Income Tax Appellate Tribunal - Bangalore
Ab Inbev Gcc Services India Private ... vs The Dcit, Circle-3(1)(1), Bangalore on 2 February, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' BENCH : BANGALORE
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND
SHRI ANIKESH BANERJEE, JUDICIAL MEMBER
IT(TP)A No. 792/Bang/2022
Assessment Year : 2018-19
M/s. AB INBEV GCC
Services India Pvt. Ltd.,
(earlier known as GCC
Services India Pvt. Ltd.),
The Deputy
12th and 13th Floor,
Commissioner of
Peridot Block, Bagmane
Income Tax,
World Technology Centre
Circle 3(1)(1),
SEZ,
Vs. Bangalore.
Marthalli Road,
KR Puram,
Bangalore - 560 048.
PAN: AAFCG8223M
APPELLANT RESPONDENT
Assessee by : Shri Chavali Narayan, CA
Shri Sunil Kumar Singh,
Revenue by :
CIT-2
Date of Hearing : 25-01-2023
Date of Pronouncement : 02-02-2023
ORDER
PER ANIKESH BANERJEE, JUDICIAL MEMBER
Instant appeal is directed against the order of the Ld. DCIT, Circle - 3(1)(1), Bangalore (in brevity the AO), order passed u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (in brevity the Act) for A.Y. 2018-19 by order dated 14.07.2022.
Page 2 of 13IT(TP)A No. 792/Bang/2022
2. The assessee has taken the following grounds.
Tax effect relating to
Grounds of Appeal each Ground of
appeal
Based on the facts and circumstances of the case and in law, the Ld. Assessing Officer ("Ld. AO")/ Ld. Transfer Pricing Officer ("Ld. TPO")/ Hon'ble Dispute Resolution Panel (`Hon'ble DRP') grossly erred in --
1. General Ground for TP adjustments Included in Ground By not accepting the economic analysis undertaken by No. 2 the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 (Rules') and modifying/ undertaking fresh analysis while determining the arm's length price and in doing so making an adjustment of INR 95,17,882 to the international transaction.
2. Grounds against imputing interest on outstanding receivables due from AEs -- Adjustment of INR 95,17,882
a) Not appreciating that outstanding receivables is not covered in the definition of international transaction as defined u/s 92B of the Act in the facts and circumstances of the case; 34.6080% of
b) Not appreciating that the receivables are adjustment consequential/ closely linked to the principal amount of INR transaction of provision of services and hence 95,17,882 = have been aggregated for determination of ALP INR 32,93,949 under TNMM;
c) Not appreciating the fact that the working capital adjustments undertaken take into account the impact of outstanding receivables of the controlled transactions vis-a-vis the uncontrolled transactions in determining the arm's length margin and no separate benchmarking is required;
Page 3 of 13IT(TP)A No. 792/Bang/2022
d) Not appreciating the facts and circumstances surrounding the receivables and re-
characterising the outstanding receivables as unsecured loans advanced to AEs:
e) Not following any statutorily prescribed method and without doing any comparability benchmarking as prescribed under Chapter X of the Act.
Without prejudice to the above
f) Considering SBI short-term deposit rates for imputing notional interest instead of LIBOR; and
g) Considering credit period of 30/45 days instead of the industry average credit period
3. Without prejudice to the above grounds, ground against not considering export incentives of INR 7,74,02,570 as operating item while determining margin of the Appellant
a) Not appreciating that the export incentive is directly linked to the provision of services by the Appellant to its group company and should be Included in Ground considered as operating in nature while No. 2 determining the operating revenue of the Appellant;
Without prejudice to the above
b) In case export incentive income of INR 7.74,02.570 is treated as non-operating in nature, corresponding expenditure of INR7,74.02.570 shall also be excluded from the total operating costs for computing operating margin of the Appellant
4. Ground against not following the directions of the Hon'ble DRP while passing the final assessment order regarding:
Included in Ground
a) inclusion of Sundaram Business Services Limited No. 2 ("Sundaram") in final list of comparables
b) allowing credit period mentioned in intercompany agreement for computation of interest on AE receivables
5. Ground against selection of uncomparable companies Included in Ground Not undertaking an objective comparative analysis and No. 2 inter-alia selecting certain companies as comparable which are functionally not comparable to the Appellant Page 4 of 13 IT(TP)A No. 792/Bang/2022
6. Ground on erroneous initiation of penalty under section 270A of the Act Ld. AO was not justified and rather grossly erred in law and in f acts by initiating penalty proceedings NA under section 270A of the Act by f alsely stating that the Assessee has under -reported the income.
7. Shortfall in computation of interest u/s 244A of the Act That on the facts and in law, Ld. AO was not justified and has erroneously computed interest u/s 244A NA at INR 15,91,146 thereby resulting in short grant of interest. Necessary directions may please be given to the Ld. AO in this regard.
The Appellant craves leave to add, alter, amend, vary, omit, or substitute any of the aforesaid grounds of appeal at any time before, or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law.
3. Tersely we advert the case that GCC was setup to provide a range of centralised back-office service in nature of finance, accounting, administration, human resource etc in support of its group entity business. GCC is wholly owned subsidiary of Interbrew International B.V. Netharlands which is ultimately held by AB InBev.
3.1. On transfer pricing matter, the ld. Transfer Pricing Officer (in short TPO) proposed - transfer pricing adjustment in relation to provision of services by GCC to its AE amount of Rs. 36,99,01,460/- and computed interest on delayed collection of receivables and made addition of Rs. 1,24,15,227/- with total income of assessee. Being dissatisfied on order of the TPO the assessee filed objection before the ld. Dispute Resolution Panel (in short DRP) & finally the adjustment amount is reduced & disallowance of Arm's Length Price (in short ALP) is restricted to amount of Rs.95,17,882/-. In the final order the AO has Page 5 of 13 IT(TP)A No. 792/Bang/2022 computed the interest u/s. 244A amounting to Rs.15,91,146/- resulting in short grant of interest. Further, the assessee has taken the ground for not considering the export incentive amount of Rs.7,74,02,570/- as operating item while determining the margin of the assessee. The assessee applied TNMM as MAM and margin was within the range of adjusted PLI "OP/OC" i.e. after undertaking working capital adjustment to adjust for differences in receivables and payables order of the comparables selected by the appellant. After the order of the AO, the assessee has challenged the order before the ITAT for judicial consideration.
4. Ground no. 2 - grounds against imputing interest on outstanding receivables due from AEs-Adjustment of Rs.95,17,882/-.
The Ld. Counsel for the assessee submitted the paper book which is kept in the record. The counsel has first invited our attention that the issue is already settled by the Coordinate Bench in assessee's own case in IT(TP)A No. 290/Bang/2022 for A.Y. 2017-18 by order dated 14.11.2022. The relevant paragraphs are extracted as below.
"2.8 The Ld.AR submitted that the delayed/ outstanding receivables should not be considered as a separate international transaction. It was further submitted that determination of ALP in respect of delayed receivables from inter-company transactions is not required since ALP of inter-company transactions of provision of services has been already determined and no separate adjustment is necessary in this regard."
"4. This Bench referred to decision of Special Bench of this Tribunal in case of Instrumentation Corpn. Ltd. v. Asstt. DIT in ITA No. 1548 and 1549 (Kol.) of 2009, dated 15-7- 2016, held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an Page 6 of 13 IT(TP)A No. 792/Bang/2022 international transaction as per explanation to section 92 B of the Act. Alternatively, it also argued by the Ld.AR that in TNMM, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables as loans and advances to associated enterprise would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 has observed that:
"There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to 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-à-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions."
4.1 In view of the above, we deem it appropriate to set aside this issue to Ld.AO/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in accordance with law. We also direct the Ld.TPO that in the event the WCA subsumes the outstanding receivables, no separate characterisation is to be made. However for those receivables that fall out of the WCA pertaining to year under consideration, then, the rate of interest to be Page 7 of 13 IT(TP)A No. 792/Bang/2022 charged must LIBOR + 300 basis points in accordance with the principles laid down by Hon'ble Delhi High Court in case of CIT vs. Cotton Naturals (I) Pvt. Ltd., reported in (2015) 276 CTR 445 by considering a credit of 90 days. Accordingly these ground raised by assessee stands allowed for statistical purposes."
4.1. The Ld. CIT.DR only relied on the order of the revenue authorities and not placed any contrary judgment against the submission of the assessee.
4.2. We consider the submission of the assessee and the order of the Coordinate Bench. The issue is already decided by the Coordinate Bench in favour of the assessee. In the circumstances, the remaining unchanged as compared to the A.Y. 2017-18, this issue is squarely covered in assessee's own case for A.Y. 2017-18. So, the addition made on account of transfer pricing adjustment on outstanding receivables amount of Rs.95,17,882/- is to be decided afresh in the light of above order in assessee's own case cited (supra). Accordingly, the issue in dispute is remitted back to the file of AO/TPO for reconsideration. This ground of appeal no. 2 is partly allowed for statistical purposes.
5. Ground no. 3 - Without prejudice to the above grounds, ground against not considering export incentives of INR 7,74,02,570 as operating item while determining margin of the Appellant.
The Counsel (in short AR) argued & had drawn our attention that the issue is already settled by the Coordinate benches of ITAT in favour of the assessee. The AR first invited our attention in the Page 8 of 13 IT(TP)A No. 792/Bang/2022 order of DRP in page no. 50. The relevant paragraph is extracted as below.
"2.12 Ground of objection No. 12: Erroneous computation of margins Objection No. 12.1: The Ld. TPO/AO erred in not considering export incentives as operating item while determining margin of the Assessee.
2.12.1 We note that contention of the taxpayer is that different treatment has been given by the TPO to the tax payer and the comparables in respect of export incentives. This objection is not valid as we find that export incentives are not considered as part of the operating revenue both in the case of taxpayer as well as in the cases of the comparable companies. Therefore, uniform treatment has been applied by the TPO. The stand taken by the TPO regarding export incentive as non--operating in nature gets support from the decision of the Honourable Delhi ITAT in Good year India Limited ITA No. 1706/De1/2017 dated 22.01.2018.
Accordingly, this ground is rejected."
5.1. The assessee in its paper book has placed the following submission which is reproduced as below: -
"Our submissions 4.4 The Appellant humbly submits that export incentive income earned by the Appellant is directly linked to the provision of services by the entity to its group company. Accordingly, income earned by sale of SEIS scrips should be considered as operating in nature while determining the operating revenue of the Appellant.
4.5 Although the term operating revenue is not defined under the Act, reference can be made to the Safe Harbour rules notified by Central Board of Direct Taxes ("CBDT"). Rule 10TA(k) of the Income Tax Rules, 1962 ("the Rules") provides the definition of the operating revenue as under:
"(k) "operating revenue" means the revenue earned by the assessee in the previous year in relation to the international transaction during the course of its normal operations but not including the following, namely:--
(i) interest income;
(ii) income arising on account of foreign currency fluctuations;
(iii) income on transfer of assets or investments;
(iv) refunds relating to income-tax;
(v) provisions written back;
(vi) extraordinary incomes; and Page 9 of 13 IT(TP)A No. 792/Bang/2022
(vii) other incomes not relating to normal operations of the assessee."
(Emphasis supplied) 4.6 The TP guidelines issued by the Organisation for Economic Co- operation and Development ("OECD Guidelines") state as follows:
"2.83 As a matter of principle, only those items that (a) directly or indirectly relate to the controlled transaction at hand and (b) are of an operating nature should be taken into account in the determination of the net profit indicator for the application of the transactional net margin method.
2.84 Costs and revenues that are not related to the controlled transaction under review should be excluded where they materially affect comparability with uncontrolled transactions."
(Emphasis supplied) 4.7 Further the UN TP Manual states as follows:
"Operating profit or operating income is the income of a company net of direct and indirect expenses but before deduction for interest and taxes. It is defined as sales minus COGS minus operating expenses (alternatively expressed as gross profit minus operating expenses). -Operating profit- is a better term than net profit- in this context because net profit is also used to represent the profit of a company after interest and taxes have been subtracted. Further. the term operating profit indicates more clearly that only profits resulting from operating activities are relevant for transfer pricing purposes.
(Emphasis supplied) 4.8 Having regard to the above guidance, it may be inferred that an item which relates to the international transaction in question, may be considered as an operating item for the purpose of computation of operating profit margin of such transaction. The income recognized for such scrips relates to the provision of IT enabled services, as the entitlement to such scrips arises only on account of such IT enabled services rendered by the Appellant to its AEs. Accordingly, such income qualifies as a part of operating revenue for the purpose of computation of operating profit margin of the transaction pertaining to rendering of IT enabled services by the Appellant.
4.9 Furthermore. one would need to understand the object and purpose of providing the SEIS incentive and whether in an uncontrolled situation the export incentive would be retained by the exporter or would the same be passed on to the principal/ buyer? If the export incentive is targeted at making exports from India more competitive and in the absence of such an incentive, Indian exports would be at a cost disadvantage relative to other sources of purchase for the buyer, in such a situation an uncontrolled exporter would be willing to pass on the export benefit to the buyer to make his pricing more competitive. 4.10 In this case it may be appropriate to consider export incentive as part of operating revenue in a TNMM analysis. This would effectively result Page 10 of 13 IT(TP)A No. 792/Bang/2022 in transferring the export incentive to the buyer. Alternatively, if there is no evidence of export incentives being transferred to the buyer in an uncontrolled scenario. the export incentive may need to be considered as non-operating. as this treatment would result in the exporter retaining the benefit. In this regard, reference can be drawn from the rationale of the Government of India ("Gol") for providing SEIS benefit. The SEIS scheme was launched by the Gol with the following objectives:
Encouraging export of notified Services from India: 1 Making exports of services from India globally competitive: 2 and Rewarding exporters to offset infrastructural inefficiencies and associated costs involved and to provide exporters a level playing field.3"
5.2. The assessee relied on judicial precedent & also provide support for treating export incentives as operating in nature. The AR relied on the Mumbai Tribunal in the case of Welspun Zucchi Textiles Ltd v ACIT (56 SOT 444) held that DEPB benefit received during the year should be considered as a part of the turnover of assessee and hence it should be considered as operating in nature. The ITAT order was upheld by the Bombay High Court in Income Tax Appeal No. 1286 of 2014. The relevant extract of the ITAT order is reproduced below:
"(vi) The export sale is also eligible for DEPB benefit and the Appellant has earned such export benefits to the tune of Rs.2.18.78.013/- during the year. This income has been included under the head "Other Income". There is no manner of doubt that the export benefit is inextricably linked with the export sale. Therefore. while negotiating the price with the AE and for that matter with any other party. the Appellant has been taking into consideration the export benefits that would accrue to the Appellant on export of such goods. In other words. the Appellant may quote a lower price as it is already certain that export benefits will accrue. The only impact on the financial statements is that due to the accounting practice that the export benefit is grouped under other income when in real sense it is nothing but part of sales consideration. Hence.
while calculating the margins. DEPB and other export benefits should be considered as part of total sales."
Page 11 of 13IT(TP)A No. 792/Bang/2022 5.3. The CIT-DR only relied on the order of the revenue authorities.
5.4. We consider the argument of both the parties, peruse the documents available on the record.
The assessee humbly submitted that export incentive income earned is directly linked to the provision of services by the entity to its group company. Accordingly. income earned by sale of SEIS scrips should be considered as operating in nature while determining the operating revenue of the assessee. Although the term operating revenue is not defined under the Act. reference can be made to the Safe Harbour rules notified by Central Board of Direct Taxes (-CBDT). Rule 10TA(k) of the Income Tax Rules, 1962 ( in short the Rules) provides the definition of the operating revenue which is discussed above in paragraph 5.1.
The TP guidelines issued by the Organisation for Economic Co- operation and Development ("OECD Guidelines) state as follows:
"2.83 As a matter of principle. only those items that (a) directly or indirectly relate to the controlled transaction at hand and (b) are of an operating nature should be taken into account in the determination of the net profit indicator for the application of the transactional net margin method.
2.84 Costs and revenues that are not related to the controlled transaction under review should be excluded where they materially affect comparability with uncontrolled transactions."
We consider that an item which relates to the international transaction in question, be considered as an operating item for the purpose of computation of operating profit margin of such Page 12 of 13 IT(TP)A No. 792/Bang/2022 transaction. The income recognized for such scrips relates to the provision of IT enabled services, as the entitlement to such scrips arises only on account of such IT enabled services rendered by the assessee to its AEs. Accordingly, such income qualifies as a part of operating revenue for the purpose of computation of operating profit margin of the transaction pertaining to rendering of IT enabled services by the assessee.
In this case it may be appropriate to consider export incentive as part of operating revenue in a TNMM analysis.
6. Considering above, Ground no. 3 is allowed in favour of assessee and Ground no. 2 is partly allowed for statistical purposes. Ground no. 1, 4 & 5 are not pressed by the AR. Ground no. 6 is premature and Ground no. 7 is consequential in nature.
7. In the result, the appeal of the assessee bearing IT(TP)A No. 792/Bang/2022 is partly allowed for statistical purposes.
Order pronounced in the open court on 02nd February, 2023.
Sd/- Sd/-
(CHANDRA POOJARI) (ANIKESH BANERJEE)
Accountant Member Judicial Member
Bangalore,
Dated, the 02nd February, 2023.
/MS /
Page 13 of 13
IT(TP)A No. 792/Bang/2022
Copy to:
1. Appellant 4. CIT(A)
2. Respondent 5. DR, ITAT, Bangalore
3. CIT 6. Guard file
By order
Assistant Registrar,
ITAT, Bangalore