Income Tax Appellate Tribunal - Delhi
Aithent Technologies Pvt. Ltd., New ... vs Acit, New Delhi on 6 December, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I-1' : NEW DELHI)
BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER
and
SHRI KULDIP SINGH, JUDICIAL MEMBER
ITA No.6076/Del./2016
(Assessment Year : 2004-05)
M/s. Aithent Technologies Pvt. Ltd., vs. ACIT, Circle 2 (1),
A - 16/9, Vasant Vihar, New Delhi.
New Delhi - 110 057.
(PAN : AAACS2319H)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Atul Ninawat, CA
REVENUE BY : Shri Sanjay I. Bara, CIT DR
Date of Hearing : 04.11.2019
Date of Order : 06.12.2019
ORDER
PER KULDIP SINGH, JUDICIAL MEMBER
This is second round of litigation as in the first round, the case was set aside to the AO for fresh adjudication by the Tribunal with direction to recompute the Arm's Length Price (ALP) of the transaction of the interest on loan.
2. The Appellant, M/s. Aithent Technologies Pvt. Ltd. (hereinafter referred to as 'the taxpayer') by filing the present appeal sought to set aside the impugned order dated 28.09.2016 passed by the AO in consonance with the orders passed by the ld. 2 ITA No.6076/Del./2016 DRP/TPO under section 143 (3) read with section 144C of the Act qua the assessment year 2004-05 on the grounds inter alia that :-
"1. The Order of the Learned Assessing Officer ('Ld. AO') is bad in law and on the facts and circumstances of the case.
2. The Ld. Transfer Pricing Officer ('Ld. TPO')/ Ld. Assessing Officer ('Ld. AO') have erred on facts and circumstances of the case in determining the arm's length price of the appellant's international transaction with its associated enterprises in respect of interest on loan advanced to wholly owned subsidiary thereby proposing an enhancement of returned income by Rs.1,07,27,100/-.
3. The Ld. TPO/AO has erred in laws and facts of the case by not acting as per the directions of Hon'ble DRP.
4. The Ld. TPO/AO has failed to rectify the apparent mistake appearing in its rectified order wherein US Prime Lending rate has been used for benchmarking the interest on loan ignoring the directions of Hon'ble DRP to use LIBOR plus 500 basis points.
6. The Ld. TPO/ AO has erred in laws and facts of the case by computing the interest on loan on medium of opening and closing balance of the loan instead of working on daily average basis.
7. The Ld. TPO/AO/Hon'ble DRP has erred in laws and facts of the case by computing interest at US LIBOR further enhanced by more than 125% for risk profile etc. which is completely unreasonable and against the accepted industry norms.
8. The above grounds are without prejudice to each other."
3. Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Aithent Technologies Pvt. Ltd., the taxpayer is a software consulting firm providing software solution to global clients. The Associate Enterprise (AE), Aithent Inc., is a New York based company who identifies the customers and thereafter, work is assigned to the taxpayer company. As per 3 ITA No.6076/Del./2016 Transfer Pricing (TP) analysis, the taxpayer is primarily engaged in software development activities viz. off-the-shelf software and specified technical software specification. The compensation for software development between two related parties is determined either on time and material contract basis or on fixed price control basis. The customers are primarily USA, Canada based and AE determines the pricing for the customers. During the year under assessment, the taxpayer entered into international transactions as under :-
S.No. International Transaction Method Value (in Used Rs.) 1 Software Development Services 6.461 crore 2 Recruitment Services 0.475 crore TNMM 3 Reimbursement of Expenses 0.128 crore 4 Loan Given 14.96 crore
4. The taxpayer has given interest free loan to its AE to the tune of Rs.14,95,79,141/- as on 31.03.2004. In the first round of litigation, ld. TPO vide order dated 29.11.2006 proceeded to conclude that the loan would have fetched interest in arm's length transaction and determined notional interest @ 10% on the above loan as the arm's length value of the interest. However, the taxpayer's transaction qua software development segment has been held to be at arm's length. Consequently, AO enhanced the amount of Rs.1,15,19,007/- in the income of the taxpayer on 4 ITA No.6076/Del./2016 account of interest payment u/s 92CA of the Income-tax Act, 1961 (for short 'the Act') in the first round of litigation. Thereafter, ld. CIT (A) proceeded to hold that LIBOR plus 400 basis points seems appropriate rate for charging interest and thereby determined the interest rate of 5.1595% (March 2004 rate of LIBOR plus 400 basis points) on the outstanding loan as the arm's length price. Thereafter, matter was agitated by the taxpayer before the Tribunal who has restored the case back to the AO for fresh adjudication to recompute the ALP of the transactions.
5. After considering the submissions made by the taxpayer, the TPO proceeded to conclude that loan or borrowing money between two AEs is an international transaction and the interest chargeable on the loans to an AE requires to be computed on the arm's length principle which has to be notional and relied upon the decision rendered by the Tribunal in the case of Perot Systems TSI (India) Ltd. vs. DCIT and VVF Ltd. vs. DCIT (2010-TIOL-55-ITAT- MUM). TPO also proceeded on the premise that no independent company would like to advance a loan based on the cost of funds, even if the same are required through borrowings. Ld. TPO also proceeded to apply the CUP under which interest rate that an independent party would earn at arm's length on a loan extended under similar circumstances as no independent party would extend 5 ITA No.6076/Del./2016 its loan based on cost of its fund only but it would add further spread over and above the interest rate at which it got the funds for his margin as well as for the risk it is undertaking by advancing a loan to a party carrying on business outside India and that also without security. Accordingly, ld. TPO determined the interest on loan at Rs.1,58,90,255/-.
6. The taxpayer carried the matter before the ld. DRP by way of filing objections, who has followed the TPO/DRP's order for AY 2002-03 dated 24.12.2014 and directed the TPO to apply LIBOR plus 500 basis points given by the taxpayer's company to its AE. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal.
7. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
8. At the very outset, ld. AR for the taxpayer contended that the issue in question is duly covered in favour of the taxpayer in its own case for AY 2006-07 decided in ITA No.257/Del/2017 vide order dated 02.09.2019. It is further contended that when granting a loan to wholly owned subsidiary is less risky as compared to loan granted by bank, TPO/DRP have erred in making the mark-up of 6 ITA No.6076/Del./2016 500basis points to the LIBOR and relied upon the decision rendered by the Hon'ble Delhi High Court in the case of CIT vs. Cotton Naturals (I)(P) Ltd. (2015) 55 taxmann.com 523 (Delhi) and the decision rendered by Hon'ble Rajasthan High Court in the case of CIT vs. M/s. Vaibhav Gems Ltd. (now known as Vaibhav Global Ltd.) in D.B. ITA No.14/2015 order dated13.10.2017.
9. Hon'ble Delhi High Court in CIT vs. Cotton Naturals (I)(P) Ltd. (supra) rejected the mark-up towards the translation cost and has also rejected the comparison by the TPO with banks and also held that risk factor attached to the loan granted by the taxpayer to its AE by the TPO is also not approved by the Hon'ble High Court and returned the finding in favour of the taxpayer as under:-
"32. On the question of adjustment made on account of the transaction cost, we do not appreciate the reasoning given by the TPO and find it difficult to accept. The transaction or hedging cost is borne and paid by the borrower. These are undertaken when they take loans in US Dollars or other foreign currencies because the borrower wants to cover any loss on account of the depreciation of the Indian Rupee vis-à-vis the foreign currency. The assessee in the present case is not the borrower, but the lender. Transaction cost is not, therefore, applicable in the case in question, as the loan had to be repaid in US Dollars. Mark up towards the transaction cost is exorbitant and even comparison with banks is unsound and unintelligible. Risk factor adjustment is also stretched, for it ignores the close relationship between the two AEs and the funds were the shareholder funds, and not borrowed money."
10. Similarly, Hon'ble Rajasthan High Court in CIT vs. M/s. Vaibhav Gems Ltd. (supra) also decided the identical issue in 7 ITA No.6076/Del./2016 favour of the taxpayer by holding that the taxpayer is entitled for the benefit of average LIBOR rate existing at that time which was 0.79% and also rejected the addition of ad hoc 2% applied by the Revenue by returning following findings :-
"11. Regarding ITA No.149/2015 preferred by the assessee in view of the Delhi High Court judgment (para no.14), the international transaction is required to be accepted, therefore, Tribunal has committed serious error. The assessee will be entitled for the benefit of average LIBOR rate existing at that time which was 0.79% and addition of adhoc 2% is not proper. In that view of the matter, the addition of 2% interest in the income is required to be quashed and set aside."
11. Coordinate Bench of the Tribunal in taxpayer's own case for AY 2006-07 (supra) decided the identical issue in favour of the taxpayer by returning following findings :-
"9. In so far as the facts are concerned, there is no dispute that the assessee advanced the interest free loan to its wholly owned subsidiary. In the first round of litigation, the Ld. TPO reckoned the notional interest as per PLR and was confirmed by the Ld. DRP, In the second round of litigation, the ld. TPO bench marked the interest on loan at SBI PLR plus 300 basis points, whereas, ld. DRP, while following their own finding for the AY 2002-03 made it US LIBOR plus 500 basis points. It is not the case of the assessee that the facts involved in the matter are different from those involved for the AY 2002-03. It is not the case of the assessee that the findings of the ld. DRP for the AY 2002-03 are in any way disturbed in any subsequent proceedings.
10. In the circumstances, we are of the considered opinion that the LIBOR with mark up cannot be found fault with, having regard to the facts of the case of the assessee. However, we find that the mark up of 500 basis points to the US LIBOR appears to be unjustifiable. We consequently, accept the alternate plea of the assessee and find that the bench marking of the interest on loan at US LIBOR plus 170 basis points would meet the ends of justice, and, accordingly, direct the ld. TPO to recompute the notional interest at US LIBOR plus 170 basis points, Grounds of appeal are, accordingly, allowed in part."8 ITA No.6076/Del./2016
12. In view of the facts and circumstances of the case discussed in the preceding paras and following the aforesaid decision rendered by Hon'ble High Courts discussed in preceding paras and by the coordinate Bench of the Tribunal, we are of the considered view that transfer pricing adjustment qua the transaction of advancing loan by the taxpayer to its AE is to be determined at US LIBOR plus 170 basis points. Consequently, the TPO is directed to recompute the interest at US LIBOR plus 170 basis points to benchmark the international transactions qua interest on loan by the taxpayer to its AE. Consequently, the appeal filed by the taxpayer is allowed.
Order pronounced in open court on this 6th day of December, 2019.
Sd/- sd/-
(R.K. PANDA) (KULDIP SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated the 6th day of December, 2019
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.