the trade receivable during the present period was Rs.5,84,94,810/-. Thus, more than 60% of the total turnover is receivable from the AE by the assessee. If we apply the principles as submitted by the assessee that only the LIBOR+200 points are required to be charged, then the very purpose of benchmarking of the trade receivables would be lost and in fact, it will amount to shifting the profit of the assessee to its AE situated abroad. In fact the transactions of the assessee is required to be examined from the perspective of a prudent business man and required to be analyzed whether the assessee would give similar benefits to unrelated parties or not. In the present case, the trade receivables were 5.84 crores and if the assessee is required to bear the cost of Rs.5,84,94,810 without any carrying cost, then the assessee would be rendering the services at ALP at a lower rate tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applying CUP method and then fix the rate of interest on the delayed receivables from the AE. However, with a view to give a quietus to the issue , we are of the opinion that instead of 8% interest rate, rate of interest of 6% be applied on outstanding receivable at the year end . 40. In our considered opinion, the submission of the assessee that LIBOR+200 points require to be applied, cannot be upheld in these facts of the case , as it will amount to shifting of profit from assessee to its AE, which cannot be countenanced under Chapter X of the I.T. Act. Moreover, the rate of interest on loan transaction ( LIBOR + points ) cannot be equated with delayed receipt of the outstanding amount by assessee from its AE, as both stands on different premises having different purpose and nature. In fact if outstanding receivable are due for a longer period, then assessee would be required to deploy more resources either in the form of debt/equity to meet out the cash flow/working capital requirements. 41. The judgments relied upon by the assessee in support of its claim are not applicable to the facts of the present case. The first judgment relied upon by the assessee at pag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ins to the A.Y 2010-11. This judgment is also not applicable for the simple reason, that there is a change in law which was brought into by the Finance Act, 2012 and therefore, the Tribunal did not have the benefit of examining the interest on the receivables. The 5th judgment relied upon by the assessee is in the case of GSS Infotech Ltd vs. ACIT reported in (2016) 70 taxmann.com 356 (Hyd.Trib). This judgement pertains to the A.Y 2010-11. This judgment is also not applicable for the simple reason, that there is a change in law which was brought into by the Finance Act, 2012 and therefore, the Tribunal did not have the benefit of examining the interest on the receivables. The 6th judgment relied upon by the assessee is in the case of CIT vs. Vaibhav Gems Ltd reported in (2017) 88 taxmann.com 12 (Raj.). In this case, the Hon'ble Rajasthan High Court after relying upon the decision of the Hon'ble Delhi High Court in the case of CIT vs. Cotton Naturals (I) Pvt. Ltd (2015)231 Taxmann.com 401 had allowed the applicability or LIBOR+200 points interest free loan provided by the appellant to its AEs. In the present case, admittedly, the case is not pertaining to the loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tyam Ventures (ITA 362/Hyd/2021 dt.28.06.2012) wherein the Co-ordinate Bench of the Tribunal had decided the issue of receivables in favour of the Revenue by holding as under : 8. We have heard the rival submissions and perused the material on record. Recently, the Tribunal in the case of Zeta Interactive Systems (India) Pvt. Ltd. had decided the issue of receivables and at para 39 and 40, it held as under : 39. In the present case, the total turnover of the assessee in respect of Software Development Services was Rs.9,86,90,620/- whereas the trade receivable during the present period was Rs.5,84,94,810/-. Thus, more than 60% of the total turnover is receivable from the AE by the assessee. If we apply the principles as submitted by the assessee that only the LIBOR+200 points are required to be charged, then the very purpose of benchmarking of the trade receivables would be lost and in fact, it will amount to shifting the profit of the assessee to its AE situated abroad. In fact, the transactions of the assessee is required to be examined from the perspective of a prudent business man and required to be analyzed whether the assessee would give similar benefits to unrelat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pinion, 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. However, with a view to give a quietus to the issue, we are of the opinion that instead of 8% interest rate, rate of interest of 6% be applied on outstanding receivable at the year end. 40. In our considered opinion, the submission of the assessee that LIBOR+200 points require to be applied, cannot be upheld in these facts of the case, as it will amount to shifting of profit from assessee to its AE, which cannot be countenanced under Chapter X of the I.T. Act. Moreover, the rate of interest on loan transaction (LIBOR + points) cannot be equated with delayed receipt of the outstanding amount by assessee from its AE, as both stands on different premises having different purpose and nature. In fact, if outstanding receivable are due for a longer period, then assessee would be required to deploy more resources either in the form of debt/equity to meet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 45 7,11,80,351 1.00 30-45 days -- -- -- 45-60 days -- -- -- =60 days 29 11,63,338 0.02 Sub total (B) 519 62,38,68,941 Total (A) + (B) 3520 7,10,54,46,805 10. From the perusal of the Chart, it is absolutely clear that there were 519 invoices valued at Rs.62,38,68,941/- for which the payments were due beyond the credit period 60 days. In our view, the lower authorities have computed the Arm s Length Price and have mentioned that the same being international transaction, the same is required to be bench marked by considering t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , no borrowed fund was used for making supplies to it s A.E. and therefore, is not liable to be compensated for the delay in receiving the receivable is concerned, the same in our view, suffers from inherent flaw as in the T.P. analysis, the TPO is required to examine whether the assessee had supplied the product / services to it s A.E. at Arm s Length Price or not ? If by providing the services / goods at a discounted rate or permitting the assessee to receive the payment after a long period of 60 days or 90 days, then it will amount to permitting the A.E. to use the working capital of the assessee for the purposes of earning the profit. No prudent business man would venture into this kind of activity and permit a third party to use the working capital of the assessee and earn profit thereon. In the present case, though the assessee was required to maintain the T.P. Study and file the same before the TPO to show that the assessee s transactions with it s A.E. were at Arms Length however, nothing has been brought to our notice that the assessee has brought any comparable instance. In these circumstances, the TPO had applied the banking rate as applicable to short term loans. In our ..... X X X X Extracts X X X X X X X X Extracts X X X X
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