Blue Coat Network (India) Private Limited Vs DCIT (ITAT Bangalore)
The issue under consideration is whether TPO is correct in making an upward adjustment to the transfer price of the Appellant’s international transactions on account of imputation of notional interest on outstanding receivables?
ITAT states that this issue was considered by this Tribunal in the various cases which held that outstanding sum of invoices is akin to loan advanced by- assessee to foreign AE., hence it is an international transaction as .per explanation to section 92B of the Act. Alternatively, it has been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and loans an advances to international transaction would amount to double taxation. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. There are several factors which need to be considered before holding that every receivable is an international transaction and it requires an. assessment on the working capital of the assessee. In view of the above, ITAT deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Assessing Officer/TPO for deciding it in, conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Accordingly, this ground raised by assessee stands allowed for statistical purpose.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal by assessee is directed against order of the Deputy Commissioner of Income-tax Circle-1(1)(2) passed u/s 143(3) r.w.s. 144C(13) of the Income-tax Act,1961 [‘the Act’ for short] dated 30.10.2018. The assessee has raised following grounds of appeal:-
A. General Ground
1. That the order of the learned, Deputy Commissioner of Income-tax, Circle 1(1)(2), Bengaluru (Assessing Officer’ or ‘learned AO’) and directions of Hon’ble Dispute Resolution Panel, Bangalore (“Hon’ble DRP”) to the extent prejudicial to the Appellant, is contrary to law, facts and circumstances of the case and liable to be quashed.
2. That the impugned order of the learned AO, as per the postal records has been issue beyond the time limit specified under sub-section (13) of section 144C of the Income-tax Act, 1961 (“the Act”) and therefore bad in law.
B. Transfer Pricing
3. That on facts and in the circumstances of the case, the learned AO/ learned TPO erred in making an upward adjustment to the transfer price of the Appellant’s international transactions of INR 10,508,698 in respect of software development services and INR 7,23,881 on account of imputation of notional interest on outstanding receivables. The learned DRP erred in further enhancing the adjustment in respect of Appellant’s software development services to INR 11,884,856 and confirming the adjustment of INR 723,881 in respect of notional interest on outstanding receivables.
Grounds for software development services
4. On the fact and in the circumstances of the case and in law, with respect to adjustment to the transfer price of the software development services, the learned DRP/ AO/ TPO erred in:
4.1. Rejecting the Transfer Pricing (`TP’) documentation maintained by the Appellant under Section 92D of the Act, in good faith and with due diligence.
4.2. Rejecting the comparability analysis carried out by the Appellant in the TP documentation and in conducting a fresh comparability analysis for the software development services based on the application of additional filters in determining the arm’s length price.
4.3. Using data, which was not contemporaneous and which was not available in the public domain at the time of preparing the TP documentation.
4.4. Not considering the multiple year/prior year data of comparable companies while determining the arm’s length price in relation to the Appellant’s international transactions with its AEs.
4.5. Using information under section 133(6) of the Act, which tantamount to choosing secret comparable companies whose information was not available in public domain while preparing the transfer pricing documentation for the relevant financial year.
4.6. Disregarding certain filters applied by the Appellant in selection of the comparable companies at the time of TP documentation.
4.7. Applying/ modifying the following filters while undertaking comparability analysis:
a) Rejection of companies whose employee cost is less than 25% of operating revenue;
b) Rejection of companies having export sales less than 75% of the total sales; and
c) Companies of different financial year ending or data of the company do not fall within 12 month period.
4.8. Including the following companies even though they are functionally different from operational profile of the Appellant:
a) Infosys Limited;
b) Persistent Systems Limited;
c) Mindtree Limited;
d) Thirdware Solutions Limited; and
e) Larsen & Tubro Infotech Limited
4.9. Excluding the following companies even though they are functionally comparable to the Appellant and passes all the filters applied by the learned TPO in its order:
a) Sasken Communication Technologies Limited;
b) Akshay Software Technologies Limited;
c) E-Zest Solutions Limited;
d) Sankhya InfoTech Limited;
e) I2T2 India Limited;
f) Daffodil Software Limited;
g) Kireeti Soft Technologies Limited;
h) Exiliant Technologies Private Limited;
i) Celstream Technologies Limited;
j) Maveric Systems Limited; and
k) Evoke Technologies Limited
4.1o.Not considering certain expenses such as provision for doubtful debts and write back of provision operating in nature on the premise that these are not the routine operating costs in determining the operating mark-up of the comparable companies.
4.11. Rejecting the segmental financial information as provided by the Appellant and reallocating the “other expenses” between the Software development services, Marketing and support services and Data center services segment on the basis of revenue by disregarding the documents/ information submitted by the Appellant before the learned Panel during the DRP proceedings, supporting the allocation methodology adopted by the Appellant for the segmentation.
4.12.Not providing adjustment for the differences in working capital of the Appellant and the comparable companies.
4.13.Not providing suitable adjustment to account for differences in the risk profile of the Appellant vis-a-vis the comparable companies.
4.14. Computing incorrect operating mark-up of certain comparable companies.
(Tax Effect: INR 3,621,178)
Grounds for imputation of notional interest on outstanding receivables
5. On facts and in the circumstances of the case, the learned DRP/AO/TPO erred in :
5.1. Considering overdue receivables from Associated Enterprises (‘AEs’) as an international transaction under the provisions of Section 92B of the Act.
5.2. Without prejudice to ground nos. 3 & 5.1 above, ignoring the fact that the Appellant does not pay interest to the AEs in relation to outstanding payable to AEs.
5.3. Without prejudice to ground nos. 3 & 5.2 above, charging interest in respect of all invoices raised during the year and outstanding at the beginning of the year, after allowing a credit period of only 3o days.
5.4. Without prejudice to ground nos. 3 & 5.2 above, charging interest for the full year instead of restricting it till March 31, 2014, i.e. while computing the notional interest on overdue receivable the interest should be computed only from the date of raising invoices, after allowing credit period of 180 days, up till the date of realization of such invoices or March 31, 2014, whichever is earlier.
5.5. Without prejudice to ground nos. 3 & 5.2 above, imputing the notional interest invoice-wise and disregarding the weighted average method of computing the credit period for the outstanding receivables from the AEs.
(Tax Effect: INR 234,864)
C. Other than Transfer Pricing
Disallowance of depreciation claimed in respect of additions made during the previous year
6. That on the facts and circumstances of the case, the learned AO erred in disallowing excess depreciation amounting to INR 465,396 in respect of fixed assets additions in the previous year 2013-14 of INR 775,660 on account of failure to furnish invoices.
7. That on the facts and circumstances of the case, the learned AO erred in disallowing excess depreciation amounting to INR 1,560,735 in respect of fixed addition in the previous yea? 2013-14 of INR 2,601,225 by considering such addition to be pertaining to previous year 2014-15.
8. Without prejudice to the above, in respect of assets belonging to Computers (including computer software) block of INR 3,009,941, which has been put to use for less than 180 days in the previous year, the learned AO erred in disallowing depreciation in respect of such assets at the rate of 6o% instead computing depreciation as per second proviso to subsection (1) of section 32 of the Income-tax Act, 1961 at rate of 3o% (i.e., 5o% of 6o%).
(Tax effect: INR_657,378)
Disallowance of travelling expenses and legal and professional expenses
9. That on the facts and circumstances of the case, the learned AO and Hon’ble DRP erred in disallowing travelling expenses and legal & professional expenses together amounting to INR 4,000,000 on account of failure to furnish invoices.
10. That the proceedings before the learned AO/ Hon’ble DRP suffered from lack of natural justice as the learned AO/ Hon’ble DRP did not give an opportunity to rebut the estimate of arriving at the disallowance.
(Tax effect: INR 1,297,800)
D. Other miscellaneous grounds
