Inflow Technologies Private Limited Vs ACIT (ITAT Bangalore)
The assessee, as a part of share purchase agreement, during the business structuring had given a corporate guarantee to one of its group supplier CISCO for supplies made to its AE (Inflow Singapore). According to the assessee, it did not intend to get any remuneration for the same since these activities were in the nature of shareholders / stewardship activities, and was only incidental to the main activities of the assessee. It was further submitted that it had not costed anything to the assessee in making such an arrangement. It was also contended that the above corporate guarantee did not have any bearing on the profit, loss, income, assets of the assessee so as to call it as an international transaction as contemplated u/s 92B(1) of the I.T.Act. The assessee also submitted that it was having advances of Rs.7,67,65,463 from its AE and advances from AE was well over the corporate guarantee of Rs.3,79,37,300 extended by the assessee in favour of its subsidiary. The AO / TPO rejected the submissions of the assessee and computed tax at 2% on the quantum of corporate guarantee given by the assessee to its AE.
The DRP held that the corporate guarantee given by the assessee to its AEs was an international transaction and would fall within the definition of international transaction u/s 92B of the I.T.Act brought in by Finance Act, 2012. The DRP after relying on various judicial pronouncements computed the rate at 1.6% instead of 2% computed by the AO / TPO.
The assessee being aggrieved, has filed this appeal before the Tribunal.
We have heard rival submissions and perused the material on record. The corporate guarantee is an international transaction and there is no doubt that the arm’s length price has to be computed with reference to the said transaction. However, in the instant case, it is the case of the assessee that amount of Rs.7,67,65,463 of the subsidiary is lying with the assessee on account of advance for which no interest was being charged by the subsidiary. This factual aspect has not been examined neither by the AO / TPO nor by the DRP. Hence, we are of the view that the matter needs to be examined afresh by the AO / TPO and we remit the issue to the files of the AO / TPO. It is ordered accordingly.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
These appeals at the instance of the assessee pertain to assessment years 2013-2014 and 2014-2015. Since these appeals were heard together, it is being disposed of by this consolidated order.
We shall dispose of the appeals as under:
ITA No.3338/Bang/2018 (Asst.Year 2013-2014)
2. Though 17 grounds are raised in this appeal, the learned AR, during the course of hearing, pressed only ground Nos. 12, 14, 15, 16 and 17. Ground Nos.12, 14 and 15 are relating to transfer pricing adjustment. Ground Nos.16 and 17 are regarding corporate tax issue.
We shall adjudicate the grounds as under:-
Ground No.12 (Transfer Pricing Adjustment)
“Ground No.12 : Computation of margin of the comparable companies adopted by the ld.TPO is erroneous.”
3. As regards the above ground, the only contention of the learned AR is that out of the final list of comparables selected by the TPO (refer page 6 of the TPO’s order), the margin of one of the comparable companies, namely, Priya International Limited is erroneous. It was submitted by the learned AR that this fact was noticed by the DRP in assessee’s own case for assessment year 2012-2013, wherein the DRP directed the A.O. to take the margin of only electronic segment.
3.1 The learned Departmental Representative did not raise any specific objection to the submission of the learned AR in his written submission dated 28.01.2021.
3.2 We have heard rival submissions and perused the material on record. The DRP in its directions dated 28.12.2016 for assessment year 2012-2013 in assessee’s own case had directed the A.O. to rectify the margin of Priya International Limited by adopting only electronics segment. The relevant directions of the DRP for assessment year 20122013 in assessee’s own case, reads as follow:-
“M/s Priya International Limited:
It is noticed from the Annual Report that, out of the sales of Rs.9.05 crores, the sale of software is only Rs.2.66 crores. The balance revenue is from sale of chemicals. It is noticed by us that there are three segments, i.e., indenting, chemicals and electronic. In our view, the TPO should have considered only the electronics segment. Accordingly, we direct the TPO to rectify the margin while giving effect to the directions of this order.”
3.2.1 The financials of Priya International Limited for the assessment year 2013-2014 is placed on record at pages 103 to 120 of the paper book filed by the assessee. On perusal of the financial, it is clear that comparable company, namely, Priya International Limited is having three segments for the relevant assessment year also. Out of the total revenue of Rs.11,12,36,471 for the relevant assessment year, the sale of software / electronics is only to the tune of to Rs.3,03,49,608. The AO / TPO is directed to adopt the margin of Priya International Limited with regard to the segment of electronics alone. It is ordered accordingly.
3.2.2 In the result, ground No.12 is allowed for statistical purposes.
Ground Nos.14 and 15 (Transfer Pricing Adjustment)
“Ground No.14 : The ld.CIT(A) erred in enhancing the transfer pricing adjustment by directing the Ld.TPO to re-compute the arm’s length price in the case of the Appellant at entity level.
Ground No.15 : The Ld.CIT(A) failed to consider that in accordance with the provisions of Chapter X of the Income Tax Act, adjustment with respect transfer pricing has to be restricted to Associated Enterprises’ transactions only.”
4. As regards the above grounds, the learned AR contends that the CIT(A) has erred in enhancing the transfer pricing adjustment by directing the AO to re-compute the arm’s length price of the assessee at entity level. The learned AR submitted that according to the provisions of Chapter X of the Income-tax Act, the TP adjustment has to be restricted to the Associate Enterprises’ transactions alone. In this context, the learned AR relied on the Bangalore Bench of the Tribunal in the case of IKA India Private Limited v. DCIT in IT(TP)A No.2192/Bang/2017 (order dated 17.09.2018).
4.1 The learned DR did not raise any specific objection to the above contention of the assessee in the written submission filed by him.
4.2 We have heard rival submissions and perused the material on record. The Bangalore Bench of the Tribunal in the case of IKA India Private Limited v. DCIT (supra) had held that as per section 92 of the I.T.Act, the transfer pricing adjustment has to be made with reference to the international transactions the assessee had undertaken with its AEs. The relevant finding of the Co-ordinate Bench of the Tribunal reads as follow:-
“55. We have considered the rival submissions. The reasoning of the CIT(A) for considering the entire sales in manufactured finished goods segment for determination of ALP is that certain components and raw materials used in manufacture of finished goods are also sourced from AE and there is a possibility of the cost of such component having been bargained at a price which is not at arm’s length. This presumption of the CIT(Appeals) is without any basis. He has not demonstrated with actual figures as to how there would be impact on profit margin on sale of finished products to AE because of purchases of some components from AE. He has given examples which are imaginary figures. Apart from this, the TPO has accepted that purchase of raw material and components by the assessee from its AE is at arm’s length. Therefore, the basis on which the CIT(A) proceeded to apply the ALP test for transactions with non-AE is neither correct on facts nor permissible in law. As rightly contended by the assessee, section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE.
56. In view of the above transfer pricing provisions and various judicial precedents, we hold that the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee.”
4.2.1 In view of the clear directions of the Co-ordinate Bench order of the Tribunal in the case of IKA India Private Limited v. DCIT (supra) that the transfer pricing adjustment should be restricted to AEs related transaction, we direct the AO / TPO to re-compute the arm’s length price of the assessee in respect of the international transaction it had entered with its AEs. It is ordered accordingly.
4.2.2 In the result, ground No.14 and 15 are allowed for statistical purposes.
Ground No.16 & 17 (Corporate Tax issue) (Disallowance of interest expenses)
“Ground No.16 : The Ld.AO erred in disallowing the interest paid on account of statutory payments amounting to Rs.15,16,148. The Ld.CIT(A) erred in not deleting the said disallowance..
Ground No.17 : The Ld.AO and the Ld.CIT(A) ought to have appreciated that the impugned interest expense is allowable under the provisions of the Act.”
5. The above grounds relate to disallowance of amount of Rs.15,16,748 being interest expenditure on account of delayed payment of service tax, TDS, excise duty, entry tax, VAT, etc. The AO had disallowed the entire amount of Rs.15,16,148 by holding it as not an allowable business expenditure.
5.1 Aggrieved, the assessee preferred an appeal to the first appellate authority. Before the first appellate authority, it was submitted that the interest is compensatory in nature and should be allowed as expenditure u/s 37 of the I.T.Act. The CIT(A) noticed that the receipt and payment of service tax, excise duty, VAT etc. are not included in the Profit & Loss account of the assessee, and it is only forming part of the Balance Sheet. Considering this factor, the CIT(A) held that the interest expenditure on account of delayed payment of statutory dues cannot be allowed as a business expenditure. The CIT(A) also relied on the judgment of the Hon’ble Bombay High Court in the case of Aruna Mills Ltd. v. CIT [1957] 31 ITR 155 (Bom.)]and the Calcutta High Court in the case of Orient General Industries Ltd. v. CIT [1994] 209 ITR 409 (Cal.)].
5.2 Aggrieved, the assessee has filed this appeal before the Tribunal. The learned AR reiterated the submissions made before the Income Tax Authorities. The learned AR has also relied on the order of the Mumbai Bench of the Tribunal in the case of Chander K.Raichandani v. ACIT in ITA No.799/Mum/2012 (order dated 08.02.2013).
5.3 The learned DR relied on the finding of the AO and the CIT(A).
5.4 We have heard rival submissions and perused the material on record. The assessee had claimed as deduction in the Profit and Loss Account, interest expenditure on account of delayed payment of statutory dues amounting to Rs.15,16,748. Whether the statutory payment are routed through the Profit and Loss account or not is immaterial for deciding the issue whether interest paid for the belated payment of statutory dues is compensatory or not (if the same is compensatory, the interest expenditure is allowable deduction u/s 37 of the I.T.Act). The Mumbai Bench of the Tribunal in the case of Chander K.Raichandani v. ACIT (supra) had clearly held that the simple interest paid for belated payment of statutory dues is nothing but compensatory and allowable deduction u/s 37 of the I.T.Act. The Co-ordinate Bench of the Mumbai Tribunal relied on various judicial pronouncements. The relevant finding of the Mumbai Bench of the Tribunal, reads as follow:-
“5. The Hon’ble Supreme Court in the case of Mahalakshmi Sugar Mills Co. vs. CIT, 123 ITR 429(SC) have held that interest for delay payment of statutory dues is an allowable deduction u/s.37(1) of the Act. Same view has also been taken by Hon’ble Supreme Court in the case of Lachmandas Mathuradas vs CIT, 254 ITR 799(sc). We also find that Hon’ble Allahabad High Court in the case of Commissioner of Income-tax v. Ishwari Khetan Sugar Mills (Pvt.) Ltd.,272 ITR 224(All) have held that interest on delayed payment of provident fund is an allowable deduction u/s.37(1) of the Act. Hon’ble Delhi High Court in the case of Commissioner of Income-tax v. Delhi Automobiles, 272 ITR 381 (Del) has held that interest payments on delayed sales tax is an allowable deduction u/s.37(1) of the Act. In view of above and respectfully following the judicial pronouncements (supra), we are of the view that interest on late 3 payment of MVAT to the extent of Rs.6,41,348/- is an allowable deduction u/s.37(1). Hence, we reverse the orders of authorities below by allowing the deduction of interest u/s.37(1) on account of late payment tax under MVAT Act, 2002. Hence, grounds of appeal taken by assessee is allowed.
5.4.1 In view of the Co-ordinate Bench of the Tribunal, we hold that the sum of Rs.15,16,748 paid as interest for belated payment of statutory dues is an allowable deduction. It is ordered accordingly.
5.4.2 In the result, ground Nos.16 and 17 are allowed.
ITA No.3339/Bang/2018 : Asst.Year 2014-2015
6. Thirteen grounds are raised in this appeal. The learned AR had only pressed ground Nos.10 to 13. Ground No.10 is regarding working capital adjustment and Ground No.11 to 13 are regarding corporate guarantee commission.
We shall adjudicate the issues, ground-wise as under:
Ground No.10
“Ground No.10 : The Ld.TPO erred in not providing working capital adjustment to the margins of the comparable companies adopted by him. Hon’ble DRP erred in rejecting the plea of the appellant.”
7. The TPO did not grant working capital adjustment claimed by the assessee while determining the arm’s length price. The observations of the TPO in not granting working capital adjustment reads as follow:-
“The taxpayer’s Net margin on sales in the AE segment as shown on page 3 is at a margin of 1.31%. Further, no adjustments like working capital and other adjustments can be given unless reasonably accurate adjustment can be made. The purpose of making an adjustment is to increase the comparability and not the profitability. Further, in the absence of accurate details of debtors and creditors of the taxpayer as well as the Uncontrolled Comparables, no working capital adjustment is given.”
7.1 The DRP affirmed the view taken by the AO / TPO.
7.2 Aggrieved, the assessee has filed this appeal before the ITAT. The learned AR by referring to page 105 of the paper book, submitted that the details of working capital adjustment were on record before the AO / TPO and the DRP. It was submitted that the rejection of claim of working capital adjustment is against the Rules and judicial pronouncements. The learned AR relied on the ITAT Bangalore Bench orders in the case of M/s.Goldman Sachs Services Pvt. Ltd. V. JCIT in ITA No.2355/Bang/2019 (order dated 15.06.2020) and Yahoo Software Development India Pvt. Ltd. v. JCIT reported in [2020] 115 taxmann.com 60 (Bangalore-Trib.).
7.3 The learned DR has filed a brief written submission essentially supporting the order of the AO/TPO and the DRP.
7.4 We have heard rival submissions and perused the material on record. The solitary reason assigned by the TPO which was endorsed by the DRP is that the assessee had not demonstrated the impact of working capital adjustment on profit margin of assessee as well as the comparable companies. In this context, we find on identical facts, the Bangalore Bench of the Tribunal in the case of Yahoo Software Development India Pvt. Ltd. v. JCIT (supra) had held that when the details required for working capital adjustment has been provided by the assessee, the Revenue Authorities were not justified in denying the claim of the assessee for deduction. The relevant finding of the Bangalore Bench of the Tribunal, reads as follow:-
“14. We have heard the rival submissions. The relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows:
Determination of arm’s length price under section 92C . 10B . (1) For the purposes of sub-section (2) of section 92C, the arm’s length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :—
(a) to (d)
(e)transactional net margin method, by which,—
(i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;
(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;
(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market;
(iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii);
(v) the net profit margin thus established is then taken into account to arrive at an arm’s length price in relation to the international transaction [or the specified domestic transaction];
(f)……….
(2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:—
(a) the specific characteristics of the property transferred or services provided in either transaction;
(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;
(c) 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;
(d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.
(3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if—
(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or
(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.
15. A reading of Rule 10B(1)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market.
16. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the “TPG”) contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm’s length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that:
