Global Logic India Ltd., New Delhi V. DCIT, New Delhi

ITA 1115/DEL/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 3162 (ITAT-DELHI)
• Duration Of Justice: 9 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-12-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 05-07-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 27-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Retrospective amendment; Question of law; Notional interest
• Section: 143(3); 92B; 234B; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI B.P. JAIN, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.1104/DEL./2015 (ASSESSMENT YEAR : 2010-11) ITA NO.1115/DEL./2017 (ASSESSMENT YEAR : 2012-13) M/S. GLOBAL LOGIC INDIA LTD., VS. DCIT, CIRCLE 12 (1), (FORMERLY KNOWN AS GLOBAL LOGIC NEW DELHI. INDIA PRIVATE LIMITED), 207, GUPTA ARCADE, LSC PLOT NO.5, MAYUR VIHAR PHASE-1 EXTENSION, NEW DELHI 110 034. (PAN : AABCI2526F) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY VOHRA, SENIOR ADVOCATE SHRI NEERAJ JAIN, ADVOCATE AND SHRI ABHISHEK AGARWAL, CA REVENUE BY : SHRI SANJAY BATRA, CIT DR DATE OF HEARING : 21.11.2017 DATE OF ORDER : 12.12.2017 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, M/S. GLOBAL LOGIC INDIA LIMITED (HE REINAFTER REFERRED TO AS THE TAXPAYER) BY FILING THE PRESEN T APPEALS SOUGHT TO SET ASIDE THE IMPUGNED ORDERS DATED 24.12.2014 & 23 .11.2016, ITA NO.1104/DEL/2015 ITA NO.1115/DEL/2017 2 PASSED BY THE AO IN CONSONANCE WITH THE ORDERS PASS ED BY THE LD. DRP/TPO UNDER SECTION 143 (3) READ WITH SECTION 144 C OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEARS 2010-11 & 2012-13 RESPECTIVELY ON THE GROUNDS INTER ALIA THAT :- ITA NO.1104/DEL/2015 (AY 2010-11) 1. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPLETING ASSESSMENT UNDER SECTION 143(3) R EAD WITH SECTION 144(C) OF THE INCOME-TAX ACT ('THE ACT ') AT AN INCOME OF RS.5,45,07,770 AS AGAINST RETURNED INC OME OF RS.1,44,76,534. 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN ADJUSTMENT OF RS.4,00,31,234 IN RESPECT OF THE RECEIPT OF RECEIVABLE FROM THE ASSOC IATED ENTERPRISE CONSIDERING THE SAME TO BE AN 'INTERNATI ONAL TRANSACTION' OF LOAN, ON THE BASIS OF THE ORDER PAS SED UNDER SECTION 92CA(3) OF THE ACT BY THE TRANSFER PRICING OFFICER ('TPO'). 2.1 THAT THE DISPUTE RESOLUTION PANEL (DRP') ERRED ON FACTS AND IN LAW IN UPHOLDING THE ORDER OF THE T PO, WHEREIN, IT WAS HELD THAT THE ALLEGED DELAY IN REAL IZATION OF RECEIVABLES IS AS AN INTERNATIONAL TRANSACTION I N TERMS OF SECTION 92B OF THE ACT. 2.2 THAT THE DRP ERRED ON FACTS AND IN LAW IN HOLDING THAT THE TPO IS JUSTIFIED IN DETERMINING TH E ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION AND DETERMINING THE ARM'S LENGTH RATE OF INTEREST BY CONSIDERING PRIME LENDING RATE OF SBI, APPLYING CUP METHOD. 2.3 THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN NOT CONSIDERING THE ORDER PASSED BY TPO GIVI NG EFFECT TO THE SPECIFIC DIRECTIONS OF DRP REGARDING THE ITA NO.1104/DEL/2015 ITA NO.1115/DEL/2017 3 ARM'S LENGTH RATE OF INTEREST, WHILE PASSING THE FI NAL ASSESSMENT ORDER. 2.4 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT DELAY IN RECEIPT OF RECEIVABL E IS NOT AN 'INTERNATIONAL TRANSACTION', PER SE, UNDER SECTI ON 92B OF THE ACT BUT IS A CONSEQUENCE OF AN 'INTERNAL TRANSACTION' UNDERTAKEN IN THE FORM OF SERVICES RENDERED TO THE ASSOCIATED ENTERPRISE. 2.5 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN RE-CHARACTERIZING THE ALLEGED DELAY IN RECEIPTS OF RECEIVABLES AS UNSECURED LOANS ADVANCED TO THE ASSOCIATED ENTERPRISES AND MAKING A TRANSFER PRICIN G ADJUSTMENT ON THAT BASIS. WITHOUT PREJUDICE, 2.6 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT ACCEPTING THAT IN ANY CASE THE TRANSACTION OF D ELAY IN RESPECT OF RECEIVABLES WAS CLOSELY LINKED TO THE 'INTERNATIONAL TRANSACTION' OF EXPORTS AND SINCE TH E PROFIT EARNED BY THE APPELLANT AS A PERCENTAGE OF C OST IS HIGHER THAN THE PROFIT EARNED BY COMPARABLE COMPANIES, NO TRANSFER PRICING ADJUSTMENT WAS EVEN OTHERWISE REQUIRED TO BE MADE IN THIS REGARD. 2.7 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT EVEN AFTER CONSIDERING ADJUST MENT ON ACCOUNT OF WORKING CAPITAL IN THE MARGIN OF THE APPELLANT AND THE COMPARABLE COMPANIES SINCE THE ADJUSTED MARGIN OF THE APPELLANT IS HIGHER THAN THA T OF COMPARABLE COMPANIES NO INTEREST OUGHT TO BE IMPUTE D ON THE ALLEGED DELAY IN RECEIPT OF RECEIVABLES. 2.8 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN REJECTING THE DELAY IN RECEIPT OF RECEIVABLES ON TRANSACTION UNDERTAKEN WITH UNRELATED THIRD PARTIES AS COMPARABLE UNCONTROLLED PRICE FOR THE PURPOSE OF BENCHMARKING THE DELAY IN RECEIPT OF RECEIVABLES ON TRANSACTION UNDERTAKEN WITH ASSOCIATED ENTERPRISES, APPLYING CUP METHOD. ITA NO.1104/DEL/2015 ITA NO.1115/DEL/2017 4 2.9 WHILE APPLYING CUP METHOD, THE DRP/TPO ERRED ON FACTS AND IN LAW IN REJECTING INTEREST RATE COMP UTED ON THE BASIS OF LIBOR RATES, WITHOUT APPRECIATING T HAT SINCE THE RECEIVABLES OUTSTANDING FROM THE ASSOCIAT ED ENTERPRISES WERE DENOMINATED IN FOREIGN CURRENCY, T HE INTEREST APPLICABLE ON LOAN AVAILABLE IN THE INTERN ATIONAL MARKET OUGHT TO BE CONSIDERED. 4. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ALLOWING CREDIT OF ADVANCE TAX, TOS, FOR EIGN TAX AND TAX PAID UNDER MAT PROVISIONS, WHILE COMPUTING THE TAX LIABILITY ON ASSESSED INCOME AND THEREBY RAISING A FRIVOLOUS TAX DEMAND. 5. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DETERMINING THE ASSESSED TAX DEMAND UNDER NORMAL PROVISIONS OF THE ACT WITHOUT APPRECIATING T HAT TAX LIABILITY IS HIGHER AS PER BOOK PROFITS COMPUTE D UNDER THE MAT PROVISIONS OF THE ACT. 6. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN LEVYING INTEREST UNDER SECTION 234B AND SECT ION 234C OF THE ACT. ITA NO.1115/DEL/2017 (AY 2012-13 ) 1. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPLETING ASSESSMENT UNDER SECTION 143(3) R EAD WITH SECTION 144(C) OF THE INCOME-TAX ACT ('THE ACT ') AT AN INCOME OF RS.42,15,26,930 AS AGAINST RETURNED INCOME OF RS.39,08,14,360. 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN ADJUSTMENT OF RS.3,07,12,570 IN RESPECT OF THE RECEIPT OF RECEIVABLE FROM THE ASSOC IATED ENTERPRISE CONSIDERING THE SAME TO BE AN 'INTERNATI ONAL TRANSACTION' OF LOAN, ON THE BASIS OF THE ORDER PAS SED UNDER SECTION 92CA(3) OF THE ACT BY THE TRANSFER PRICING OFFICER ('TPO'). 2.1 THAT THE DISPUTE RESOLUTION PANEL (DRP') ERRED ON FACTS AND IN LAW IN UPHOLDING THE ORDER OF THE T PO, WHEREIN, IT WAS HELD THAT THE ALLEGED DELAY IN RECE IPT OF ITA NO.1104/DEL/2015 ITA NO.1115/DEL/2017 5 RECEIVABLES AS UNSECURED LOANS ADVANCE TO THE ASSOCIATED ENTERPRISE WHICH IS AS AN INTERNATIONAL TRANSACTION IN TERMS OF SECTION 92B OF THE ACT. 2.2 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT DELAY IN RECEIPT OF RECEIVABL E IS NOT AN INTERNATIONAL TRANSACTION, PER SE, UNDER SECTION 92B OF THE ACT BUT IS A CONSEQUENCE OF AN INTERNAL TRANSACTION UNDERTAKEN IN THE FORM OF SERVICES RENDERED TO THE ASSOCIATED ENTERPRISE. 2.3 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN RE-CHARACTERIZING THE ALLEGED DELAY IN RECEIPTS OF RECEIVABLES AS UNSECURED LOANS ADVANCED TO THE ASSOCIATED ENTERPRISES AND MAKING A TRANSFER PRICIN G ADJUSTMENT ON THAT BASIS. WITHOUT PREJUDICE, 2.4 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT ACCEPTING THAT IN ANY CASE THE TRANSACTION OF D ELAY IN RESPECT OF RECEIVABLES WAS CLOSELY LINKED TO THE 'INTERNATIONAL TRANSACTION' OF EXPORTS AND SINCE TH E PROFIT EARNED BY THE APPELLANT AS A PERCENTAGE OF C OST IS HIGHER THAN THE PROFIT EARNED BY COMPARABLE COMPANIES, NO TRANSFER PRICING ADJUSTMENT WAS EVEN OTHERWISE REQUIRED TO BE MADE IN THIS REGARD. 2.5 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT EVEN AFTER CONSIDERING ADJUST MENT ON ACCOUNT OF WORKING CAPITAL IN THE MARGIN OF THE APPELLANT AND THE COMPARABLE COMPANIES SINCE THE ADJUSTED MARGIN OF THE APPELLANT IS HIGHER THAN THA T OF COMPARABLE COMPANIES NO INTEREST OUGHT TO BE IMPUTE D ON THE ALLEGED DELAY IN RECEIPT OF RECEIVABLES. 2.6 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN REJECTING THE DELAY IN RECEIPT OF RECEIVABLES ON TRANSACTION UNDERTAKEN WITH UNRELATED THIRD PARTIES AS COMPARABLE UNCONTROLLED PRICE FOR THE PURPOSE OF BENCHMARKING THE DELAY IN RECEIPT OF RECEIVABLES ON TRANSACTION UNDERTAKEN WITH ASSOCIATED ENTERPRISES, APPLYING CUP METHOD. ITA NO.1104/DEL/2015 ITA NO.1115/DEL/2017 6 2.7 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN ADDING AN ADHOC MARK-UP OF 400 POINTS ON THE LIBOR RATE OF INTEREST, ARBITRARILY ON ACCOUNT OF CREDIT RATING RISK, SECURITY RISK, TRANSACTION COST ETC. 2.8 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT IN TERMS OF MASTER CIRCULAR NO.10/2011-12, RESERVE BANK OF INDIA ALLOWS A PERIO D OF 12 MONTHS TO ALL COMPANIES FOR RECEIVING REPATRI ATION OF EXPORT SALES PROCEEDS, AND THEREFORE, INTEREST I F ANY, OUGHT TO BE IMPUTE DON THE PERIOD OF DELAY BEYOND 1 2 MONTHS. 2.9 THAT THE AO/TPO ERRED ON FACTS AND IN LAW IN COMPUTING INTEREST IN RESPECT OF THE ALLEGED DELAY IN REALIZATION OF RECEIVABLES EVEN FOR THE PERIOD AFTE R THE CLOSE OF THE RELEVANT PREVIOUS YEAR I.E. AFTER 31.0 3.2012. 3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CALCULATING SURCHARGE AND EDUCATION CESS ON GROSS TAX PAYABLE WITHOUT GIVING EFFECT TO MAT CRED IT UNDER SECTION 115JAA OF THE ACT. 4. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ALLOWING FOREIGN TAX CREDIT OF RS.15,70, 867 WITHOUT ASSIGNING ANY SPECIFIC REASON. 5. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN ALLOWING SHORT CREDIT OF TAX DEDUCTED AT SOU RCE TO THE EXTENT OF RS.45,737/-. 6. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN LEVYING INTEREST UNDER SECTION 234C OF THE A CT ON THE RETURNED INCOME. 7. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN LEVYING INTEREST UNDER SECTION 234B OF THE A CT. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : GLOBAL LOGIC INDIA PRIVA TE LTD., THE ITA NO.1104/DEL/2015 ITA NO.1115/DEL/2017 7 TAXPAYER IS ENGAGED IN THE PROFESSION OF SOFTWARE D EVELOPMENT SERVICES TO GLOBAL LOGIC INC. AND OTHER GLOBAL LOGI C GROUP COMPANIES. DURING THE YEAR UNDER ASSESSMENT, THE T AXPAYER ENTERED INTO INTERNATIONAL TRANSACTION TO THE FOLLO WING EFFECT :- S.NO. INTERNATIONAL TRANSACTION AMOUNT (IN RS.) 1 SOFTWARE DEVELOPMENT AND RELATED SERVICES 1,723,446,486 2 REIMBURSEMENT OF EXPENSES FROM ASSOCIATED ENTERPRISES 107,691,808 3. THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY T HE TAXPAYER QUA SOFTWARE DEVELOPMENT AND RELATED SERVICES HAVE BEEN FOUND AT ARMS LENGTH BY LD. TPO AS PER TP REPORT PREPARED B Y THE TAXPAYER. HOWEVER, THE LD. TPO DISPUTED THE INTERNATIONAL TRA NSACTIONS ENTERED INTO BY THE TAXPAYER QUA REIMBURSEMENT OF E XPENSES FROM ASSOCIATED ENTERPRISE (AE) TO THE TUNE OF RS.10,76, 91,808/- ON THE GROUND THAT REALIZATION OF PAYMENTS EXCEED FROM 30 DAYS TO 248 DAYS WHICH IS ON ACCOUNT OF NON-REALIZATION OF PAYM ENT FROM ITS AE AS SPECIFIED IN THE AGREEMENT. 4. THE LD. TPO FURTHER CALLED UPON THE TAXPAYER TO SHOW CAUSE AS TO WHY THE PENAL INTEREST BE NOT CHARGED FROM TH E AE QUA THE PAYMENT MADE BEYOND THE PERIOD OF 30 DAYS FROM THE DATE OF RECEIPT OF INVOICE ON ACCOUNT OF DELAY IN REALIZATI ON OF PAYMENT. TPO PROPOSED A TOTAL OF 14.88% MARK UP TO BE APPROP RIATED ON THE ITA NO.1104/DEL/2015 ITA NO.1115/DEL/2017 8 BASIS OF PLR OF SBI AT 11.88% FOR FY 2009-10 AND 30 0 BASIS POINTS TO BE ADDED FOR RISK INCLUDING LACK OF SECUR ITY PROCESSING FEE, CREDIT RATING AND LOAN TENURE AND SHOW-CAUSE T HE TAXPAYER AS TO WHY ARMS LENGTH INTEREST IS DETERMINED AT RS.6,56, 56,435/- AS ADJUSTMENT U/S 92CA FROM THE AE. 5. ASSESSEE FILED REPLY CLAIMING THAT THE TRANSACTI ON AS TO OUTSTANDING RECEIVABLES CANNOT BE RECHARACTERIZED A S LOAN ADVANCE TO AE. THE TAXPAYER ALSO RELIED UPON EXPLANATION ( I) (A) AND (C) OF SECTION 92B WHICH RECOGNIZES SALES AND RECEIVABLES ARISING DURING THE BUSINESS AS SEPARATE TRANSACTION. 6. BEING DIS-SATISFIED WITH THE CONTENTIONS MADE BY THE TAXPAYER, THE TPO PROCEEDED TO CALCULATE THE ARMS LENGTH INTEREST TO THE TUNE OF RS.4,00,31,234/- PROPOSED AS TP ADJU STMENT THEREOF U/S 92CA. 7. THE TAXPAYER CARRIED THE MATTER BY WAY OF RAISIN G OBJECTIONS BEFORE THE LD. DRP WHO HAS APPROVED THE ADJUSTMENT MADE BY THE LD. TPO. FEELING AGGRIEVED, THE TAXPAYER HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 8. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. ITA NO.1104/DEL/2015 ITA NO.1115/DEL/2017 9 GROUND NO.1 IN ITA NO.1104/DEL/2015 (AY 2010-11) AND ITA NO.1115/DEL/2017 (AY 2012-13) 9. GROUND NO.1 BEING GENERAL IN NATURE DOES NOT REQ UIRE ANY ADJUDICATION. GROUNDS NO.2 TO 2.9 IN ITA NO.1104/DEL/2015 (AY 2010-11) AND ITA NO.1115/DEL/2017 (AY 2012-13) 10. LD. TPO REJECTED THE CONTENTIONS RAISED BY THE TAXPAYER INTER ALIA THAT THERE IS NO INTERNATIONAL TRANSACTIONS IN VOLVED QUA OUTSTANDING RECEIVABLES; THAT THE BENCHMARKING OF D ELAY IN RECEIPT OF RECEIVABLES IS AT PAR WITH INTERNAL COMPARABLES; THAT THE TAXPAYER HAS EARNED HIGHER MARGIN VIS--VIS COMPARABLE COMPA NIES IN TNMM; THAT THE INTEREST RATES PROPOSED ON UNSECURED LOAN CANNOT BE APPLIED ON DELAY OF RECEIVABLES; THAT NO INTERES T CAN BE CHARGED ON THE OPENING BALANCE OF RECEIVABLES; THAT INTERES T SHALL BE CHARGED ON LIBOR RATE AND PROCEEDED TO CALCULATE THE ARMS LENGTH INTEREST AS UNDER :- 5.9 FOLLOWING THE DISCUSSIONS IN THE PRECEDING PAR AS, THE FOLLOWING CONCLUSIONS CAN BE DRAWN :- (I) THE ASSESSEE IN THE PROCESS OF EXTENDING CREDIT FACILITY ON OUTSTANDING RECEIVABLES TO ITS AES HAS NOT FOLLOWED THE ARMS LENGTH PRINCIPLE. ITA NO.1104/DEL/2015 ITA NO.1115/DEL/2017 10 (II) THE ASSESSEE DID NOT CORRECTLY ASSESS THE RISK ASSOCIATED WITH THE INTERNATIONAL TRANSACTION OF NO N RECOVERY OF DUES, THE RISK LIKE FOREIGN EXCHANGE FLUCTUATION RISK, CREDIT RISK, FINANCIAL RISK, BUSI NESS RISK ETC. (III) THE ASSESSEES COST OF BORROWING OR AVAILABILITY OF SURPLUS FUNDS IS NOT RELEVANT FOR DETERMINING THE A RMS LENGTH INTEREST TO BE CHARGED BY THE ASSESSEE. (IV) THE ASSESSEE SHOULD HAVE USED THE STANDARD OF THE RETURN THAT IT WOULD HAVE EARNED IN INDIA IF MONEY WAS LENT HERE TO A COMPANY WITH THE SAME ECONOMIC STATU S AS THAT OF AE. (V) THE ASSESSEE HAS NOT BEEN ABLE TO PROVIDE ANY SUBSTANTIAL ARGUMENT AGAINST THE USE OF THE PLR OF SBI. THE 14.88% RATE OF RETURN ON THIS PARTICULAR RATING HAS BEEN CALCULATED IN A SCIENTIFIC MANNER AND WAS ALSO PROVIDED IN THE SHOW CAUSE NOTICE. HENCE, FOLLOWING THE DISCUSSION IN THE PRECEDING PA RAS THE INTEREST IS CALCULATED IN THE ANNEXURE 1 TO 5 AND MADE A PART OF THIS ORDER. THE LEDGER ACCOUNT DETA ILS HAVE BEEN TAKEN AS FURNISHED BY THE ASSESSEE. BASED ON THE CALCULATION ABOVE, THE ARMS LENGTH IN TEREST IS DETERMINED AS RS.4,00,31,234/- AND ACCORDINGLY, THE SAME IS THE PROPOSED ADJUSTMENT U/S 92CA. THE ASSESSING OFFICER SHALL ENHANCE THE INCOME OF T HE ASSESSEE BY RS.4,00,31,234/-. THE LD. TPO PROPOSED ADJUSTMENT U/S 92CA ON ACCOUNT OF ARMS LENGTH INTEREST ON RECEIVABLES TO THE TUNE OF RS.4, 86,19,810/- FOR AY 2012-13. ITA NO.1104/DEL/2015 ITA NO.1115/DEL/2017 11 11. L D. AR FOR THE TAXPAYER CHALLENGING THE IMPUGNED ORD ER CONTENDED INTER ALIA THAT A CONTINUED DEBT BALANCE IS NOT AN INTERNATIONAL TRANSACTION; THAT TRANSACTION OF ACCO UNTS RECEIVABLES CANNOT BE RECHARACTERIZED AS LOANS; THAT THERE CANN OT BE NO SEPARATE ADJUSTMENT ON ACCOUNT OF INTEREST IN CASES WHERE T HE ENTITY LEVEL MARGIN OF THE TAXPAYER IS HIGHER THAN THE COMPARABL E COMPANY; THAT EVEN IF THE PRICING / PROFITABILITY OF THE TAX PAYER IS MORE THAN WORKING CAPITAL ADJUSTMENT MARGIN OF THE COMPARABLE S THEN IMPUTING ADDITIONAL INTEREST ON THE OUTSTANDING REC EIVABLES IS UNWARRANTED AND THAT THERE CANNOT BE ADJUSTMENT OF INTEREST AS THE TAXPAYER IS NOT CHARGING INTEREST FROM BOTH AE AND UNRELATED THIRD PARTIES QUA RECEIPT OF REMITTANCES. 12. HOWEVER, ON THE OTHER HAND, LD DR FOR THE REVEN UE TO REPEL THE ARGUMENTS ADDRESSED BY THE LD. AR FOR THE TAXPA YER CONTENDED THAT AS PER EXPLANATION (I), (C) TO SECTION 92B(1) INSERTED BY FINANCE ACT, 2012 WITH RETROSPECTIVE EFFECT FROM 01 .04.2002, PAYMENT OR DEFERRED PAYMENT OR RECEIVABLES OR ANY O THER DEBT ARISING DURING THE COURSE OF BUSINESS IS AN INTERNA TIONAL TRANSACTION AND RELIED UPON THE ORDER PASSED BY LD. TPO. 13. THE LD. TPO WHILE TREATING THE OUTSTANDING RECE IVABLES AS INTERNATIONAL TRANSACTION RELIED UPON EXPLANATION ( I), (A) & (C) OF SECTION 92B WHICH IS REPRODUCED AS UNDER FOR READY REFERENCE :- ITA NO.1104/DEL/2015 ITA NO.1115/DEL/2017 12 EXPLANATION (I), (A) AND (C) OF SECTION 92B RECOGN IZES SALES AND RECEIVABLES ARISING DURING THE COURSE OF BUSINESS AS SEPARATE TRANSACTION. THE EXPLANATIONS READ AS UNDER :- (I) THE EXPRESSION INTERNATIONAL TRANSACTION SHAL L INCLUDE (A) THE PURCHASE, SALE, TRANSFER, LEASE OR USE OF TANGIBLE PROPERTY INCLUDING BUILDING, TRANSPORTATION VEHICLE, MACHINERY, EQUIPMENT, TOOLS, PLANT, FURNITURE, COMMODITY OR ANY OTHER ARTICLE, PRODUCT OR THING; (B) .. (C) CAPITAL FINANCING, INCLUDING ANY TYPE OF LONG-T ERM 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 14. PROVISIONS CONTAINED UNDER EXPLANATION (I), (A) & (C) OF SECTION 92B HAVE BEEN ANALYZED BY HONBLE DELHI HIG H COURT IN CASE CITED AS PR. CIT-V VS. KUSUM HEALTH CARE PVT. LTD. IN ITA 765/2016 ORDER DATED 25.04.2017 , WHEREIN IT IS HELD THAT THE EXPRESSION ADDED IN EXPLANATION TO SECTION 92B DOES NOT MEAN THAT DE HORS THE CONTEXT, EVERY ITEM OF RECEIVABLES APPE ARING IN THE ACCOUNTS OF AN ENTITY, WHICH MAY HAVE DEALING WITH FOREIGN AE, WOULD AUTOMATICALLY BE CHARACTERIZED AS AN INTERNAT IONAL TRANSACTION AND DECIDED THE ISSUE IN FAVOUR OF THE TAXPAYER BY RETURNING FOLLOWING FINDINGS :- ITA NO.1104/DEL/2015 ITA NO.1115/DEL/2017 13 10. THE COURT IS UNABLE TO AGREE WITH THE ABOVE SUBMISSIONS. THE INCLUSION IN THE EXPLANATION TO SECTION 92B OF THE ACT OF THE EXPRESSION RECEIVABL ES DOES NOT MEAN THAT DE HORS THE CONTEXT EVERY ITEM O F RECEIVABLES APPEARING IN THE ACCOUNTS OF AN ENTIT Y, WHICH MAY HAVE DEALINGS WITH FOREIGN AES WOULD AUTOMATICALLY BE CHARACTERISED AS AN INTERNATIONAL TRANSACTION. THERE MAY BE A DELAY IN COLLECTION OF MONIES FOR SUPPLIES MADE, EVEN BEYOND THE AGREED LI MIT, DUE TO A VARIETY OF FACTORS WHICH WILL HAVE TO BE INVESTIGATED ON A CASE TO CASE BASIS. IMPORTANTLY, THE IMPACT THIS WOULD HAVE ON THE WORKING CAPITAL OF TH E ASSESSEE WILL HAVE TO BE STUDIED. IN OTHER WORDS, T HERE HAS TO BE A PROPER INQUIRY BY THE TPO BY ANALYSING THE STATISTICS OVER A PERIOD OF TIME TO DISCERN A PATTE RN WHICH WOULD INDICATE THAT VIS--VIS THE RECEIVABLES FOR THE SUPPLIES MADE TO AN AE, THE ARRANGEMENT REFLECT S AN INTERNATIONAL TRANSACTION INTENDED TO BENEFIT TH E AE IN SOME WAY. 11. THE COURT FINDS THAT THE ENTIRE FOCUS OF THE A O WAS ON JUST ONE AY AND THE FIGURE OF RECEIVABLES IN RELATION TO THAT AY CAN HARDLY REFLECT A PATTERN TH AT WOULD JUSTIFY A TPO CONCLUDING THAT THE FIGURE OF RECEIVABLES BEYOND 180 DAYS CONSTITUTES AN INTERNATIONAL TRANSACTION BY ITSELF. WITH THE ASSES SEE HAVING ALREADY FACTORED IN THE IMPACT OF THE RECEIV ABLES ON THE WORKING CAPITAL AND THEREBY ON ITS PRICING/PROFITABILITY VIS--VIS THAT OF ITS COMPARA BLES, ANY FURTHER ADJUSTMENT ONLY ON THE BASIS OF THE OUTSTANDING RECEIVABLES WOULD HAVE DISTORTED THE PI CTURE AND RE-CHARACTERISED THE TRANSACTION. THIS WAS CLEA RLY IMPERMISSIBLE IN LAW AS EXPLAINED BY THIS COURT IN CIT V. EKL APPLIANCES LTD. (2012) 345 ITR 241 (DELHI). 12. CONSEQUENTLY, THE COURT IS UNABLE TO FIND ANY ERROR IN THE IMPUGNED ORDER OF THE ITAT GIVING RISE TO ANY SUBSTANTIAL QUESTION OF LAW FOR DETERMINATION. THE APPEAL IS, ACCORDINGLY, DISMISSED. 15. SO, IN VIEW OF THE LAW LAID DOWN BY HONBLE HIG H COURT IN PR. CIT-V VS. KUSUM HEALTH CARE PVT. LTD. (SUPRA), WE ARE OF THE ITA NO.1104/DEL/2015 ITA NO.1115/DEL/2017 14 CONSIDERED VIEW THAT NO ADJUSTMENT CAN BE MADE ON A CCOUNT OF NOTIONAL INTEREST ON RECEIVABLES BY RELYING UPON EX PLANATION (I), (A) & (C) OF SECTION 92B BY TREATING THE CONTINUED DEBT BALANCE AS AN INTERNATIONAL TRANSACTION. MOREOVER WHEN THE TAXPA YER IS DEBT FREE COMPANY, THERE IS NO QUESTION OF CHARGING ANY INTER EST OR RECEIVABLES. THIS ISSUE HAS ALSO BEEN DECIDED BY H ONBLE DELHI HIGH COURT IN CASE OF PR. CIT-1 VS. M/S. BECHTEL INDIA PVT. LTD. IN ITA 379/2016 ORDER DATED 21.07.2016 . 16. FURTHERMORE WHEN WE EXAMINE THE ENTITY LEVEL MA RGIN OF THE TAXPAYER VIS--VIS COMPARABLE COMPANIES, THE TAXPAY ER HAS EARNED HIGHER MARGIN I.E. TAXPAYER EARNED 38.39% OP/OC MAR GIN VIS--VIS MARGIN OF COMPARABLE COMPANIES AT 11.43%. IN SUCH CIRCUMSTANCES, NO SEPARATE ADJUSTMENT ON ACCOUNT OF INTEREST CAN BE MADE. BECAUSE THE CREDIT PERIOD EXTENDED TO AE CAN NOT BE CONSIDERED AS A STANDALONE TRANSACTION WITHOUT CONS IDERING THE MAIN TRANSACTION OF THE SALE. 17. FURTHERMORE WHEN THE TAXPAYER IS UNDISPUTEDLY A DEBT FREE COMPANY, AS IT IS NOT THE CASE OF THE LD. TPO THAT BORROWED FUNDS HAVE BEEN APPROPRIATED ENABLING THE AE TO MAKE THE DELAYED PAYMENT ON RECEIVABLES. SO WHEN OUTSTANDING RECEIV ABLES IS NOT A SEPARATE INTERNATIONAL TRANSACTION, THE DELAY IN RE ALIZATION OF THE SALE PROCEEDS IS INCIDENTAL TO THE TRANSACTION OF SALE AND AS SUCH NO ITA NO.1104/DEL/2015 ITA NO.1115/DEL/2017 15 NOTIONAL INTEREST CAN BE LEVIED BY TREATING THE SAM E AS UNSECURED LOAN. 18. FURTHERMORE IT IS THE CASE OF THE TAXPAYER THAT WHEN THE TAXPAYER IS NOT CHARGING INTEREST FROM UNRELATED TH IRD PARTY / NON- AE, IN CASE OF SUCH DELAY, NO ADJUSTMENT ON INTERES T IN CASE OF AE CAN BE MADE AND DREW OUR ATTENTION TOWARDS THE DETA ILS OF INVOICES RAISED QUA UNRELATED PARTIES AVAILABLE AT PAGE 183A OF THE PAPER BOOK WHEREIN DELAY IN REALIZATION OF THE RECEIVABLE S IS ALSO UP TO 218 DAYS FOR AY 2010-11 AND UP TO 417 DAYS QUA AY 2 012-13 AS PER DETAIL OF INVOICES RAISED ON UNRELATED PARTIES QUA AY 2012-13, AVAILABLE AT PAGE 236 OF THE PAPER BOOK. 19. THIS ISSUE HAS BEEN DEALT WITH BY HONBLE BOMBA Y HIGH COURT IN CASE CITED AS CIT-9 VS. M/S. INDO AMERICAN JEWELLERY LTD. IN ITA (L) NO.1053 OF 2012 ORDER DATED 08.01.2 013 WHEREIN FOLLOWING QUESTION WAS FRAMED :- B. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW THE ITAT WAS JUSTIFIED IN DELET ING THE ADDITION OF RS.87,66,641/- BEING INTERNET RECEI VABLE ON OUTSTANDING AMOUNT DUE TO THE ASSESSEE COMPANY FROM THE ASSOCIATED ENTERPRISES? 20. AFORESAID QUESTION WAS DECIDED IN FAVOUR OF THE TAXPAYER BY UPHOLDING THE ORDER RENDERED BY THE TRIBUNAL BY MAK ING FOLLOWING OBSERVATIONS :- ITA NO.1104/DEL/2015 ITA NO.1115/DEL/2017 16 5. ON APPEAL FILED BY THE REVENUE, THE ITAT UPHELD THE ORDER OF CIT (A). WHILE, UPHOLDING THE ORDER O F CIT (A), THE ITAT HELD THAT INTEREST INCOME IS ASSOCIATED ONLY WITH THE LENDING OR BORROWING OF MO NEY AND NOT IN CASE OF SALE. WE EXPRESS NO OPINION ON T HE ABOVE REASONING OF THE ITAT AND KEEP THAT REASONING OPEN FOR DEBATE IN AN APPROPRIATE CASE. HOWEVER, I N THE FACTS OF THE PRESENT CASE, THE SPECIFIC FINDING OF THE ITAT IS THAT THERE IS COMPLETE UNIFORMITY IN THE AC T OF THE ASSESSEE IN NOT CHARGING INTEREST FROM BOTH THE ASSOCIATED ENTERPRISES AND NON ASSOCIATED ENTERPRIS ES- DEBTORS AND THE DELAY IN REALIZATION OF THE EXPORT PROCEEDS IN BOTH THE CASES IS SAME. IN THESE CIRCUMSTANCES, THE DECISION OF THE TRIBUNAL IN DELE TING THE NOTIONAL INTEREST ON OUTSTANDING AMOUNT OF EXPO RT PROCEEDS REALIZED BELATEDLY CANNOT BE FAULTED. 21. SO, WHEN THE TAXPAYER HAS NOT BEEN MAKING ANY D ISTINCTION BETWEEN AE AND NON-AE IN CHARGING ANY INTEREST ON O UTSTANDING RECEIVABLES, THE ADJUSTMENT MADE BY THE TPO/DRP/AO ON ACCOUNT OF ARMS LENGTH INTEREST IS NOT SUSTAINABLE. MOREO VER THE INTEREST CAN BE CHARGED ONLY ON LOANING OR BORROWING OF MONE Y AND NOT IN CASE OF SALE. PARTICULARLY WHEN THERE IS NO PENAL CLAUSE IN THE AGREEMENT ENTERED INTO BETWEEN THE TAXPAYER AND ITS AE/NON-AE TO CHARGE THE INTEREST ON DELAYED RECEIVABLES. EVEN O THERWISE, A TRANSACTION CANNOT BE RECHARACTERIZED MERELY ON GRO UND OF DELAY IN PAYMENT OF RECEIVABLES. 22. IDENTICAL ISSUE HAS ALSO BEEN EXAMINED BY COORD INATE BENCH OF THE TRIBUNAL IN KADIMI TOOL MANUFACTURING CO. PVT. LTD. VS. DCIT IN ITA NO.7068/DEL/2014 ORDER DATED 25.09.2017 AND HAS ITA NO.1104/DEL/2015 ITA NO.1115/DEL/2017 17 BEEN DECIDED IN FAVOUR OF THE TAXPAYER BY RELYING U PON KUSUM HEALTHCARE PVT. LTD. VS. ACIT 170 TTJ 411 AND BECHTEL INDIA PVT. LTD. (SUPRA) WHEREIN SLP FILED IN THE HONBLE SUPREME C OURT HAS BEEN DISMISSED. 23. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, TPO/D RP/AO HAVE ERRED IN MAKING ADJUSTMENT ON ACCOUNT OF ARMS LENGTH INTEREST WHICH IS NOT SUSTAINABLE IN THE EYES OF LA W, HENCE NO ADJUSTMENT ON ACCOUNT OF INTEREST ON RECEIVABLES CA N BE MADE. SO, GROUNDS NO.2 TO 2.9 ARE DETERMINED IN FAVOUR OF THE TAXPAYER. GROUNDS NO.4 & 5 ITA NO.1104/DEL/2015 (AY 2010-11) AND GROUNDS NO.3, 4 & 5 ITA NO.1115/DEL/2017 (AY 2012-13) 24. AO HAS NOT ALLOWED CREDIT OF ADVANCE TAX, TDS, FOREIGN TAX AND TAX PAID UNDER MAT PROVISION WHILE COMPUTING TH E TAX LIABILITY ON ASSESSED INCOME. 25. WE ARE OF THE CONSIDERED VIEW THAT WHILE CALCUL ATING THE TAX PAID UNDER MAT PROVISION, IT IS REQUIRED TO BE DEDU CTED FROM GROSS TAX PAYABLE. SIMILARLY, WHILE CALCULATING THE TAX CREDIT OF ADVANCE TAX, TDS AND FOREIGN TAX IS ALSO REQUIRED TO BE SET OFF FIRST IN COMPUTING THE OVERALL TAX LIABILITY BY THE TAXPAYER . PARTICULARLY WHEN TAX LIABILITY OF THE TAXPAYER IS HIGHER AS PER PEAK PROFIT ITA NO.1104/DEL/2015 ITA NO.1115/DEL/2017 18 COMPUTED UNDER MAT PROVISION OF THE ACT, SO AO IS D IRECTED TO RECOMPTUE THE TAX LIABILITY BY CONSIDERING THE CRED IT OF ADVANCE TAX, THE TDS, THE FOREIGN TAX AND TAX PAID ON MAT PROVIS ION IN THE LIGHT OF THE DECISION RENDERED BY HONBLE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. VACMENT INDIA - 369 ITR 304 (ALL.). SO, GROUNDS NO.4 & 5 IN ITA NO.1104/DEL/2015 (AY 2010-1 1) AND GROUNDS NO.3, 4 & 5 IN ITA NO.1115/DEL/2017 (AY 201 2-13) ARE DETERMINED IN FAVOUR OF THE TAXPAYER. GROUND NO.6 IN ITA NO.1104/DEL/2015 (AY 2010-11) AND GROUNDS NO.6 & 7 ITA NO.1115/DEL/2017 (AY 2012-13 ) 26. THE AFORESAID GROUNDS QUA LEVY OF INTEREST U/S 234B AND 234C NEEDS NO SPECIFIC FINDING BEING CONSEQUENTIAL IN NATURE. ORDER PRONOUNCED IN OPEN COURT ON THIS 12 TH DAY OF DECEMBER, 2017. SD/- SD/- (B.P. JAIN) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 12 TH DAY OF DECEMBER, 2017 TS ITA NO.1104/DEL/2015 ITA NO.1115/DEL/2017 19 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.