ITAT allows Employee’s Contribution to PF/EPF paid after Due Date

Doosan Power Systems India P.Ltd. Vs DCIT (ITAT Chennai)

We find that issue of belated payment of employees contribution to PF & ESI is allowable expenditure u/s.43B of the Act or not is no longer res integra. The Hon’ble Supreme Court in the case of M/s.Vinay Cements Ltd. (supra) and also in the case of CIT V. Alom Extrusions Ltd. reported in 319 ITR 306 has considered identical issue and held that employees contribution to PF & ESI is deductible, even if such payment is remitted beyond due date specified under respective Acts, but made on or before due date of furnishing return of income filed u/s.139(1) of the Act. The Hon’ble Madras High Court in the case of CIT Vs .M/s.Industrial Security & Intelligence India Pvt. Ltd., (supra) has considered an identical issue and held that belated payment of employees contribution to PF & ESI is deductible, if such payment is made on or before due date of filing return of income u/s.139(1) of the Act.

In this view of the matter and by respectfully following the decision of Hon’ble Supreme Court in the cases discussed herein above, we are of the considered view that Assessing Officer as well as DRP were erred in confirming disallowances towards employees contribution to PF & ESI. Hence, we direct the Assessing Officer to delete addition made towards disallowance of employees contribution to PF & ESI.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal filed by the assessee is directed against

final assessment order passed by the Assessing Officer u/s.143(3) r.w.s.144C (13) of the Act in pursuant to the directions of DRP-2, Bengaluru dated 27.12.2017 issued under section 144C(5) of the Act and pertains to assessment year 2011-12.

2. The assessee has raised following grounds of appeal:-

“1. The Learned Assistant Commissioner of Income Tax (OSD), Corporate Range – I, Chennai erred on the facts and in law in passing the impugned assessment order pursuant to the directions of the Hon’ble Income-lax Appellate Tribunal and Hon’ble Dispute Resolution Panel confirming the adjustment of INR 31,864,765 and computing he total income of the Appellant for Assessment Year 2011-12 al INR 29,88,63,333 as against the returned income of INR 266,998,568.

Grounds in relation to Transfer Pricing — Technical Support Services Segment

2. The AO inadvertently erred on the facts and in law, in computing the adjustment of INR 17,417,268 in relation to the international transaction of provision of engineering design, drawing and consultancy services in the impugned assessment order passed pursuant to the directions of the Dispute Resolution Panel dated 27 December 2017. Without apprcciating he fact that the said adjustment was deleted by the Ld. Transfer Pricing Officer (ld. TPO)”.

3. The Ld. Assessing Officer and TPO, and Hon’ble DRP erred on the facts and in law in passing the assessment order pursuant to the directions of the DRP making alt adjustment of INR 4,241,096 by considering. The outstanding receivables from AEs as a separate ‘international transaction” and accordingly determining the arms length price of the impugned international transaction.

4. The Ld. AO, Ld TPO and Hon’ble DRP erred on facts and in law in erroneously re-characterizing the outstanding receivables from AE of the Appellant as unsecured loan and computing notional ,nlcresl on alleged delays in realization of payment from the AEs against the invoices raised for provision of engineering design, drawing and consultancy services.

5. The id. AO, Ld. IPO and Hon’ble DRP, without prejudice, erred on fads and in law in arbitrarily applying interest II the rate of 12.625 percent being the average Prime Lending Rate (PLR) of Bank of India for FY 2010-11 of the outstanding receivables from the AEs without appreciating lie fact that the transactions giving rise to the receivables were denominated in foreign currency and therefore, an international LIBOR based rate should be considered for the purpose of imputing interest.

6. The Ld. AO, Ld TPO and the Hon’ble DRP. erred on fads and in law in ignoring the fact that the margin earned by the Appellant from the international transactions is higher than the arm’s length margin earned by the comparable companies and it already subsumed / factored-in the impact of return on outstanding receivables.

Grounds in relation in Corporate Tax Adjustment:

7. The Ld AO and Hon’ble DRP erred on the facts and in law in disallowing employees contribution to Provident Fund (PF”) amounting to INR 5,768,966.

7.1 The ld. AO and Hon’ble DRP erred in disallowing INR 876S,966 under section 36(l)(va) of the Income-tax Act (the Act”) on account of delayed remittance of the employee’s contribution to PF

7.2 The Ld. AO and Honble DRP failed to appreciate that the Appellant had made the requisite remittance before the due date of filing of Return of Income for AY 2011-12 i.e., 30 November 2011.

7.3 The Ld. AO failed to appreciate die existing jurisprudence which had held that employees contribution to Pr are also covered under Section 438 of the Act and that the delayed employee’s contribution to be allowed as deduction in the computation of taxable income for the year under consideration if they are paid before the due date of Filing the RoI.

7.4 Further, the Ld. AO and Hon’ble DRP failed to appreciate the rulings of the Hon’ble Supreme Court (SC’) in the case of CIT v. Alom Extrusion Ltd 319 IR 306, CIT VS. Vinay Cements Ltd 213 CTR 268 (SC) and other judgments wherein it was held that employees contribution to PF Employee’s State Insurance can be claimed as all allowable deduction under section 36(1)(va) read with section 43B of the Act if the said payments are made on or before the due date for filing the RoI for the subject assessment year .

8. The Id. AO and Hon’ble DRP erred on facts and in law by not giving the credit for Tax Deducted at Source (TDS”) and Advance tax.

8.1 The ld. AO and Hon’ble DRP erred it not giving credit for TDS amounting to INR 21,616,883 and advance tax amounting to INR 1,190,000.

9. On the facts and in the circumstances of the case the AO erred in levying interest under section 234B and 234C of the Act.”

3. The case has been selected for scrutiny and during the course of assessment proceedings, a reference u/s. 92CA(1) of the Act was made to Transfer Pricing Officer to determine ALP of international transactions with its AEs. During transfer pricing assessment proceedings, the TPO made upward adjustment of `1,75,55,986/- to the EDS segment and `42,41,096/- as interest on AE receivables. Based on the TPO order dated 29.01.2015, Assessing Officer has passed draft assessment order u/s. 143(3) r.w.s 92CA of the Act on 30.03.2015 and proposed following transfer pricing adjustments. The Assessing Officer has also proposed additions towards corporate tax issues like disallowance u/s.14A of the Act, disallowance u/s. 36(1)(va) and disallowance u/s.40(a)(ia) of the Act. The details of adjustments proposed by the Assessing Officer in draft assessment order is as follows:-

4. Brief facts of the case are that assessee company incorporated in the year 2006 is a wholly owned subsidiary of DHICL. It is engaged in the business of providing engineering design and related services to its overseas group companies. The assessee has been established as a Software Technology Park (STP) in India. Under the project segment, the company is engaged in the business of building, installation and maintain engineering plants with specialization in thermal and coal power plants. Under the Engineering Design Services ( EDS) segment, company is engaged in rendering engineering design, drawings and consultancy services in relation to power projects executed by its AEs.

5. The assessee has filed its return of income for assessment year 2011-12 on 28.03.2013 admitting total income of ` 26,69,98,568/-. The assessee has filed auditors report in

form 3CEB related to international transactions, as per which during the year under consideration, it has entered into following international transactions with its AEs:-

6. The assessee has filed objections against draft assessment order passed by Assessing Officer before DRP-2, Bengaluru, and challenged various adjustments proposed by Assessing Officer, but could not succeed. The learned DRP has upheld adjustments proposed by the Assessing Officer towards upward adjustments on EDS segments and interest on AE receivables. The learned Assessing Officer has passed final assessment order on 22.02.2016 in pursuant to directions of DRP and made additions proposed by TPO towards international transactions . The assessee carried matter in appeal before ITAT., Chennai. The Tribunal vide its order dated 14.12.2016 has set aside the appeal to the learned DRP for fresh consideration. The DRP-2, Bengaluru vide its order dated 27.12.2017, in consequent to the directions of Tribunal has passed order u/s. 144C(5) of the Act and confirmed additions made by Assessing Officer towards upward adjustments on EDS segment and interest imputation on AE receivables. The Assessing Officer in pursuant to the directions of DRP has passed final assessment order without giving effect to the DRP direction and subsequently passed rectification order u/s.154 on 24.05.2018 and deleted TP adjustment in relation to EDS segment.

7. Being aggrieved by final assessment order, assessee is in appeal before us.

8. Ground No.1 of assessee appeal is general in nature and does not require specific adjudication and hence, same is rejected.

9. The assessee has not pressed ground nos.2, 8 and 9, because Assessing Officer has passed rectification order abd deleted TP adjustment relating to EDS segment and also has given effect to short credit of TDS and advance tax. Consequently, reworked interest u/s. 234B & C of the Act. Therefore, ground no.2, 8 & 9 of assessee appeal are dismissed as not pressed.

10. The first issue that came up for our consideration from ground No.3, 4 & 6 of assessee appeal is interest imputation on AE receivables. The learned AR submitted that Assessing Officer / DRP erred on facts and in law in making adjustment of `42,41,096/- by considering outstanding receivables from AEs as a separate international transaction and accordingly determining ALP of impugned international transaction. The AR further submitted that outstanding receivables as a result of its international transactions with AEs are not separate international transaction as per section 92B of the Act, when principal transaction giving rise to receivable has been accepted to be at arms length and consequently, no separate adjustment is warranted on account of outstanding receivables. The AR further submitted that without prejudice, even if it is treated as international transaction and requires to be bench marked, then applying interest @ 12.625% on the basis of priming lending rate of Bank of India is incorrect because transactions giving rise to receivables were denominated in foreign currency and therefore, international LIBOR based rate should be considered for imputing interest. The AR relied on the following case laws in support of his contentions:-

Amadeus India Pvt Ltd., ITA 901/2019 (Delhi High Court) Kusum Health Care Pvt Ltd., ITA 765/2016 (Delhi High Court) Sophos Technologies Private Limited (Formerly known as Cyberoam Technologies P Ltd) (TS-1213 ITAT-2OI8(Ahd)TP) Lotus Labs Pvt Ltd TA No. 2295/ Bang/ 2016 M/s Logix Micro Systems Ltd VsAsst CIT (2010-TIl-50-ITAT-BANG- TP) Dy. CIT v/s M/s. lndo American Jewellery Limited. ITA No. 5872/Mum/2009 Nimbus Communications Limited (ITA No.2361 (Mum.) of2007) Patni Computer System Limited (ITA No 426 & 1131/PN/06)

No interest chargeable on outstanding balances:

M/s Logix Micro Systems Ltd VsAsst CIT (2010-TlI-50-ITAT-BANG -TP)

Nimbus Communications limited ITA No.2361 (Mum.) of 2007)

Patni Computer System Limited (ITA No 426 & 1131/PN/06)

International rate should be used since transaction denominated in foreign currency:

Pr. CIT vs Tecnimont Pvt Ltd., ITA 56 o120l6 (Bombay High Court)

CIT vs. Cotton Naturals (I) Pvt. Ltd.. ITA No. 233/2014 Delhi HC Plintron Global Technology Solution Vs DCIT. ITA No. 532/Chny/2017

Siva Industries & Holdings Ltd. Vs ACIR (ITA No.148/Mds/2010 Sin Ventures Limited vs. ACIT (ITA No. 216l/Mds/20ll) Bharti Airtel Services Limited. ITA No. 58l6/Del/2012 Kohinoor Foods Ltd. Vs ACIT,ITA NO. 3688 to 3891IDel/2OI2 Foursoft Ltd. Vs Dy. CIT(ITA No. 1495/Hyd/20l0)

11. The learned DR , on the other hand, strongly supporting order of the authorities below submitted that AE receivables is separate international transaction even before amendment to section 92B and hence, any outstanding receivables beyond specified credit period should be benchmarked to determine ALP between the parties and said bench marking should be on the basis of rate of interest, if any, paid by assessee on its borrowings in Indian currency. Therefore, Assessing Officer as well as DRP were right in imputing interest on the basis of prime lending rate of Bank of India for relevant assessment year and hence, there is no reason to interfere with the findings of authorities below. In this regard, she relied upon decision of ITAT., Delhi in the case of Bharti Airtel Services Ltd.in ITA No.161/Del/2017.

11. We have heard both the parties, perused the materials available on record and gone through the orders of authorities below along with case laws cited by both the parties. As regards preliminary arguments of the AR for the assessee that delay in realization of receivables from AE beyond credit period is not a separate international transaction, we find that the definition of international transactions has been amended by insertion of clause (c) to explanation to Section 92B by the Finance Act, 2012 with retrospective effect from 01.04.2002, where the “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 payments or receivables or any other debt arising during the course of business” are international transactions and hence delay in realization of receivables from AE beyond credit period constitutes a separate international transaction with effect from assessment year 2013-14 onwards. Therefore, we are of the considered view that there is no merit in the arguments taken by the assessee that delay in realization of AE receivables is not an international transaction. We further note that after the amendment to clause (c) of explanation to Section 92B of the Act, realization of receivables after abnormal delay beyond credit period would tantamount to indirect funding to AE and merely because the assessee is almost a debt free company or the margin of the assessee is higher than the comparables, no such funds of the assessee should be allowed to be utilized for indefinite period. We further note that once delay in realization of AE receivables constitute an international transaction, whether or not, assessee charges interest on receivables from AE or not, has no relevance because any understanding or arrangement between the assessee and its AE which is detrimental to Revenue and against the principles of scheme of Chapter X of the Act, cannot come to the rescue of the assessee. We further note that merely because there is no provision to chargeability of interest in the agreement between the assessee and its AE for delayed realization and merely because assessee does not pay any interest to the AE on the security deposit, the Revenue cannot be deprived on its legitimate share in accordance with the scheme of Chapter X of the Act and the purpose behind the Chapter X. Therefore, we are of the considered view that there is no error in the finding recorded by the AO as well as the TPO and the DRP to come to the conclusion that delay in realization of receivables from AE beyond credit period tantamount to indirect funding to AE which constitutes separate international transactions.

13. Having said so, let us examine what is appropriate rate for benchmarking international transactions for delay in realization of AE receivables. In order to impute interest on receivables, the benefit and detriment that it would be enjoyed and suffered by the parties to the transaction requires consideration. The assessee has allowed credit to its AE which is a non-resident, therefore the benefits that the AE derives from enjoying the long credit period for payment in respect of services rendered has to be measured in terms of the interest that would have been incurred by the AE in the country of residence. If we go by the standards, the LIBOR rate is most appropriate rate of interest in the international market and which is accepted by most of the countries. Therefore, it would be most appropriate if the LIBOR rate is applied as most appropriate rate of interest for imputing interest on delay in receivables from AE. In this case, the AO has imputed notional interest by adopting PLR as the base rate. Therefore, we are of the considered view the LIBOR + 300 basis point rate is most appropriate rate and hence, direct the AO/TPO to adopt LIBOR + 300 basis point for imputing interest on overdue receivable. As regards, the argument of ld.AR for assessee that the TPO has not given any credit period, we find that in any trade there is a credit period for payment to services or goods. Therefore the AO is directed to allow normal credit period allowed by the assessee, if there is any agreed credit period between assessee and AE. If there is no agreed credit period, then the AO is directed to allow standard credit period that the industry is allowing in this line of business.”

14. This view is also further supported by the decision of ITAT., Delhi in the case of Bharti Airtel Services Ltd.,Vs. DCIT in ITA No.161/Del/2017, where even before amendment to definition of international transactions, it was held that AE receivables constitute a separate international transactions which requires to be benchmarked. The Bench further held that in case of rate of interest rate applicable to transactions giving rise to receivables denominated in foreign currency should be applied and in such case, international LIBOR rate should be considered for the purpose of imputing interest . Therefore, considering facts and circumstances of the case and also by following ratio laid down in the case laws discussed herein above, we are of the considered view that AE receivables beyond specified credit period constitute separate international transactions and the same needs to be benchmarked and hence there is no error in findings recorded by AO / DRP to hold that it is an international transaction. But when it comes to rate at which such interest is to be imputed, it is a well settled principle of law that international LIBOR rate is an appropriate rate for imputing interest on AE transactions, because transactions giving rise to receivables were denominated in foreign currency and accordingly, we direct AO to apply LIBOR+300 BPS for imputing interest on AE receivables. Accordingly, ground taken by assessee is partly allowed.

15. The next issue that came up for our consideration from ground no.7 of appeal is employees contribution to PF & ESI. The Assessing Officer has disallowed employees contribution towards PF & ESI on the ground that same has been remitted beyond due date specified under respective Acts.

16. The learned AR for assessee at the time of hearing submitted that this issue is squarely covered by the decision of Hon’ble Supreme Court in the case of CIT Vs. Vinay Cements Ltd. reported in 313 CTR 268 and also the decision of Hon’ble Madras High Court in the case of CIT Vs. M/s. Industrial Security Intelligence India Pvt. Ltd., in TCA No.585 & 586 of 2015 dated 24.07.2015.

17. The learned DR, on the other hand, fairly accepted that the issue is covered in favour of the assessee by the decision of Hon’ble Supreme Court. Further, as a matter of fact, she has strongly supported the order of the Assessing Officer .

18. Having heard both sides and considered materials on record, we find that issue of belated payment of employees contribution to PF & ESI is allowable expenditure u/s.43B of the Act or not is no longer res integra. The Hon’ble Supreme Court in the case of M/s.Vinay Cements Ltd. (supra) and also in the case of CIT V. Alom Extrusions Ltd. reported in 319 ITR 306 has considered identical issue and held that employees contribution to PF & ESI is deductible, even if such payment is remitted beyond due date specified under respective Acts, but made on or before due date of furnishing return of income filed u/s.139(1) of the Act. The Hon’ble Madras High Court in the case of CIT Vs .M/s.Industrial Security & Intelligence India Pvt. Ltd., (supra) has considered an identical issue and held that belated payment of employees contribution to PF & ESI is deductible, if such payment is made on or before due date of filing return of income u/s.139(1) of the Act.

19. In this view of the matter and by respectfully following the decision of Hon’ble Supreme Court in the cases discussed herein above, we are of the considered view that Assessing Officer as well as DRP were erred in confirming disallowances towards employees contribution to PF & ESI. Hence, we direct the Assessing Officer to delete addition made towards disallowance of employees contribution to PF & ESI.

20. In the result, appeal filed by assessee is partly allowed.

Order pronounced in the open court on 10th March, 2021