HM Clause India Private Limited Vs DCIT (ITAT Hyderabad)
ITAT Hyderabad held that interest on trade receivables u/s. 92B(1) of the Income Tax Act could be determined by applying SBI short-term deposit rates.
Facts- Assessee is a company engaged in the business of purchases and sale of vegetable seeds and research and development and settings. The case was selected for scrutiny and notice u/s. 143(2) of the Act was issued to the assesse.
During the year under consideration, the assessee company had entered into international transactions within the meaning of Section 92CA of the Act. Thereafter, the case was referred to the Transfer Pricing Officer (TPO) in order to get the arm’s length price of those transactions determined by the TPO. The TPO vide order u/s. 92CA(3) of the Act proposed an amount of Rs. 38,74,591/- in respect of interest on delayed receivables as the transfer pricing adjustment. Accordingly, made adjustment u/s. 92CA amounting to Rs. 38,74,591/- to be added to the income of the assessee.
The solitary issue raised is with respect to trade receivables outstanding by the assessee from it’s Associated Enterprise (AE). During the year under consideration, as per the Transfer Pricing Officer’s order, trade receivables by the assessee from it’s A.E works out to Rs. 6,19,93,459/-. AO had determined the interest on trade receivables u/s. 92B(1) of the Act by applying the SBI short-term deposit rates. DRP confirmed the order of TPO. Being aggrieved, the present appeal is filed.
Conclusion- Held that in the absence of the availability of due amount, the assessee was required to approach the banks in India for the purposes of raising the funds necessary for carrying out its day-to-day activities in the form of short-term bank loan. If the assessee had received the amount within the stipulated time, then the said outstanding amount would have been available for operations of the assessee, the assessee would be required to pay interest to the said bank. On the contrary, if the assessee had a surplus amount, then the assessee may deposit the said amount with the bank and would earn interest as applicable to the short-term deposit.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
This appeal is filed by the assessee, feeling aggrieved by the order passed by the Deputy Commissioner of Income Tax, Hyderabad dated 29.07.2022 involving proceedings u/s 143(3) r.w.s. 144C(13) of the Act for the A.Y 2018-19, on the following grounds :
“1.That on the facts and circumstances of the case, the assessment order dated 29 July 2022 passed by the Office of the Deputy Commissioner of Income Tax, Circle 2(1), Hyderabad (herein after referred to as “Learned Assessing Officer” or “Ld. AO”) under section 143(3) read with section 144C(3) read with section 144B of the Act is bad in law.
2.That on the facts and circumstances of the case, the Ld.AO/Transfer Pricing Officer (“Ld. TPO”) erred in making transfer pricing adjustment with respect to Interest on Delayed Receivables of 38,74,591 to the income of the Appellant without appreciating the facts of the case.
3. That on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO erred in treating the outstanding receivables as international transaction u/s 92B of the Act.
4. That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO erred in ignoring the fact that the balance of outstanding payable with Associated Enterprises (AE) is more as compared to the outstanding balance of the receivables with AE.
5. That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO erred in not appreciating the fact that the receivables are a result of the business transactions of the Appellant and cannot be segregated from integral part of the operations of the Appellant;
6. That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO having accepted the primary transactions to be at arms length under Transactional Net Margin Method ought not to have separately benchmarked outstanding receivables as it is subsumed in the main transaction.
7. That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO erred in considering the fact that neither the AE charges to Appellant in case of delay in outstanding payables nor the Appellant charges to AE in case of delay of the amount receivable.
8. That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO erred in not considering the fact that the Appellant has not charged interest in respect of belated trade receipts from Non-AE and as such the Appellant adopted a consistent practice of not charging interest for belated trade receivables from AE transaction also.
9. Without prejudice that TNMM is the most appropriate method, the AO ought to have appreciated that internal CUP method is the second most appropriate method
10. That on the facts and circumstances of the case, the Ld. AO/ Ld. TPO erred in not granting the benefit of working capital adjustment to the Appellant as prescribed under Rule 1013(1)(e) of the Income-tax Rules, 1962 [“the Rules”].
11. That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO erred in not appreciating the fact that charging of notional interest on receivables is equivalent to hypothetical income and not real income;
12. That on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO erred in considering CUP as the Most Appropriate Method for benchmarking Interest on delayed receivables.
13. Without prejudice to the above, the TPO has incorrectly applied CUP method.
14. That on the facts and circumstances of the case and in law, the Ld. AO/ Ld, TPO erred in making the adjustment on account of interest on receivables computed on ad-hoc basis by applying short term deposit rates of State Bank of India.
15. Without prejudice, that on the facts and circumstances of the case and in law, the LD. AO/ Ld. TPO erred in not adopting the LIBOR based rate, while determining the arm’s length price of the interest on delayed receivables.
16. That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO erred in considering a very low credit period of just 30 days instead of considering industry average credit period.”
2. The brief facts of the case are that assessee is a company engaged in the business of purchases and sale of vegetable seeds and research and development and settings. Assessee filed its return of income for A.Y. 2018-19 on 29.11.2018 declaring total income of Rs.16,04,14,750/- under normal provisions and at income of Rs.14,78,03,870/- u/s 115JB of the Income Tax Act, 1961. The case was selected for scrutiny and notice u/s. 143(2) of the Act was issued to the assessee on 22.09.2019 which was duly served upon the assessee. During the year under consideration, the assessee company had entered into international transactions within the meaning of section 92CA of the Act. Thereafter, the case was referred to the Transfer Pricing Officer (TPO) in order to get arm’s length price of those transactions determined by the TPO. The TPO vide order u/s 92CA(3) of the Act dt.31.07.2021 proposed an amount of Rs.38,74,591/- in respect of interest on delayed receivables as the transfer pricing adjustment. Accordingly, made adjustment u/s 92CA amounting to Rs.38,74,591/- to be added to the income of the assessee.
2.1 Consequently, a draft assessment order was passed on 24.09.2021 with total income to be assessed u/s 143(3) r.w.s. 144C(1) of the Income Tax Act at Rs.16,48,95,494/-. Thereafter, against the proposed draft order, assessee filed objections before the DRP – 1, Bengaluru, who vide its order dt.10.06.2022 directed the TPO to adopt SBI short term deposit rates for subject year as ALP interest rate and compute the adjustment. Taking into consideration, the order giving effect dt.07.07.2022, assessment was completed determining the taxable income at Rs.16,48,95,494/-.
3. The solitary issue raised is with respect to trade receivables outstanding by the assessee from it’s Associated Enterprise (hereinafter referred to as “A.E.”). During the year under consideration, as per the Transfer Pricing Officer’s order, trade receivables by the assessee from it’s A.E. works out to Rs.6,19,93,459/-.
4. The Assessing Officer, after affording an opportunity of hearing, has determined the interest on trade receivables u/s 92B(1) of the Act by applying the SBI short-term deposit rates. The relevant finding given in Paras 6.3 to 6.5 which is to the following effect :
“6.3 The next issue arises as to whethif4twoble is an international transition which at all needs to be benchmarked separately. In this regard, attntiofl•l3 drawn to the amendment explanation (1)1 to Sec. 928 which has been inserted by Finance Act. 2012 with effect from 01.04.2002. As per the amendment the term international transaction includes:
“………. Capital financing, including any type of long-term or short-Eerm 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……. ”
6.4 As can be seen from the above amendment, any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business advancement is covered under the definition of .international transactions, It may be of relevance to mention that the transfer pricing regulations also require that it is not only the ‘form but the overall arrangement/ substance of the transactions that must be kept in mind. Towards this end, the following provisions from the regulations are produced:
Section 92F(v) of the Income-tax Act states:
“Transaction includes an arrangement; understanding or action in concert, whether or not such arrangement, understanding or action is formal or in writing;”
Similarly, Rule 108(2)1 states:
“The contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions:”
6.5 Above provisions read with the well-established doctrine of ‘substance over form’ (applied by the Courts in numerous judicial decisions) indicate that transfer pricing regulations are to be applied keeping in mind the overall scheme of the taxpayer’s business arrangement.
In Swadeshi Cotton Mills Co Ltd v CIT (6311R 57) the Supreme Court held thai the mere existence of an agreement between two parties on the supply of goods or services did not mean that the Revenue authority had not discretion in deciding whether the payment had been made wholly and exclusively for the pul~r.sa of business. Merely because of the existence of an agreement, the Income-tax Officer is not bound to agree that the payment was made exclusively and wholly for the purpose of the business.
In MadhowjlOharamshiMfg Co Ltd v CIT (78 ITR 62), the Supreme Court held that the appointments of the selling agent and the managing agent and the agreements to pay compensation for termination of their contracts formed a chain of sham or colourable transactions designed to withdraw large sums of tax free money.
In JK Cotton Mfrs Ltd v CIT (101 ITR 221) it was held that the circumstances indicated that the expenses incurred were not dictated by commercial expediency, but were inspired by profit hunting and tax avoidance motive and hence, could not be allowed as deduction,
In McDowell & Co Ltd v CTO (154 ITR 148) the Apex Court upheld Revenue’s right to disregard a transaction and look at its substance, if it was undertaken as an anti-avoidance tool. The tax consequences of interlocking, interdependent and predetermined transactions were to be judged by reference to its subscribers. A series of transactions into which steps that had no commercial purpose apart from the avoidance of tax liability had been inserted, had to be ignored.”
5. Feeling aggrieved, the assessee has challenged the draft order dt.24.09.2021 before the Dispute Resolution Panel (DRP) and the DRP had also confirmed the order of TPO and the findings of DRP was given in Para 2.1.15 to 2.1.16 of the order which is to the following effect :
“2.1.15 The assessee also raised a plea that it has not charged interest from both AEs and non-AEs and hence interest cannot be imputed on the AE transactions. It was also pleaded that the assessee does not pay interest on the advances & trade payables from the AEs. In this regard, it is relevant to note that the assessee failed to submit any information in regard to the non-AE transaction, such as the terms of service and payment, the credit period along with the relevant agreement and documents. Similarly, the assessee has not submitted complete information relating to payables such as date of invoice, credit period, date of payment, period of delay with supporting invoices. Therefore, these pleas are liable to be rejected.
2.1.16 As regards adoption of ALP interest rate, 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 58 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 Logik Microsystems Erd (ITA No.423/Bang/2019 dated 07.10.2010) (2010-TI I-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 property deployed, the assessee company may earn an income at the maximum rate applicable to deposits and not at the rate applicable to loans. We find it appropriate to adopt a reasonable rate that would be available to the assessee on short-term deposits”. Accordingly, the TPO is directed to adopt the SBI short term deposit interest rate for the subject year as the ALP interest rate and re-compute the adjustment to be made to the total income. As the SBI short term deposit rate is an index rate adopted under Indian conditions to charge interest it is not an adhoc rate as contended by the assessee. Therefore, we reject the plea of the assessee to adopt LIBOR rate for the purpose of computing interest on outstanding receivables.”
6. Feeling aggrieved with the findings of DRP, the assessee is now in appeal before us.
7. The first contention made by the assessee before us is that the assessee has a trade outstanding payable to its AE to an extent of Rs.21,35,64,228/- which is higher than the trade outstanding receivables from it’s AE which is to the extent of Rs.6,19,93,459/-. Therefore, no adjustment can be made in the hands of the assessee towards the trade receivables as there is a negative balance.
7.1. The second contention made by the assessee before us is that the lower authorities have applied SBI short term deposit rate for short term fixed deposits’ interest to bench mark and compensate the interest to the assessee for the outstanding due. It was submitted that despite the SBI term deposit rate, the Libor + 200 basic points are required to be applied.
8. On the other hand, the ld.DR had submitted that as per the definition of Section 92B of the Act, outstanding trade receivables are considered to be a separate international transaction which is required to be benchmarked. The outstanding payables by the assessee to it’s A.E. are not the subject matter of the present dispute. It is not relevant for the determination of Arms Length Price (ALP) and therefore, the first contention raised by the assessee has no merit.
9. Further, the ld.DR had submitted that the Tribunal in the case of Satyam Venture Engineering Services Pvt. Ltd. (TS 581 ITAT 2015 (HYD), Apache Footware India Private Limited in ITA 568/Hyd/2022 and M/s. Aurobindo Pharma Limited (ITA No.485/Hyd/2022) has decided the issue by applying the SBI short term deposit rate, and therefore, the same interest rate on trade receivables is required to be applied.
10. Ld.DR further submitted that recently, the co-ordinate Bench of the Tribunal in the case of Kartar GDC India (P) Ltd., ITA No.484/Hyd/2022 and Imedx Information Services (P) Ltd., ITA 1755/Hyd/2019 has granted Libor 200 + basic points on the trade receivables, therefore, the same principle is required to be applied.
11. We have heard the rival submissions and perused the material available on record. In the decision of Apache (supra), we have held as under :
“9. We have heard the rival submissions and perused the material on record. From the perusal of the order passed by the TPO, it is clear that both the lower authorities have given an elaborate reasoning for coming to the conclusion that the delay in receiving the receivables is an international transaction and is required to be bench marked in accordance with law. We are reproducing hereinbelow the chart filed by the assessee which is to the following effect :
