Appeal Details
Counselvise Citation
[2018] 126 COUNSELVISE.COM (IT) 2384 (ITAT-HYDERABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
2 year(s) 29 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
28-03-2018
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
B
Assessment Year
2011-2012
Appeal Filed On
29-02-2016
Judgement Text
THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO.232/HYD/2016 ASSESSMENT YEAR: 2011-12 OPEN TEXT CORPORATION INDIA PVT LTD., (CORDYS SOFTWARE INDIA PVT LTD IS NOW MERGED WITH OPEN TEX CORPORATION INDIA PVT LTD.,) HYDERABAD. PAN- AAACB8264E VS. DY. CIT, CIRCLE-1(2), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RAVI BHARADWAJ REVENUE BY : SHRI R. LAXMAN DATE OF HEARING : 07-02-2018 DATE OF PRONOUNCEMENT : 28-03-2018 ORDER PER P. MADHAVI DEVI, J.M.: THIS IS ASSESSEES APPEAL FOR THE A.Y 2011-12. TH E ASSESSEE WAS ORIGINALLY KNOWN AS M/S CORDYS SOFTWAR E INDIA PVT LTD., AND THE ASSESSMENT WAS COMPLETED IN THE SAID NAME. THE APPEAL WAS ALSO DISPOSED OF BY THE CIT(A) IN THE SAME NAME. THEREAFTER, THERE HAS BEEN A MER GER WITH M/S. OPEN TEXT CORPORATION INDIA PVT. LTD., AN D THE REVISED FORM NO. 36 INCORPORATING THE NAME OF ASSES SEE AS M/S OPEN TEXT CORPORATION INDIA PVT. LTD., IS FILED ON 2 ITA NO. 232/HYD/2016 OPEN TEXT CORPORATION INDI PVT LTD., HYDERABAD. 27.10.2017 AND THEREFORE THIS APPEAL IS DISPOSED IN THE NAME OF THE MERGED COMPANY. 2. IN THIS APPEAL, THE ASSESSEE IS AGGRIEVED BY THE TRANSFER PRICING ADJUSTMENT MADE BY THE TPO BY IMPU TING INTEREST ON OUTSTANDING RECEIVABLES RELATING TO PRO VISION OF SOFTWARE SERVICES RENDERED BY THE ASSESSEE TO ITS A ES AS ON 31.03.2011. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1.A) MAKING TP ADJUSTMENT BY IMPUTING INTEREST AT 5% ON OUTSTANDING RECEIVABLES RELATING TO PROVISION OF SO FTWARE SERVICES TO ASSOCIATED ENTERPRISE'S (AE'S) AS ON MA RCH 31 ST 2011: (I) NOT APPRECIATING THAT THE INSTANT TRANSACTION I S NOT COVERED IN THE DEFINITION OF INTERNATIONAL TRANSACT ION AS DEFINED U/S 92B OF THE ACT IN THE FACTS AND CIRCUMS TANCES OF THE CASE. (II) NOT APPRECIATING THE FACT THAT THE RECEIVABLES ARE CONSEQUENTIAL CLOSELY LINKED TO THE PRINCIPLE TRANS ACTION OF PROVISION OF SOFTWARE SERVICES AND HENCE HAVE BEEN AGGREGATED FOR DETERMINATION OF ALP UNDER TNMM. (III) NOT APPRECIATING THE FACTS AND CIRCUMSTANCES SURROUNDING THE RECEIVABLES AND RE-CHARACTERIZING T HE OUTSTANDING RECEIVABLES AS UNSECURED LOANS ADVANCED TO AES. (IV) NOT APPRECIATING THE FACT THAT UNDER TNMM, THE IMPACT OF OUTSTANDING RECEIVABLES ON THE WORKING CAPITAL ADJUSTMENTS HAVE ALREADY BEEN TAKEN INTO ACCOUNT WH ILE DETERMINING THE ARM'S LENGTH MARGIN FOR THE INTERNA TIONAL TRANSACTIONS AND HENCE THERE IS NO NEED OF IMPUTING INTEREST ON OUTSTANDING RECEIVABLES AGAIN. L.B) WITHOUT PREJUDICE TO THE ABOVE, NOT UNDERTAKI NG AN OBJECTIVE ECONOMIC ANALYSIS TO DETERMINE THE ARM'S LENGTH PRICE OF THE OUTSTANDING RECEIVABLES BY (I) NOT APPRECIATING THAT THE RECEIVABLES DUE FROM OVERSEAS AE'S ARE IN FOREIGN CURRENCY AND HENCE INTEREST, IF ANY, IS 3 ITA NO. 232/HYD/2016 OPEN TEXT CORPORATION INDI PVT LTD., HYDERABAD. TO BE BENCHMARKED WITH THE RATES PREVALENT IN THE INTERNATIONAL MARKET FOR FOREIGN CURRENCY LOANS. (I .E. AT USD 'LIBOR PLUS'). CORPORATE TAX ISSUES 2. IMPOSITION INTEREST U/S SECTION 234B AND 234D OF THE ACT ON THE TRANSFER PRICING ADJUSTMENT. 3. IMPOSING PENALTY U/ S 271(1)( C ) OF THE ACT 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY, WHICH IS ENGAGED IN THE BUSINESS OF PROVIDING SOFTW ARE DEVELOPMENT SERVICES, CONSULTANCY AND RESELLING SER VICES, FILED ITS E-RETURN FOR THE A.Y 2011-12 ON 29.09.201 1 ADMITTING A TOTAL INCOME OF RS. 9,90,00,709/- UNDER THE NORMAL PROVISIONS OF THE ACT AND RS. 10,40,34,469/- UNDER THE PROVISIONS OF SEC 115JB OF THE ACT. DURING THE ASSESSMENT PROCEEDINGS U/S 143(3), THE A.O OBSERVED THAT THE ASSESSEE HAS ENTERED INTO AN INTERNATIONAL TRAN SACTION WITH ITS AES AND THEREFORE HE MADE A REFERENCE TO T HE TPO U/S 92CA OF THE ACT FOR DETERMINING THE ARMS LENGT H PRICE. 4. THE TPO DURING THE PROCEEDINGS U/S 92CA OF THE A CT, CALLED FOR VARIOUS DETAILS AND OBSERVED THAT AFTER ALLOWING THE WORKING CAPITAL ADJUSTMENT, THE TRANSACTIONS OF SOFTWARE DEVELOPMENT SERVICES AND ALSO THE DISTRIBU TION ACTIVITY ARE AT ARMS LENGTH. HOWEVER, HE OBSERVED THAT A SUM OF RS. 45,38,74,268/- WAS RECEIVABLE BY THE ASS ESSEE 4 ITA NO. 232/HYD/2016 OPEN TEXT CORPORATION INDI PVT LTD., HYDERABAD. AT THE END OF THE YEAR AND THAT A SUM OF RS. 45.12 CRORES HAS BEEN RECEIVED AFTER CONSIDERABLE DELAY AND THE BALANCE HAS BEEN RECEIVED WITHIN TIME. HE, THEREFORE, ISSU ED A SHOW CAUSE NOTICE PROPOSING TO CHARGE INTEREST @ 12 % ON THE DELAYED RECEIPTS AFTER ALLOWING CREDIT PERIOD O F ONE MONTH. 5. THE ASSESSEE SUBMITTED ITS DETAILED EXPLANATION, BUT THE TPO WAS NOT CONVINCED WITH THE CONTENTIONS OF T HE ASSESSEE. THE TPO OBSERVED THAT ANY INDEPENDENT PA RTY WOULD LIKE TO RECEIVE ITS FUNDS WITHIN THE CREDIT P ERIOD ALLOWED AND IF NOT, WOULD NORMALLY CHARGE INTEREST. AFTER COMING TO THIS CONCLUSION, THE TPO RELIED UPON THE DECISION OF THE TRIBUNAL AT BENGALURU IN THE CASE OF LOGIX M ICRO SYSTEMS LTD., IN ITA NO. 524/BANG/2009 (42 SOT 525) , FOR CHARGING INTEREST @ 12% P.A AND PROPOSED AN ADJUSTM ENT UNDER SEC. 92CA OF THE ACT. 6. THE A.O, CONSEQUENTLY PROPOSED THE DRAFT ASSESSM ENT ORDER, AGAINST WHICH, THE ASSESSEE PREFERRED ITS OB JECTIONS BEFORE THE DRP. THE DRP, VIDE ITS ORDERS DATED 02.11.2015, CONFIRMED THE ORDER OF THE A.O, BUT RES TRICTED THE INTEREST TO 5% AS AGAINST 12% APPLIED BY THE TP O. 5 ITA NO. 232/HYD/2016 OPEN TEXT CORPORATION INDI PVT LTD., HYDERABAD. THEREAFTER, THE A.O PASSED THE FINAL ASSESSMENT ORD ER, AGAINST WHICH THE ASSESSEE IS IN APPEAL BEFORE US. 7. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE INTEREST ON OUTSTANDING RECEIVABLES HAS BECOME AN INTERNATIONAL TRANSACTION ONLY BY VIRTUE OF FINANCE ACT 2012 AND THEREFORE IS APPLICABLE ONLY PROSPECTIVELY AND CANNOT BE APPLIED TO THE ASSESSMENT YEAR BEFORE US. HE SUBMITTED THAT SIMILAR TRANSACTION OF CORPORATE GUA RANTEE ALSO HAS BECOME AN INTERNATIONAL TRANSACTION ONLY B Y VIRTUE OF THE AMENDMENT IN 2012, AND VARIOUS BENCHES OF TH E TRIBUNAL INCLUDING THE BENCHES AT HYDERABAD HAVE HE LD THE AMENDMENT TO BE APPLICABLE PROSPECTIVELY. HE ALSO PLACED RELIANCE UPON SOME DECISIONS TO CONTEND THAT NOTION AL INTEREST ON OUTSTANDING RECEIVABLES CANNOT BE TREAT ED AS AN INTERNATIONAL TRANSACTION AND TAXED DURING THE RELE VANT ASSESSMENT YEAR. 8. THE LD. DR, ON THE OTHER HAND, SUPPORTED THE ORD ERS OF THE AUTHORITIES BELOW. 9. HAVING REGARD TO THE RIVAL CONTENTIONS AND MATER IAL ON RECORD, WE FIND THAT THE ISSUE WHETHER NOTIONAL INT EREST IS CHARGEABLE ON RECEIVABLES HAS BEEN CONSIDERED BY TH E 6 ITA NO. 232/HYD/2016 OPEN TEXT CORPORATION INDI PVT LTD., HYDERABAD. COORDINATE BENCH IN THE CASE OF PEGASYSTEMS WORLDWI DE INDIA PVT LTD (CITED SUPRA) AND IT WAS HELD AS UNDE R: 17.3. WE HAVE CONSIDERED THE ISSUE AND EXAMINED T HE RIVAL CONTENTIONS. IN THE CASE OF EVONIK DEGUSSA IN DIA P. LTD., IN ITA NO. 7653/MUM/2011, IT WAS ALREADY HELD THE T P ADJUSTMENT CANNOT BE MADE ON HYPOTHETICAL AND NOTIO NAL BASIS, UNTIL AND UNLESS THERE IS SOME MATERIAL ON R ECORD THAT THERE HAS BEEN UNDER CHARGING OF REAL INCOME. THUS ON THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE OPINION THAT ADDITION ON ACCOUNT OF NOTIONAL INTEREST RELAT ING TO ALLEGED DELAYED PAYMENT IN COLLECTION OF RECEIVABLE S FROM THE AES IS UNCALLED FOR ON THE FACTS OF THE PRESENT CAS E. EVEN THOUGH DRP TRIED TO DISTINGUISH THE ABOVE DECISION ON FACTS, AS SEEN FROM THE FACTS IN BOTH THE CASES, WE ARE OF THE OPINION THAT THE ABOVE DECISION WILL EQUALLY APPLY TO ASSES SEE'S CASE. ASSESSEE HAS OUTSTANDING SERVICE CHARGES RECEIVABLE S 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. ASSESSEE HAS NO INTEREST LIABILITY AT ALL SO NOTION AL INTEREST CANNOT BE BROUGHT TO TAX UNDER THE PROVISIONS OF TP . AS RIGHTLY POINTED OUT BY THE LD. COUNSEL, THE OUTSTANDING REC EIVABLES ON ACCOUNT OF SERVICES CANNOT BE EQUATED WITH CAPIT AL FINANCING AS PROVIDED FOR IN THE EXPLANATION BY THE AMENDMENT BY FINANCE ACT , 2012 RETROSPECTIVELY. EVEN OTHERWISE, AS RIGHTLY HELD BY THE LOGIX MICRO SYSTE MS LTD V. ACIT [42 SOT 525] (SUPRA), TPO SHOULD HAVE ALLOWED SOME INTEREST FREE PERIOD FOR RECEIVING THE OUTSTANDING SERVICE CHARGES. WHILE ACKNOWLEDGING THE ORDER OF THE ITAT, TPO DID NOT EVEN BOTHER TO EXCLUDE THE REASONABLE PERIOD AN D LEVIED INTEREST NOT ONLY FROM THE DATE OF INVOICE TO THE D ATE OF REALIZATION DURING THE YEAR BUT ALSO FOR THE PERIOD BEYOND 31- 03-2010 IN LATER YEAR. WE WERE INFORMED THAT NO SUC H 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 BR INGING TO TAX THE NOTIONAL INTEREST ON THE OUTSTANDING RECEIV ABLES. ACCORDINGLY, WE ALLOW THE GROUNDS 7 & 8 OF ASSESSEE AND DIRECT AO/ TPO TO DELETE THE SAID ADDITION MADE. 7 ITA NO. 232/HYD/2016 OPEN TEXT CORPORATION INDI PVT LTD., HYDERABAD. 10. RESPECTFULLY FOLLOWING THE ABOVE DECISION, WE H OLD THAT THE NOTIONAL INTEREST ON OUTSTANDING RECEIVABLES IS NOT CHARGEABLE AND NO TP ADJUSTMENT CAN BE MADE. THUS, GROUND OF APPEAL NO. 1.A (I) IS ALLOWED. 11. AS REGARDS THE OTHER GROUNDS OF APPEAL, WE FIND THAT WHERE THE WORKING CAPITAL ADJUSTMENT IS CONSIDERED BY THE A.O, IT TAKES CARE OF THE INTEREST ON RECEIVABLES A S WELL. THIS ASPECT HAS BEEN CONSIDERED BY THE TRIBUNAL AT DELHI IN THE CASE OF KUSUM HEALTHCARE PVT LTD., IN ITA NO. 6814/DEL/2014 DATED 31.03.2015 WHICH HAS BEEN CONFIRMED BY THE HON'BLE HIGH COURT OF DELHI AND AT PARA 14 OF ITS ORDER HAS HELD AS UNDER: 14. AS MENTIONED EARLIER, THE DIFFERENTIAL IMPACT OF WORKING CAPITAL OF THE ASSESSEE VIS--VIS ITS COMPA RABLES HAS ALREADY BEEN FACTORED IN THE PRICING/PROFITABILITY OF THE ASSESSEE AND THEREFORE, ANY FURTHER ADJUSTMENT TO T HE MARGINS OF THE ASSESSEE ON THE PRETEXT OF OUTSTANDING RECEI VABLES IS UNWARRANTED AND WHOLLY UNJUSTIFIED. 12. WE FIND THAT THE HONBLE HIGH COURT OF DELHI HA S CONFIRMED THE DECISION OF THE ITAT AND THE SLP FILE D BY THE REVENUE IS PENDING BEFORE THE HONBLE SUPREME COURT . WE FIND THAT IN THE CASE OF EPAM SYSTEMS INDIA PVT LTD IN ITA NO. 192/HYD/2017 DATED 24.10.2017, COORDINATE BENCH OF THIS TRIBUNAL HAS FOLLOWED THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF KUSUM HEALTHCARE PVT LTD. , TO 8 ITA NO. 232/HYD/2016 OPEN TEXT CORPORATION INDI PVT LTD., HYDERABAD. HOLD THAT WORKING CAPITAL ADJUSTMENT TAKES INTO CONSIDERATION THE INTEREST ON THE RECEIVABLES AS WE LL. THEREFORE, ON THIS GROUND ALSO, NO TP ADJUSTMENT IS REQUIRED. THUS GROUNDS NO. 1A(II) TO (IV) ARE ALLO WED. 13. IN VIEW OF THE ABOVE DECISION, THE ALTERNATE GR OUND IN NO. 1(B) IS NOT DECIDED AT THIS STAGE, AS IT WOULD BE ONLY AN ACADEMIC EXERCISE. GROUND NO.2 IS CONSEQUENTIAL IN NATURE AND AO IS DIRECTED TO GIVE CONSEQUENTIAL RELIEF, IF ANY, TO THE ASSESSEE. 14 IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 28 TH MARCH, 2018. SD/- SD/- (B. RAMAKOTAIAH) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: 28 TH MARCH, 2018 KRK/PVV 1 M/S OPEN TEXT CORPORATION IND PVT LTD., C/O BUILDING D PLOT NO. 17, SOFTWARE UNITS LAYOUT, MADHUPUR, HYDERABAD 500 081. 2 DY CIT, CIRCLE-16(2), HYDERABAD. 3 DISPUTE RESOLUTION PANEL-1, BENGALURU 560 001. 4 PR.CIT-1, HYDERABAD. 5 THE DR, ITAT HYDERABAD
