Income Tax Appellate Tribunal - Chennai
Value Source Technologies Pvt. Ltd., ... vs Acit, Chennai on 21 March, 2018
आयकर अपील य अ धकरण ,'डी' यायपीठ,चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL
"D" BENCH, CHENNAI
ी एन.आर.एस. गणेशन, या यक सद य एवं ी एस जयरामन, लेखा सद य केसम$
BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND
SHRI S. JAYARAMAN, ACCOUNTANT MEMBER
आयकर अपील सं/.I.T.A. No. 3473/Mds/2016
नधारण वष/Assessment Year : 2012-13
M/s. Value Source Technologies Private Assistant Commissioner of Income
Limited, Vs. Tax,
No. 165/110, 6th Floor, Corporate Circle 3(2),
Menon Eternity Building, St. Mary's Road, Chennai 600 034.
Alwarpet, Chennai 600 018
[PAN: AABCV 1503D]
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ&क'ओरसे/Appellant by : Shri. N.V. Balaji, Advocate
*+यथ&क'ओरसे/Respondent by : Shri. G.M. Doss, CIT
सुनवाईक'तार ख/Date of Hearing : 22.12.2017
घोषणाक'तार ख/Date of Pronouncement : 21.03.2018
आदे श/ O R D E R
PER S. JAYARAMAN, ACCOUNTANT MEMBER:
The assessee filed this appeal against the order passed u/s.
143(3)r.w.s. 144C(5) of the Act by the ACIT, Corporate Circle -3(2), Chennai in pursuance to the direction of the DRP-2 Bangalore in F.No. 18/DRP-
2/BNG/2016-17 dated 15.09.2016.
:-2-: ITA No. 3473/Mds/2016 2. M/s. ValueSource Technologies India Private Limited (VTPL),
incorporated in Chennai as a private limited company, is a wholly owned subsidiary of ValueSource NV, Belgium (Associated Enterprise). ValueSource NV holds 99.99 percent of the equity share capital of Value Source India. The assessee is engaged in providing software development services to ValueSource NV, in the area of mainframe and open systems. Until FY 2010- 11 ,VTPL used to render services only to ValueSource NV. From FY 2011-12, VTPL has started providing software developments services to KBC Global Services (KBC Group Company). During the assessment year, the assessee has undertaken international transactions for providing software development services to ValueSource NV Belgium, KBC Global Services, NV Belgium, purchase of fixed assets and reimbursement of expenses totalling to Rs.
52,72,09,975/-.
3. The assessee is providing services to two of its AEs viz ValueSource NV Belgium (VSNV) and KBC Global Services, NV Belgium(KBC) . The TPO found that the assessee has entered into agreement with its AEs and one of the agreements (VSNV) provided for charging of interest at the developers bank rate plus 3% and in this case, the assessee has not raised the invoices regularly as per agreement and they have been raised in December and March only. In the earlier financial years too , the assessee has raised just two invoices in each such years, one in December and other in March . The :-3-: ITA No. 3473/Mds/2016 assessee had 150 days receivables outstanding at the beginning of the year, the advances received did not take care of the dues the assessee is entitled to receive from the AE at periodical intervals and the net result at the end of the year also shown 183 days of receivables outstanding . Since, the receivables outstanding were treated as an international transactions with retrospective effect from 01.04.2002 vide Finance Act, 2012 , the TPO proposed to adjust the ALP of the transaction by adding an Arm's Length interest to the receivables. The assessee submitted that it has entered into internal service agreement with two AEs and the terms thereon are different. The agreement relevant only to the AE's concern. Therefore, the part relating to charging of interest cannot be applied in general transactions. The assessee's own documents cannot be used as comparable as it is a controlled transaction.
Comparable, if any, should be made only with an uncontrolled transaction.
The transaction being in Euros with AE abroad, it would be more appropriate to consider Euribar rates instead of SBI rates. The invoices are segregated on a monthly basis which was inappropriate since the invoices have been raised in the months of December 2011 and March 2012 etc. The AO held , inter alia, that the assessee has chosen to charge interest in one set of transactions. It shows that it had intended to treat the transactions on commercial principles. By not enforcing the interest clause as provided in one of the agreements and by not including the interest clause in other agreement, the assessee has chosen to keep the money with its AEs. The :-4-: ITA No. 3473/Mds/2016 assessee was due to receive a remuneration for services within a specified due date. However, it has not enforced the payment and the legal right provided thereby. This action is considered as a willful choice to keep the funds with its AEs, which is nothing but an act of financing/funding the AEs.
The assessee instead of providing a loan/funding out of the surplus funds available with the company, alternatively can choose not to collect the money due. The same is nothing but indirect loan/funding. Had the AEs taken a loan from the assessee, it would have paid an interest to the assessee, but by way of keeping the funds they are enjoying an interest free loan. It can therefore be clearly stated that, the overdue receivables would partake the character of the activity of providing loan/funding by the assessee and the same cannot be considered to be part of the transaction of services. It is significant to note that these receivables were never formally claimed for a long time i.e. no invoices were raised at all for a considerable period as seen from the table in his order and made an upward adjustment at Rs. 207,38,637/-. Aggrieved, the assessee filed its objections before the DRP. The DRP , after due analysis of the agreements , assessee's submissions etc dismissed the objections.
5. Aggrieved, the assessee filed this appeal pleading that the TPO/AO and the Hon'ble DRP have erred in law in making upward adjustment of Rs.
2,07,38,637/- to the Arm's Length Price of the assessee's international transaction with its Associate Enterprise. The Ld. TPO/AO have erred in law :-5-: ITA No. 3473/Mds/2016 and facts by considering the outstanding receivable as a separate international transaction and re-characterizing the same as deemed loan to the AEs, in combining the two different agreements entered by the assessee with different AEs in determining the ALP and failed to appreciate that the assessee's income agreement cannot be considered as the bench mark, since, the agreement was entered into with the AE and not with an independent third party. Without prejudice, the Ld. TPO/AO erred in determining the notional interest as the adjustment to the ALP of the receivable. They erred in (a) segregating the invoices raised by the assessee on monthly basis, (b) adopting the SBI Prime Lending rate and rejecting EURIBOR for computing the notional interest on receivables (c) not netting the payables against the receivables, in computing the notional interest on receivables. The AO erred in not adjudicating the claim of the appellant during the assessment proceedings that the gratuity paid during the year be allowed. The DRP erred in not accepting the objections of the assessee etc.,
6. The AR submitted that the Ld. TPO/AO has considered TNMM as the most appropriate method to determine the international transaction of the assessee with respect to software development. The TPO after undertaking a fresh search and due examination ultimately held that prima facie, the transactions can be taken to be arm's length as the margins are within the permissible limits of variation. However, the Ld. TPO/AO have erred in law and facts by considering the outstanding receivable as a separate :-6-: ITA No. 3473/Mds/2016 international transaction and re-characterizing the same as deemed loan to the AEs. The AR relying on the Delhi High Court's decision reported in ITA 765 of 2016 in the case of Pr.CIT vs Kusum Health Care Pvt Ltd.,, ITAT Bangalore Bench decision in the case of M/s. Dell International Services India Pvt. Ltd., vs JCIT, LTU Bangalore in IT(TP)A No. 308/Bang/2015 dated 17.06.2017 for assessment year 2010-11 and the Mumbai High Court decision in the case of CIT-2 vs Tata Autocomp Systems Ltd in ITA No. 1320 of 2012 etc pleaded that the assessee's income agreement cannot be considered as the bench mark, since, the agreement was entered into with the AE and not with an independent third party and reiterated his pleas ,supra. The DR supportedthe order of the DRP stating that the DRP examined various parts of the agreements etc and dismissed the objections. He invited our attention to following portion of the order of the DRP "it is evident that the assessee is required to raise the invoices periodically and not just once in the year at the end of the financial year. Further, the method adopted in the case of assessee does not take into account the delay in payments by the AE to the assessee, if the delay is beyond 30 days. Thus the case laws quoted by the assessee should not apply to the case under consideration and the sales transactions need to be considered independent of the transaction relating to receivables, which are over delayed. Further, the assessee has not raised invoices regularly and the invoices have been raised at the end of the financial year only. As already discussed in relation to VSNV, the periodicity of invoices cannot be once or twice in a year and the findings of the TPO in this regard of treating the periodicity at arm's length to be monthly, cannot be faulted with. Further, both the agreements provide a time limit within which the payments must be made against the invoice raised. The issue of considering sales transactions independent of the transaction relating to receivables, which are over delayed has been dealt in detail by the Delhi ITAT in the case of Techbooks International Private Limited ITA No. 240/Del/2015 AY 2010-11 dated 06.07.2015, where it was held as follows:
:-7-: ITA No. 3473/Mds/2016 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 ITA No.240/Del/2015 40 determined between two independent parties. It means that if an income is 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 independent parties, then such under charged or uncharged income needs to be brought to tax by determining the ALP of the international transaction giving rise to such income.
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13.5. At this juncture, it is apposite to note that the Finance Act, 2012 has inserted Explanation to 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 expression 'international transaction' in an inclusive manner. Sub-clause (c) of clause (i) of this Explanation, which is relevant for our purpose, provides as under:- ` 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;....' 13.6. On circumspection of the relevant part of the Explanation inserted with retrospective effect from 1.4.2002, thereby also covering the assessment year under consideration, there remains no doubt that apart from any long-term or short-term lending or borrowing, etc., or any type of advance payments or deferred payments, 'any other debt arising during the course of business' has also been expressly ITA No.240/Del/2015 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 :-8-: ITA No. 3473/Mds/2016 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.
13.7. The Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 215 Taxmann 108 (Bom.) dealt, inter alia, with the following question of law:- ITA No.240/Del/2015 44 "(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?"
13.8. 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 issue to the file of the Tribunal for fresh decision in the light of the legislative amendment.
13.9. The foregoing discussion divulges that non-charging or undercharging 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 determined.
13.10. In so far as the reliance of the ld. AR on the judgment in Cotton Naturals (I) Pvt. Ltd. (supra) is concerned, we find the facts of that case to be distinguishable. In that case, a loan was advanced by that assessee to a wholly owned subsidiary in the USA. The assessee selected the Comparable Uncontrolled Price (CUP) method to benchmark the interest received on the loan and claimed that the interest received @ 4% was comparable. The TPO held that the arm's length interest rate should be taken at 14% per annum. This was reduced to 12.20% by the DRP by adopting the prime lending rate fixed by the RBI. The Tribunal relying on certain decisions upheld the assessee's claim. When the matter finally came up before the Hon'ble High Court, it held that the amount in question was given in foreign currency, i.e., in US Dollars and was also to be repaid in the same currency, i.e., US Dollars. In that view of the matter, it was held that the :-9-: ITA No. 3473/Mds/2016 currency in which the loan is to be repaid normally determines the rate of return on the money lent and the interest rate applicable to loans granted and to be returned in Indian rupee would not be a relevant comparable. The prime lending rate was, therefore, held to be not applicable. From the above narration ITA No.240/Del/2015 46 of facts, it is clear that, firstly, in the case of Cotton Naturals (I) Pvt. Ltd. (supra), that assessee charged interest on loans given to its AE. The controversy was only about the rate of interest, which ought to have been charged.
In the case under consideration, the assessee did not charge any interest on the amounts remaining parked with its foreign AE due to late or non-realization of invoices in time. As the assessee before us did not charge any interest, the judgment in Cotton Naturals (I) Pvt. Ltd.(supra) rather supports the view canvassed by the Revenue on the basic issue of chargeability of interest. Be that as it may, the amendment to section 92B made with retrospective effect from 1.4.2002 sets the controversy to rest inasmuch as it provides in unambiguous terms that any other debt arising during the course of business is an international transaction. Ex consequenti, transfer pricing adjustment on account of interest income is mandated in case of late/non realization of invoice value from AE. The view canvassed by the ld. AR on this issue is, therefore, found to be devoid of merit and hence jettisoned.
13.11. Now, we come to the computation of the ALP of the international transaction of 'debt arising during the course of business.' This has two ingredients, viz., the amount on which interest should be charged and the arm's length rate at which the interest should be charged."
Thus both the arguments of the assessee that the agreement did not provide for charging of interest on delayed payments as well as that the transaction needs to be clubbed with sales transactions, were not accepted. Further, as discussed above, since the issue gets well settled that the transaction is covered by the Explanation (i)(c) to section 92B, so the characterization of the transaction by the TPO differently becomes academic in nature. So the objections of the assessee on these issues are not accepted.
2.4 Another argument of the assessee is that the working capital adjustment would take care of the notional interest. This submission is also without any merit. This issue came up before ITAT Delhi in the case of Ameriprise India Pvt. Ltd in ITA Nos 2010 & 2575/Del/2014 AY 2009-10 dated 14.08.2015 and the ITAT decided as follows:
"28. We do not approve the reasoning given by the DRP about the subsuming of such interest in the working capital adjustment. It is axiomatic that :-10-: ITA No. 3473/Mds/2016 the working capital adjustment is in respect of international transaction of rendering services to the AE. Interest for the credit period allowed as per the Agreement is factored in the price charged for the rendering of services. Au contraire, the non-realization of invoice value beyond the stipulated period is a separate international transaction, whose ALP is required 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 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 the Agreement. The amendment made by the Finance Act, 2012 in terms of insertion of Explanation to section 92B with retrospective effect from 1.4.2002 by considering `any other debt arising during the course of business' as a separate international transaction, impliedly disapproves the view canvassed by the DRP in obliterating the determination of the ALP of the separate international transaction of interest on allowing the working capital adjustment in the international transaction of rendering of services. In our considered opinion, both the transactions are separate and distinct from each other. Whereas the international transaction of rendering services contemplates comparison of the price charged for rendering services 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 termination of the period of credit allowed under the agreement, which is subject matter of the international transaction of rendering of services. There is one more fallacy in the reasoning given by the DRP about the subsuming of interest income in the working capital adjustment. It is simple that working capital adjustment is ordinarily computed by considering the average of the opening and closing values of inventories, receivables and payables. The TP adjustment on account of interest on delayed realization of invoice value has nothing to do with the closing or opening values. It depends on the period of realization on transaction to transaction basis. To put it differently, suppose an invoice is raised on 1 st May; period allowed for realization is two months; and the invoice is actually realized on 31st December. Notwithstanding the fact that interest on such late realization would become chargeable for a period of 6 months (from 1st July to 31st December), but the amount of invoice will not be receivable as at :-11-: ITA No. 3473/Mds/2016 the end of the financial year on 31st March. As such, this receivable would not have an impact on the working capital adjustment in any manner, but would call for addition on account of the late realization of invoice value for a period of six months. We, therefore, reject the reasoning given by the DRP in deleting the addition.
Thus the issue was decided in favour of the revenue and the similar reasoning given by DRP in that case were rejected. So this objection of the assessee is also not accepted."
2.5 Considering above, the objections of the assessee in relation to treating the transaction as a separate international transaction and considering the periodicity of raising invoices as monthly by the TPO cannot be accepted.
2.6 The remaining objection of the assessee relates to the rate of interest applied by the TPO. The TPO has applied interest rate of 17% by adopting SBI rate as the base rate. This is based on the agreement between the assessee and one of its AE (VSVN). The assessee has objected to the same and has submitted that EURIBOR as benchmark cannot be faulted with for the reason that the opportunity cost of the assessee's funds has to be decided in relation to its interest earning capacity in the domestic market. Even the assessee's agreement with one of its AE (VSVN) provides for the same rate of interest. Considering above, the objections of the assessee on this issue are not accepted. "
and relied on it. Further, the DR relied on the decisions of the Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 33 taxmann.com 3 (Bom.)and Mumbai tribunal in ACIT v Nimbus Communications Ltd 34 taxmann.com 298 etc
7. We heard the rival submissions and gone through relevant materials.
The TPO found that the assessee has entered into agreement with its AEs and one of the agreements (VSNV) provided for charging of interest at the developers bank rate plus 3%, the assessee has not raised the invoices regularly as per the agreement and invoices have been raised in December :-12-: ITA No. 3473/Mds/2016 and March only. The assessee had 150 days receivables outstanding at the beginning of the year, the advances received did not take care of the dues the assessee is entitled to receive from the AE at periodical intervals and the net result at the end of the year also shown 183 days of receivables outstanding .
In the earlier financial years too, the assessee has raised just two invoices in each such years, one in December and other in March. Thus, the TPO found a clear pattern. Thus , the facts and circumstances of this case are clearly distinguishable with the facts of circumstance of the cases relied on by the assessee. Since, the receivables outstanding were treated as an international transactions with retrospective effect from 01.04.2002 vide Finance Act, 2012 , the TPO after affording due opportunity to the assessee and after considering its submissions etc made an upward adjustment at Rs.
207,38,637/- after making due adjustments. On assessee's objections the DRP analysed the assessee's agreement with its AE's, recorded its finding which in fact strengthened the findings made by the TPO. The DRP applied the decisions of the Delhi ITAT with the ratio of the Bombay High Court on such facts, as in the extracted portion, supra, and rejected the assessee's objections. The assessee has not placed any material to dislodge the findings recorded by the TPO as well as the DRP. Hence, the assessee's grounds fail.
8. On the next issue the AR submitted that during the year the Company created provision in respect of gratuity in its books of accounts and had made :-13-: ITA No. 3473/Mds/2016 payment of gratuity to certain employees. The movement in provision for gratuity during AY 2012-13 as per books of accounts of the assessee is as follows:
Particulars Amount (in INR)
Opening Balance 1,13,11,865
Add: Provision created during the year 8,50,430
Less: Payments made during the year (4,25,511)
Closing balance 1,17,36,784
The provision created during the year amounting to INR 8,50,430 was disallowed under section 40A(7) in computing total income of the Company.
However, the actual payment of gratuity during the year was inadvertently not claimed as a deduction in the return of income. Accordingly, a claim in respect of gratuity paid during the year was made by the assessee during the assessment proceedings vide submission dated February 22, 2016.
Aggrieved, the assessee filed objections before the DRP. The DRP dismissed the objections stating that "in this regard it is important to look into the scope of 'Reference to Dispute Resolution Panel'. As per sub section 2 of section 144C of the Act, the assessee can file his objections only in relation to such "variation" as is referred to in sub section 1 of section 144C. Sub section 1 of section 144C refers to 'any variation in the income or loss returned' as made by the Assessing Officer as is prejudicial to the interest of the assessee. The above objection does not at all relate to any such variation made by the AO in income or loss, as returned by the assessee in its return for AY 2011-12. So :-14-: ITA No. 3473/Mds/2016 the above objections cannot be adjudicated by this Panel being beyond its scope of powers". The AR submitted since the issue was brought to the knowledge of the AO during the assessment proceedings vide submission dated February 22, 2016. However, the AO has not considered it in his order.
He pleaded that on similar issue this tribunal has remitted the issue in its case for ay 2011-12 in ITA No. 449/Mds/2016 dated 19.05.2016 and hence pleaded that this plea may be allowed. Per contra, the DR supported the order of the DRP.
9. We have heard the rival submissions. In view of the above facts and circumstances, we deem it fit to remit this issue back to the AO with a direction to examine the assessee's claim, after affording adequate opportunity to it and if the claim is found correct to allow the same. To this extent, this ground is treated as allowed partly.
10. In the result, the assessee's appeal is partly allowed.
Order pronounced on Wednesday, the 21st day of March, 2018 at Chennai.
Sd/- Sd/-
(एन.आर.एस .गणेशन) (एसजयरामन)
(N.R.S. GANESAN) (S. JAYARAMAN)
!या यकसद"य/Judicial Member लेखासद"य/Accountant Member
:-15-: ITA No. 3473/Mds/2016
चे नई/Chennai,
1दनांक/Dated: 21st March, 2018
JPV
आदे शक'* त2ल3पअ4े3षत/Copy to:
1. अपीलाथ&/Appellant 2. *+यथ&/Respondent 3. आयकरआय5
ु त) अपील(/CIT(A)
4. आयकरआय5
ु त/CIT 5. 3वभागीय* त न ध/DR 6. गाड7फाईल/GF