Netenrich Technologies Private Limited, Hyderabad V. Asst. Commissioner of Income Tax, Central Circle-16(1), Hyderabad

ITA 2205/Hyd/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 6446 (ITAT-HYDERABAD)
• Duration Of Justice: 7 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-07-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 26-06-2018
• Assessment Year: 2013-2014
• Appeal Filed On: 22-12-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: J SIRI KUMAR
• Assessee Lawyers: SAMPATH RAGHUNATHAN
• Keywords: Transfer pricing; International transaction; Notional interest
• Section: 143(3); 234B; 11

Judgement Text

ITA NO 2205 OF 2017. PAGE 1 OF 6 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S.RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO.2205/HYD/2017 (ASSESSMENT YEAR: 2013-14) M/S. NETENRICH TECHNOLOGIES PRIVATE LTD HYDERABAD PAN: AABCN8899A VS ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 16(1) HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI SAMPATH RAGHUNATHAN FOR REVENUE : SHRI J. SIRI KUMAR, DR O R D E R PER SMT. P. MADHAVI DEVI, J.M. THIS IS ASSESSEES APPEAL FOR THE A.Y 2013-14 AGAIN ST THE ASSESSMENT ORDER PASSED BY ACIT, CIRCLE 16(1), HYDERABAD, DATED 25.10.2017, U/S 143(3) R.W.S.92CA(3) AND 144C (13) OF THE I.T. ACT. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY, ENGAGED IN THE BUSINESS OF PROVIDING I.T. ENABLED S UPPORT SERVICES TO ITS PARENT COMPANY AND ITS CUSTOMERS IN INDIA. I T FILED ITS RETURN OF INCOME FOR THE A.Y 2013-14 ON 25.11.2014 ADMITTING INCOME OF RS.3,19,81,160 AND THE BOOK PROFIT U/S 11 5JB OF THE ACT AT RS.2,97,01,603/-. DURING THE ASSESSMENT PROC EEDINGS U/S 143(3), THE AO NOTICED THAT DURING THE RELEVANT A.Y , THE ASSESSEE DATE OF HEARING: 02.07 . 201 8 DATE OF PRONOUNCEMENT: 27.07.2018 ITA NO 2205 OF 2017. PAGE 2 OF 6 HAS ENTERED INTO AN INTERNATIONAL TRANSACTION WITH ITS AE AND HAS REPORTED SAME IN ITS ANNUAL REPORT. THE AO THEREFOR E, REFERRED THE DETERMINATION OF THE ALP TO THE TPO. THE ASSESSEE H AD REPORTED THAT ITS MARGIN OF THE TRANSACTION WAS 20.12% AS AG AINST THE MARGIN OF THE COMPARABLES AT 10.71% AND THEREFORE, THE ASSESSEE CLAIMED ITS TRANSACTION TO BE AT ARMS LENGTH. 3. THE TPO, VERIFIED THE TP DOCUMENTATION OF THE ASSESSEE AND OBSERVED THAT THE METHOD OF SEARCH PRO CESS ADOPTED BY THE ASSESSEE SUFFERED FROM DEFECTS WHICH RESULTE D IN SELECTION OF INAPPROPRIATE COMPARABLES. THEREFORE, HE REJECTE D THE ASSESSEES TP STUDY AND CONDUCTED FRESH ANALYSIS AF TER AGGREGATING ALL THE TRANSACTIONS UNDER TNMM AND ARR IVED AT THE AVERAGE MEAN OF THE COMPARABLES MARGIN AT 28.45% AF TER ALLOWING THE WORKING CAPITAL ADJUSTMENT AND PROPOSED THE SHO RTFALL OF RS.1,26,41,140 AS AN ADJUSTMENT U/S 92CA OF THE ACT TOWARDS THE TRANSACTION OF ITES. THEREAFTER, THE TPO NOTICED TH AT THE RECEIVABLES WERE OUTSTANDING AT THE END OF THE FINA NCIAL YEAR AND OBSERVED THAT THIS ALSO FORMS PART OF INTERNATIONAL TRANSACTION FOR WHICH ALP IS REQUIRED TO BE DETERMINED. HE ACCORDIN GLY CHARGED INTEREST ON THE DELAY IN RECOVERY OF EXPORT RECEIVA BLES, RECEIVED BEYOND DUE DATE AND ON THE OPENING BALANCES AFTER G IVING CREDIT PERIOD OF 90 DAYS. HE ADOPTED THE INTEREST @14.45% FOR PROPOSING THE ADJUSTMENT OF RS.1,84,84,910. 4. CONSEQUENTLY, THE AO PROPOSED THE DRAFT ASSESSME NT ORDER, AGGRIEVED BY WHICH, THE ASSESSEE PREFERRED I TS OBJECTIONS BEFORE THE DRP WHICH REJECTED THE ASSESSEES CONTEN TIONS AND ACCORDINGLY, THE FINAL ASSESSMENT ORDER WAS PASSED. AGAINST THE ITA NO 2205 OF 2017. PAGE 3 OF 6 FINAL ASSESSMENT ORDER, THE ASSESSEE IS IN APPEAL B EFORE US BY RAISING THE FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN CONTRARY TO LAW, THE FINAL ASSESSMENT ORDER ('FINAL ORDER') ISSUED UNDER SECTION 143(3) READ WITH SECTION ('LW. S.') 92CA(3) LW.S 144C(13) OF THE INCOME-TAX ACT, 1961 ( ' ACT') PASSED BY THE LEARNED ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 16(1), HYDERABAD ('LD. AO') DATED 25 OCTOBER 2017 IN PURSUANCE OF THE DIRECTIONS OF THE HON'BLE DISPUTE RESOLUTION PANEL ('DRP'), HYDERABAD DATED 04 SEPTEMBER 2017 UNDER SECTION 144C (5) OF T HE ACT IS BAD IN LAW. TRANSFER PRICING ADJUSTMENT ON THE OUTSTANDING RECEIVABLES IS BAD IN LAW AND THE APPELLANT RAISES THE FOLLOWING GROUNDS: 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE IN CONSIDERING OUTSTANDING RECEIVABLE, WHI CH IS AN OUTCOME OF THE PRINCIPAL INTERNATIONAL TRANSACTI ON, AS A SEPARATE AND DISTINCT INTERNATIONAL TRANSACTION A ND FURTHER ERRED IN CONFIRMING A TRANSFER PRICING ADJU STMENT IN THE NATURE OF INTEREST ON RECEIVABLES AMOUNTING TO RS.90,46,074/-. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO ERRED IN NOT CONSIDERING THE FAC T THAT THE WORKING CAPITAL ADJUSTMENT EVALUATES THE OUTSTANDING RECEIVABLE IN A CONTROLLED SCENARIO VIS -A-VIS UNCONTROLLED SCENARIO AND THAT DIFFERENTIAL IMPACT OF WORKING CAPITAL OF THE APPELLANT VIS-A-VIS ITS COMP ARABLES HAS ALREADY BEEN FACTO RED IN THE PRICING/PROFITABI LITY OF THE APPELLANT. AND HENCE, LEVYING INTEREST ON RECEI VABLES AMOUNTS TO DOUBLE ADJUSTMENT. WITHOUT PREJUDICE TO THE FACT THAT NO ARM'S LENGTH DETERMINATION AND CONSEQUENTIAL TRANSFER PRICING ADJUSTMENT IS WARRANTED ON OUTSTANDING RECEIVABLES, THE APPELLANT WOULD LIKE TO RAISE THE FOLLOWING GROUNDS AGAINST THE COMPUTATION METHODOLOGY OF THE LD. AD: 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO ERRED IN APPLYING THE CREDIT PER IOD AVAILABLE TO THE APPELLANT, AS PER THE INTERCOMPANY AGREEMENT, AS BENCHMARK FOR COMPUTING THE TRANSFER PRICING ADJUSTMENT SINCE CREDIT PERIOD BASED ON INTERCOMPANY AGREEMENT DEFIES TRANSFER PRICING PROVISIONS. ITA NO 2205 OF 2017. PAGE 4 OF 6 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO ERRED IN BRINGING NOTIONAL INTER EST TO TAX WITHOUT CONSIDERING THE FACT THAT NEITHER THE A E NOR THE APPELLANT CHARGES ANY INTEREST IN CASE OF DELAY IN PAYMENT. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO ERRED IN INCORRECTLY CALCULATING THE INTEREST ON THE OPENING BALANCE OF RECEIVABLES CONSIDERING THE SAME AS DUE FOR MORE THAN 365 DAYS EVEN THOUGH THE SAME IS REALIZED DURING THE YEAR IN DIFFERENT TRANCHES. COMPUTATION OF INTEREST LIABILITY UNDER SECTION 234 B AND 234C OF THE ACT 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO ERRED IN LEVYING INTEREST LIABIL ITY UNDER SECTION 234B AND 234C OF THE ACT. 5. THE LEARNED COUNSEL FOR THE ASSESSEE WHILE REITE RATING THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW S UBMITTED THAT THE TPO, WHILE COMPUTING THE ALP HAS ALLOWED THE WO RKING CAPITAL ADJUSTMENT AND THE INTEREST ON RECEIVABLES HAS FACT ORED IN SUCH WORKING CAPITAL ADJUSTMENT. IN SUPPORT OF HIS CONTE NTION, HE DREW OUR ATTENTION TO THE WORKING CAPITAL ADJUSTMENT COM PUTED BY THE TPO AT -6.41% AND THE DETAILED WORKING OF THE SAME, WHICH IS PLACED AT PAGES 309 TO 311 OF THE PAPER BOOK. IT IS SEEN THEREFROM THAT THE TPO HAS CONSIDERED THE RECEIVABLES OF THE ASSESSEE AS WELL AS THE RECEIVABLES OF THE COMPARABLE COMPANIES AND HAS ALSO ADOPTED 14.45% AS BENCHMARK INTEREST RATE AND AFTER SUCH CONSIDERATION, HAS ARRIVED AT THE AVERAGE WORKING C APITAL ADJUSTMENT OF -6.41%. WE ALSO FIND, THAT IN SIMILAR CIRCUMSTANCES, IN THE CASE OF OPEN TEXT CORPORATION INDIA PVT. LTD IN ITA NO.232/HYD/2016 DATED 28.03.2018, THE B BENCH OF THE TRIBUNAL (TO WHICH THE J.M. IS A SIGNATORY) HAS CONSIDERED SIMILAR SITUATION AT PARA 9 OF ITS ORDER AND HAS HE LD AS UNDER: ITA NO 2205 OF 2017. PAGE 5 OF 6 9. HAVING REGARD TO THE RIVAL CONTENTIONS AND MATER IAL ON RECORD, WE FIND THAT THE ISSUE WHETHER NOTIONAL INTEREST IS CHARGEA BLE ON RECEIVABLES HAS BEEN CONSIDERED BY THE ITA NO. 232/HYD/2016 OPEN TEXT CO RPORATION INDI PVT LTD., HYDERABAD. COORDINATE BENCH IN THE CASE OF PE GASYSTEMS WORLDWIDE INDIA PVT LTD (CITED SUPRA) AND IT WAS HELD AS UNDE R: '17.3. WE HAVE CONSIDERED THE ISSUE AND EXAMINED TH E RIVAL CONTENTIONS. IN THE CASE OF EVONIK DEGUSSA INDIA P. LTD., IN ITA NO . 7653/MUM/2011, IT WAS ALREADY HELD THE TP ADJUSTMENT CANNOT BE MADE ON HY POTHETICAL AND NOTIONAL BASIS, UNTIL AND UNLESS THERE IS SOME MATERIAL ON R ECORD THAT THERE HAS BEEN UNDER CHARGING OF REAL INCOME. THUS ON THE FACTS AN D CIRCUMSTANCES OF THE CASE, WE ARE OF THE OPINION THAT ADDITION ON ACCOUN T OF NOTIONAL INTEREST RELATING TO ALLEGED DELAYED PAYMENT IN COLLECTION O F RECEIVABLES FROM THE AES IS UNCALLED FOR ON THE FACTS OF THE PRESENT CASE. E VEN THOUGH DRP TRIED TO DISTINGUISH THE ABOVE DECISION ON FACTS, AS SEEN FR OM THE FACTS IN BOTH THE CASES, WE ARE OF THE OPINION THAT THE ABOVE DECISIO N WILL EQUALLY APPLY TO ASSESSEE'S CASE. ASSESSEE HAS OUTSTANDING SERVICE C HARGES RECEIVABLES AND AS SEEN FROM THE ORDER OF TPO, THE OUTSTANDING IS ONLY FROM 31- 07-2009. THERE SEEMS TO BE NO SUCH DELAY IN EARLIER MONTHS. ASSESS EE HAS NO INTEREST LIABILITY AT ALL SO NOTIONAL INTEREST CANNOT BE BROUGHT TO TA X UNDER THE PROVISIONS OF TP. AS RIGHTLY POINTED OUT BY THE LD. COUNSEL, THE OUTS TANDING RECEIVABLES ON ACCOUNT OF SERVICES CANNOT BE EQUATED WITH CAPITAL FINANCING AS PROVIDED FOR IN THE EXPLANATION BY THE AMENDMENT BY FINANCE ACT , 2012 RETROSPECTIVELY. EVEN OTHERWISE, AS RIGHTLY HELD BY THE LOGIX MICRO SYSTEMS LTD V. ACIT [42 SOT 525] (SUPRA), TPO SHOULD HAVE ALLOWED SOME INTE REST FREE PERIOD FOR RECEIVING THE OUTSTANDING SERVICE CHARGES. WHILE AC KNOWLEDGING THE ORDER OF THE ITAT, TPO DID NOT EVEN BOTHER TO EXCLUDE THE RE ASONABLE PERIOD AND LEVIED INTEREST NOT ONLY FROM THE DATE OF INVOICE T O THE DATE OF REALIZATION DURING THE YEAR BUT ALSO FOR THE PERIOD BEYOND 31- 03-2010 IN LATER YEAR. WE WERE INFORMED THAT NO SUCH ADDITION WAS MADE IN THE LATER YEAR ON ASSESSEE'S RECEIVABLES. WE ARE OF THE OPINION THAT BOTH ON THE FACTS OF THE CASE AND PRINCIPLES OF LAW, THERE IS NO NEED FOR BRINGING TO TAX THE NOTIONAL INTEREST ON THE OUTSTANDING RECEIVABLES. ACCORDINGLY, WE ALLOW THE GROUNDS 7 & 8 OF ASSESSEE AND DIRECT AO/ TPO TO DELETE THE SAID ADDI TION MADE.' 6. SINCE IN THE CASE BEFORE US, THE TPO HAS ALREADY CONSIDERED THE INTEREST ON RECEIVABLES AS ONE OF TH E FACTOR FOR COMPUTING THE WORKING CAPITAL ADJUSTMENT, WE ARE OF THE OPINION THAT THE SAME CANNOT BE CONSIDERED AGAIN FOR MAKING THE T.P. ADJUSTMENT. THUS, THE GROUNDS OF APPEAL ON THIS ISS UE ARE ALLOWED. 7. VIDE LETTER DATED 5/6/2018, THE ASSESSEE HAD RAI SED AN ADDITIONAL GROUND OF APPEAL THAT THE LEARNED TPO HAS ERRED IN ITA NO 2205 OF 2017. PAGE 6 OF 6 REJECTING ITS RECTIFICATION APPLICATION TO REDUCE T HE OPENING BALANCE FROM THE OUTSTANDING FOR THE ENTIRE YEAR, B UT, SINCE IT HAS BEEN HELD THAT, NO ADJUSTMENT ON THIS ACCOUNT CAN B E MADE, THIS GROUND BECOMES ACADEMIC AND NEEDS NO ADJUDICATION. THUS, IT IS NOT ADMITTED. 8. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOW ED. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH JULY, 2018. SD/- SD/- (S.RIFAUR RAHMAN) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD, DATED 27 TH JULY 2018. VINODAN/SPS COPY TO: 1 M/S. NETENRICH TECHNOLOGIES PVT LTD, PLOT NO.770F , ANANTHAM TOWER, ROAD NO.44, JUBILEE HILLS, HYDERABAD 500033 2 ASSTT. CIT, CIRCLE 16(1) I.T. TOWERS, MASAB TANK, HYDERABAD 500004 3 DRP-1, KENDRIYA SADAN, 4 TH FLOOR, B&C WING, BENGLURU 560034 4 PR. CIT 4, HYDERABAD 5 THE DR, ITAT HYDERABAD 6 GUARD FILE BY ORDER