Ivy Comptech Private Limited, Hyderabad, Hyderabad V. DCIT, Circle-2(1), Hyderabad, Hyderabad

ITA 1403/HYD/2016

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 6679 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 3 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-01-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB-B
• Assessment Year: 2012-2013
• Appeal Filed On: 18-10-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: Y V S T SAI
• Keywords: Transfer pricing; International transaction; Retrospective amendment; Working capital adjustments; Notional interest
• Section: 143(3); 92B; 115JB

Judgement Text

ITA NO 1403 OF 2016 IV Y COMPTECH P LTD HYDERABAD. PAGE 1 OF 8 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S.RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO.1403/HYD/2016 (ASSESSMENT YEAR: 2012-13) IVY COMPTECH PRIVATE LTD HYDERABAD PAN: AAACI8884K VS DY. COMMISSIONER OF INCOME TAX, CIRCLE 2 (1) HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI RAVI BHARADWAJ FOR REVENUE : SHRI YVST SAI, DR O R D E R PER SMT. P. MADHAVI DEVI, J.M. THIS IS ASSESSEES APPEAL FOR THE A.Y 2012-13 AGAIN ST THE ASSESSMENT ORDER PASSED U/S 143(3) R.W.S. 92CA( 4) R.W.S. 144C(13)OF THE ACT, DATED 23/08/2016. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE APPELLANT CRAVES LEAVE TO PREFER AN APP EAL BASED ON THE FOLLOWING GROUNDS OF APPEAL AGAINST TH E ASSESSMENT ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 2(1), HYDERABAD (LD. ASSESSIN G OFFICER) ULS 143(3) LW.S 92CA(4) R.W.S 144C OF THE ACT. THE ASSESSEE RESPECTFULLY SUBMITS IN THIS REGARD TH AT, THE LEARNED ASSESSING OFFICER (' AO') I LEARNED TRANSFE R PRICING OFFICER ('TPO') AND THE HON'BLE DISPUTE RES OLUTION PANEL ('DRP') ERRED IN: TRANSFER PRICING MATTERS DATE OF HEARING : 24.10.2018 DATE OF PRONOUNCEMENT : 21.01.2019 ITA NO 1403 OF 2016 IV Y COMPTECH P LTD HYDERABAD. PAGE 2 OF 8 1. MAKING TP ADJUSTMENT AMOUNTING TO RS.97,25,011/- BY IMPUTING INTEREST AT 5% ON OUTSTANDING RECEIVABL ES AS ON MARCH 31ST 2012 RELATING TO SALES OF SERVICES TO ASSOCIATED ENTERPRISE'S (AE' S). A) NOT APPRECIATING THE FACT THAT THE RECEIVABLES A RE CONSEQUENTIAL/CLOSELY LINKED TO THE PRINCIPLE TRANS ACTION OF PROVISION OF IT AND IT ENABLED SERVICES TO ITS A ES AND HENCE HAVE BEEN AGGREGATED FOR DETERMINATION OF ALP UNDER TNMM; B) UNDER TNMM, THE WORKING CAPITAL ADJUSTMENTS UNDERTAKEN TAKE INTO ACCOUNT THE IMPACT OF OUTSTAND ING RECEIVABLES OF THE CONTROLLED TRANSACTIONS VIS-A-VI S THE UNCONTROLLED TRANSACTIONS IN DETERMINING THE ARM'S LENGTH MARGIN; C) NOT APPRECIATING THE FACTS AND CIRCUMSTANCES SURROUNDING THE RECEIVABLES AND RECHARACTERISING TH E OUTSTANDING RECEIVABLES AS UNSECURED LOANS ADVANCED TO AES D) NOT APPRECIATING THAT RETROSPECTIVE AMENDMENT TO THE DEFINITION OF 'INTERNATIONAL TRANSACTION' TO INCLUD E RECEIVABLE DOES NOT APPLY TO THE FACTS AND CIRCUMST ANCES OF THE ASSESSEE. E) WITHOUT PREJUDICE TO THE ABOVE GROUNDS, NOT APPRECIATING THE FACT THAT THE RECEIVABLES ARE DUE FROM AE'S & ARE IN FOREIGN CURRENCY AND HENCE INTEREST, IF ANY, IS TO BE IMPUTED BY BENCHMARKING WITH THE RATES PREVALENT IN THE INTERNATIONAL MARKET FOR FOREIGN C URRENCY LOANS. (I.E. 'LIBOR PLUS'). F) WITHOUT PREJUDICE TO THE ABOVE GROUNDS, NOT REST RICTING THE LEVY OF INTEREST ON OUTSTANDING RECEIVABLE TILL THE END OF THE RELEVANT FINANCIAL YEAR. CORPORATE TAX ISSUES- 2. COMPUTATION OF INTEREST U/S 244A. 3. LEVY OF PENALTY U/S 271AA AND 271BA THE APPELLANT CRAVES, TO CONSIDER EACH OF THE ABOVE GROUNDS OF APPEAL WITHOUT PREJUDICE TO EACH OTHER A ND CRAVES LEAVE TO ADD, ALTER, DELETE OR MODIFY ALL OR ANY OF THE ABOVE GROUNDS OF APPEAL. ITA NO 1403 OF 2016 IV Y COMPTECH P LTD HYDERABAD. PAGE 3 OF 8 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE AND INFORMATION TECHNOLOGY ENABLED SERVICES (ITES), FIL ED ITS RETURN OF INCOME FOR THE A.Y 2012-13 ON 28.11.2013 ADMITTING TOTAL INCOME OF RS.28,81,88,380 UNDER THE NORMAL PROVISIONS AND AN AMOUNT OF RS.31,09,29,586 UNDER THE BOOK PROFITS U/S 115JB OF THE ACT. DURING THE ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTION S WITH ITS AES. THEREFORE, THE DETERMINATION OF THE ALP WAS REFERRE D TO THE TPO. THE TPO FOUND THE INTERNATIONAL TRANSACTIONS FOR SO FTWARE DEVELOPMENT SERVICES AND ALSO IT ENABLED SERVICES T O BE AT ALP. 3. HOWEVER, THE AO OBSERVED THAT THE ASSESSEE HAD OUTSTANDING RECEIVABLES OF RS.60,47,83,210/- AT THE END OF THE YEAR. THE ASSESSEE WAS THEREFORE, ASKED TO SUBMIT T HE DETAILS OF RAISING THE INVOICES AND SUBSEQUENT RECEIPTS. HE OB SERVED THAT THE ASSESSEE HAS RECEIVED RECEIVABLES AFTER A CONSI DERABLE DELAY I.E. AFTER THE GRACE PERIOD OF 30 DAYS. THEREFORE, HE PROPOSED TO CHARGE INTEREST @ 14.75% ON THE OUTSTANDING RECEIVA BLES AFTER ALLOWING ONE-MONTH CREDIT PERIOD. ACCORDINGLY, THE DRAFT ASSESSMENT ORDER WAS PASSED AGAINST WHICH THE ASSES SEE PREFERRED ITS OBJECTIONS BEFORE THE DRP WHICH RESTR ICTED THE INTEREST TO 5% AND IN ACCORDANCE WITH THE SAME, FIN AL ASSESSMENT ORDER WAS PASSED AGAINST WHICH THE ASSESSEE IS IN A PPEAL BEFORE US. 4. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED T HAT THE RELEVANT FINANCIAL YEAR BEFORE US IS 2011-12, W HEN THE ITA NO 1403 OF 2016 IV Y COMPTECH P LTD HYDERABAD. PAGE 4 OF 8 INTEREST ON RECEIVABLES WAS NOT PART OF THE INTE RNATIONAL TRANSACTIONS U/S 92B OF THE ACT. HE SUBMITTED THAT ONLY SUBSEQUENTLY, THE AMENDMENT HAS BEEN BROUGHT IN WIT H RETROSPECTIVE EFFECT, BY WAY OF AN EXPLANATORY NOTE THAT THE INTEREST ON OUTSTANDING RECEIVABLES IS AN INTERNATI ONAL TRANSACTION. HE RELIED UPON VARIOUS CASE LAW IN SUP PORT OF HIS CONTENTIONS THAT INTEREST ON RECEIVABLES CANNOT BE TREATED AS AN INTERNATIONAL TRANSACTION. HE ALSO PLACED RELIANCE UPON THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL I N THE CASE OF HEXAGON CAPABILITY CENTER INDIA P LTD VS. ACIT IN I TA NOS. 251 & 258/HYD/2016 DATED 8.6.2018 WHEREIN THE TRIBUNAL BY FOLLOWING THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNA L AT BANGALORE IN THE CASE OF PEGASYSTEMS WORLDWIDE INDIA (P) LTD FOR THE A.Y 2009-10 IN ITA NOS.1758 & 1936/HYD/2014, HAS HELD T HAT NOTIONAL INTEREST ON OUTSTANDING RECEIVABLES CANN OT BE BROUGHT TO TAX. FURTHER, HE ALSO RELIED UPON THE JUDGMENT OF T HE HON'BLE DELHI HIGH COURT IN THE CASE OF KUSUM HEALTHCARE PV T LTD VS. ACIT, IN ITA NO.6814/DEL/2014 WHEREIN THE HON'BLE D ELHI HIGH COURT HAS HELD THAT THE INTEREST ON RECEIVABLES IS SUBSUMED IN THE WORKING CAPITAL ADJUSTMENT. THEREFORE, ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, THE INTEREST ON OUTSTAND ING RECEIVABLES CANNOT BE BROUGHT TO TAX AND THEREFORE, PRAYED FOR DELETION OF THE ADJUSTMENT. 5. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE EXPLANATORY NOTE IS EFFECTIVE RETROSPECTIVE W.E.F 1 .4.2002 AND THEREFORE, THE AO/TPO HAVE RIGHTLY TREATED THE INT EREST ON OUTSTANDING RECEIVABLES AS AN INTERNATIONAL TRANSA CTION AND MADE ITA NO 1403 OF 2016 IV Y COMPTECH P LTD HYDERABAD. PAGE 5 OF 8 THE ADJUSTMENT TO TAX. IN SUPPORT OF HIS CONTENTION , HE PLACED RELIANCE UPON THE FOLLOWING CASELAW: A) LOGIX MICRO SYSTEMS LTD VS. ACIT REPORTED IN (20 10) 42 SOT 525 (BANGALORE). B) BECHTEL INDIA PVT LTD VS. ACIT IN ITA NO.6530/DE L/2016 DATED 16.05.2017 C) TECHBOOKS INTERNATIONAL P LTD VS. DCIT, IN ITA NO.240/DEL/2015, DATED 6.7.2015. 6. THE LEARNED DR SUBMITTED THAT IN THE ABOVE DECIS IONS, INTEREST ON RECEIVABLES HAS BEEN TREATED AS INTERNA TIONAL TRANSACTIONS AND IT HAS BEEN HELD THAT THE INTEREST IS TO BE LEVIED ON OUTSTANDING RECEIVABLES. 7. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTH ER HAND, REBUTTED THE ARGUMENT OF THE LEARNED DR STATI NG THAT THE AMENDMENT ITSELF HAS BEEN BROUGHT INTO THE STATUTE BOOK IN THE FINANCIAL YEAR 2012-13 AND THE ASSESSEE CANNOT BE E XPECTED TO TREAT THE TRANSACTIONS AS INTERNATIONAL TRANSACTION S WITHOUT IT BEING ON THE STATUTE BOOK. HE FURTHER SUBMITTED THA T THE AO HAS TREATED 30 DAYS AS REASONABLE CREDIT PERIOD WITHOUT ANY BASIS AND RELIED UPON THE DECISIONS OF THE TRIBUNAL WHEREIN I T WAS HELD THAT EVEN THE RBI ALLOWS ONE YEAR PERIOD TO BRING THE FO REIGN EXCHANGE INTO INDIA AND THEREFORE, ONE YEAR PERIOD IS REASON ABLE PERIOD. 8. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL ON RECORD, WE FIND THAT BY THE FINANCE ACT OF 2012 AN EXPLANATORY NOTE HAS BEEN BROUGHT TO BOOK INTO THE STATUTE BOOK W.E.F. 1.4.2002. THE RELEVANT TRANSACTIONS BEFORE US RELAT E TO THE FINANCIAL YEAR 2011-12. THEREFORE, THE ASSESSEE CAN NOT BE ITA NO 1403 OF 2016 IV Y COMPTECH P LTD HYDERABAD. PAGE 6 OF 8 EXPECTED TO CONSIDER SUCH A TRANSACTION AS AN INTER NATIONAL TRANSACTION DURING THE RELEVANT PREVIOUS YEAR. THIS TRIBUNAL, IN A NUMBER OF CASES HAS HELD THAT SUCH INTEREST ON RECE IVABLES IS NOT AN INTERNATIONAL TRANSACTION PRIOR TO THE AMENDMENT AND FOR THE SAKE OF READY REFERENCE, RELEVANT PARAGRAPH IS REPR ODUCED HEREUNDER: PARA38. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE A.Y BEFORE US IS A.Y 2011-12, WHILE THE CORPORATE GUARANTEE HAS BEEN SPECIFICALLY BROUGHT UNDER THE AMBIT OF INTERNATION AL TRANSACTION BY VIRTUE OF THE AMENDMENT TO SECTION 92B BY THE FINANCE ACT OF 2012 WITH RETROSPECTIVE EFFECT FROM 1.4.2002. THE ISSUE AS TO WHETHER THE AMENDMENT IS CLARIFICATORY AND EFFECTIVE RETROSPECTIVELY OR IS I T EFFECTIVE PROSPECTIVELY HAS BEEN CONSIDERED EXTENSIVELY BY TH E COORDINATE BENCH OF THIS TRIBUNAL AT MUMBAI IN THE CASE OF SIRO CLINPHARM PRIVATE LTD IN ITA NO.2618/MUM/2014 AND ITA NO.2876/MUM/2014 DATED 31.3.2016. IN THIS DECIS ION, THE DECISION OF THE TRIBUNAL AT ITA NOS 222 309 OF 2014 RAIN GROUP CASES HYDERABAD IN THE CASE OF FOURSOFT AND OTHER RELATED DECISIONS WERE CONSIDERED AND IT WAS HELD THAT THIS PROVISION BEING IN RESPECT OF TRANSFER PR ICING LEGISLATION, WHICH IS ANTI-ABUSE LEGISLATION AND NO T PRIMARILY A SOURCE OF REVENUE, IS APPLICABLE PROSPECTIVELY I. E. FROM THE A.Y 2013-14 ONWARDS. FOR THE SAKE OF CLARITY AN D READY REFERENCE, THE RELEVANT PARAS ARE REPRODUCED HEREUN DER: 6. WHILE WE WILL, IN A SHORTWHILE DEAL WITH. . . DECISION OF A COORDINATE BENCH IN THE CASE OF MICRO INK VS ACIT (2016) 176 TTJ 8 (AHD) WHEREIN. 7. WE ARE IN CONSIDERED AGREEMENT WITH THE VIEWS S O EXPRESSED 8. LEARNED DR IN HIS WRITTEN NOTE.. 9. IN THE MICRO INK DECISION (SUPRA).. 10. NULLIFYING A JUDICIAL INTERPRETATION. 11. WHAT HAS, HOWEVER, BEEN DONE IN THE CASE. 12. DEALING WITH SUCH A SITUATION HON'BLE DELHI HI GH COURT 13. QUITE CLEARLY, IN VIEW OF THE LAW SO LAID DOWN ITA NO 1403 OF 2016 IV Y COMPTECH P LTD HYDERABAD. PAGE 7 OF 8 14. LEGISLATURE MAY DESCRIBE. 15. IT IS VERY IMPORTANT TO BEAR IN MIND. 16. WHEN THIS IS PUT TO THE LEARNED DR.. 17. WELL, IF THE 2012 AMENDMENT DOES NOT ADD. 18. IT IS FOR THIS REASON THAT THE EXPLANATION TO S ECTION 92B 19. AS WE DEAL WITH THIS QUESTION.. 20. THERE ARE A NUMBER OF DECISIONS.. 21. WHILE APPROVING THIS APPROACH 22. WHEN SUCH ARE THE VIEW OF THE HON'BLE HIGH COUR T.. 23. FOR THIS REASON ALSO, THE IMPUGNED ALP 24. IN ALL FAIRNESS TO THE LEARNED DR, .. 25. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. 26. AS REGARDS THE GRIEVANCES RAISED BY THE AO.. 27. IN VIEW OF THE ABOVE DECISIONS. 28. IN THE RESULT, APPEAL BY THE AO IS DISMISSED.. 39. RESPECTFULLY FOLLOWING THE SAME, ASSESSEES GRO UND OF APPEAL NO.3 IS ALLOWED AND GROUNDS 1,2 AND 4 TO 6 NEED NO ADJUDICATION. 8. RESPECTFULLY FOLLOWING THE ABOVE DECISION, WE HO LD THAT THE INTEREST ON RECEIVABLES IS NOT AN INTERNATIONAL TRANSACTION FOR THE RELEVANT A.Y. IN VIEW OF THE SAME, GROUNDS OF A PPEAL NO.1(D) IS ALLOWED AND OTHER GROUNDS ARE NOT ADJUDICATED AT TH IS STAGE. THEREFORE, ASSESSEES APPEAL IS TREATED AS PARTLY A LLOWED. 9. IN THE RESULT, ASSESSEES APPEAL IS TREATED AS P ARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST JANUARY, 2019. SD/- SD/- (S.RIFAUR RAHMAN) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD, DATED 21 ST JANUARY, 2019. VINODAN/SPS ITA NO 1403 OF 2016 IV Y COMPTECH P LTD HYDERABAD. PAGE 8 OF 8 COPY TO: 1 IVY COMPTECH P LTD, 5 TH FLOOR, DIVYASREE OMEGA, BLOCK-B, PLOT NO.13/E, SURVEY NO.13 (PART) KONDAPUR, HYDERABAD 50 0081 2 DY. CIT, CIRCLE 2(1) ROOM NO.514, 5 TH FLOOR, SIGNATURE TOWERS, SURVEY NO.32/A 32/P, KONDAPUR, SHERLINGAMPALLY MAND AL, HYDERABAD 500084 3 DRP-1, %-16 GROUND FLOOR, CENTRAL REVENUE BUILDIN GS, QUEENS ROAD, BENGALURU 560001 4 PR. CIT - HYDERABAD 5 THE DR, ITAT HYDERABAD 6 GUARD FILE BY ORDER