M/s. Vestas Technology R&D Chennai Pvt. Ltd., CHENNAI V. ACIT, CHENNAI

ITA 3081/CHNY/2016

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 5485 (ITAT-CHENNAI)
• Duration Of Justice: 5 year(s) 4 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-03-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2012-2013
• Appeal Filed On: 03-11-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; International transaction; Retrospective amendment; Notional interest; TDS
• Section: 92; 92B

Judgement Text

आयकर अपीलीय अिधकरण ’डी’ Ɋायपीठ चेɄई मŐ। IN THE INCOME TAX APPELLATE TRIBUNAL“D” BENCH, CHENNAI BEFORE SHRI C.M. GARG, JM & SHRI ARUN KHODPIA, AM आयकर अपील सं./ITA No.3081/Chny/2016 (िनधाŊरण वषŊ / Assessment Year : 2012-2013) M/s Vestas Technology R&D Chennai Private Limited, Block A, 8 th Floor, TECCI Park No.173, Rajiv Gandhi Road, Old Mahabalipuram Road, Shollinganallur, Chennai Vs ACIT, Corporate Circle-3(2), Chennai PAN No. : AACCV 4768 P (अपीलाथŎ /Appellant) .. (ŮȑथŎ / Respondent) िनधाŊįरती की ओर से /Assessee by : Darpan Kirpalani, Advocate राजˢ की ओर से /Revenue by : Dr. S.Palanikumar, CIT सुनवाई की तारीख / Date of Hearing : 15/02/2022 घोषणा की तारीख/Date of Pronouncement : 31/03/2022 आदेश / O R D E R Per Arun Khodpia, AM : This is an appeal filed by the assessee against the order of the ACIT, Corporate Circle-3(2), Chennai, dated 28.09.2016 for the assessment year 2012-2013, on the following grounds of appeal: - 1. Ground No.1 1.1. On the facts and in the circumstances of the case and in law, the learned Assistant Commissioner of Income Tax, Chennai ("Ld. AO"), the Ld. Deputy commissioner of Income tax, Chennai ("Ld. TPO") and the Ld. Dispute Resolution Panel ("Ld. DRP"), erred in enhancing the income of the appellant by INR 79,265,132 on account of interest at the rate of 21% on receivables purportedly due to the appellant from its Associated Enterprise ("AE") , without granting working capital adjustment. 1.2. In this regard, the order of the Ld. AO to the extent prejudicial to the Appellant is bad in law and is liable to be quashed. ITA No.3081/Chny/2016 2 2. Ground No.2 2.1. On the facts and in the circumstances of the case and in law, the Ld. AO, the Ld. TPO and the Ld. DRP, erred on the following: 1. Treating the receivables due from the AE, as a separate international transaction. 2. Failing to appreciate that cost considered for pricing the international transactions subsumed the credit period extended to the AE. 3. Erred in re-characterising the overdue amount on receivables due from the AE as an unsecured interest-free loan. 4. Failing to appreciate that the parties never agreed for an interest compensation on delayed realisation of receivables, which can be evidenced from the intercompany agreement. 5. Failing to take cognisance of the CUP provided by the appellant based on the arm's length practice prevalent within the appellant group regarding overdue receivables from third parties. 2.2. In this regard, the order of the Ld. AO to the extent prejudicial to the Appellant is. bad in law and is liable to be quashed. 3. Ground No.3 3.1. Without prejudice to the earlier grounds, the Ld. AO/TPO under the directions of the Ld DRP, erred in arbitrarily applying the CUP method for determination of an arm's length interest purportedly due to the appellant on overdue receivables from AEs, in this process erred on the following points: 1. The Ld. AO did not place on record any comparable uncontrolled transaction and relied on appellant's own invoice to its AE, which is a controlled arrangement. 2. Erred in failing to appreciate that the receipts of the appellant were denominated in foreign currency and could at best be construed as a foreign currency loan; thereby necessitating the use of an appropriate foreign currency denominated interest rate i.e. LIBOR. 3.2. In this regard, the order of the Ld. AO to the extent prejudicial to the Appellant is bad in law and is liable to be quashed. The above Grounds of Appeal are without prejudice to one another. The appellant craves leave to add, to alter, to amend, to substitute, to modify and / or withdraw all or any of the ITA No.3081/Chny/2016 3 Grounds of Appeal herein and to submit such statements, documents and papers as may be considered necessary either at or before the appellate hearing. It is prayed that the additions made by the Ld. AO in relation to the international transaction of interest on receivable from AE be deleted. 2. Brief facts of the case are that a reference u/s.92CA(1) of the Act in the case of assessee was made for determination of arm’s length price with reference to all the transactions reported in Form No.3CEB filed by the assessee for the assessment year under consideration. Accordingly a notice u/s.92CA(2) of the Act along with questionnaire was issued to the assessee on 26.02.2014 to furnish the details of documents and information and the assessee appeared and presented the case. The TPO found that in the instant case the assessee has adopted the Transactional Net Margin Method (TNMM) as the most appropriate method for determining the Arms Length Price of the transactions with its Associated Enterprises and has taken operating profit to operating cost as the profit level indicator for its operations. The assessee in its TP study report identified 14 comparables to bench mark its international transaction with the AE. The weighted average margin on cost of the comparables was shown by the assessee as 13.08% as against the assessee’s margin on cost of 9.51%. Availing the permission deviation in computing ALP, the assessee claimed that the transaction with AE were at arm’s length. Thereafter the TPO going through all the details and discussing the issue at length, rejected the arguments of the assessee against charging interest on receivables and after working out the interest ITA No.3081/Chny/2016 4 which ought to have been charged, has come to the conclusion that an upward adjustment of Rs.7,85,18,835/- to the ALP of the international transaction entered into by the assessee during the year under consideration is required. 3. Thereafter a draft assessment order u/s.143(3)/147 of the Act was passed on 04.03.2016, whereby making addition of Rs.7,85,18,835/- on account of the value of international transactions entered into by the assessee with its AEs. Further the TPO disallowed Rs.7,46,297/- on account of interest on income tax and TDS u/s.37 of the Act. 4. Dissatisfied with the order passed by the TPO, the assessee carried the matter before the Dispute Resolution Panel (in short the ‘DRP’) and the DRP after discussing the detail available on record and following the case laws, rejected the objections of the assessee and upheld the decision of the AO. Subsequently, the AO giving effect of the order passed by the DRP, dated 19.08.2016, made addition of Rs.7,85,18,835/- on account of TP adjustments and disallowed Rs.7,46,297/- of interest on income tax and TDS u/s.37 of the Act. 5. Now, the assessee again dissatisfied with the above order of AO, has filed appeal before the Tribunal. 6. Ld. AR of the assessee submitted that the authorities below erred in enhancing the income of the appellant by INR 7,92,65,132/- on account of interest at the rate of 21% on receivables purportedly due to the assessee from its Associated Enterprise ("AE"), without granting working capital adjustment. It was also submitted by the ld. AR of the assessee that the ITA No.3081/Chny/2016 5 parties never agreed for an interest compensation on delayed realisation of receivables, which can be evidenced from the intercompany agreement. It was also contended by the ld. AR that the authorities below failed to take cognisance of the CUP provided by the assessee based on the arm's length practice prevalent within the assessee group regarding overdue receivables from third parties. The Ld. AO/TPO under the directions of the Ld DRP, erred in arbitrarily applying the CUP method for determination of an arm's length interest purportedly due to the assessee on overdue receivables from AEs. The ld. AR of the assessee also submitted that the authorities below failed to appreciate that the receipts of the assessee were denominated in foreign currency and could at best be construed as a foreign currency loan; thereby necessitating the use of an appropriate foreign currency denominated interest rate i.e. LIBOR. Accordingly, the ld. AR of the assessee submitted that the order of the AO to the extent prejudicial to the assessee is bad in law and is liable to be quashed. 7. Ld AR further submitted before the bench a compendium of case laws and describe the findings in favour pf assessee in those cases under identical circumstances, the case laws with its paras with coclusion on the issue of interest on delayed payment are produced here under: i) Firestone Diamond Pvt. Ltd., ITA No.139/Mum/2014, dated 31.03.2016, wherein the Tribunal has followed its earlier order of the coordinate bench of the Tribunal in the case of Rusabh Diamonds Vs. ACIT, ITA No.2497/Mum/2010, wherein at para 43, the Tribunal has held as under :- 43. When such are the views of Hon'ble High Court, it is not open to us to proceed on the basis that even though, in the light of the law ITA No.3081/Chny/2016 6 laid down by Hon'ble Delhi High Court in the case of DIT vs New Skies Satellite BV (supra), the amendment is required to be read as prospective, the Tribunal cannot do so as it is a creature of the Income Tax Act itself. In our considered view, and for the detailed reasons set out above, the amendment in Section 92B, at least to the extent it dealt with the question of issuance of corporate guarantees, is effective from 1 st April 2012. The assessment year before us being an assessment year prior to that date, the amended provisions of Section 92 B have no application in the matter. ii) Albany Molecular Research Hyderabad Research Center Private Limited, ITA No.425/Hyd/2015 along with other connected appeals, dated 26.11.2020, wherein the Tribunal in para 16 has held as under :- 16. The ground No.2 raised by the revenue is challenging the action of the ld. DRP to apply LIBOR rates as the applicable ALP rate for imputation of interest on deferred receivables. We have already held that deferred receivables cannot be construed as a separate international transaction for A.Yrs.2010-11, 2011-12 and 2012-13 in assessee‟s appeal supra by placing reliance on the decision of Mumbai Tribunal in the case of Firestone Diamond Pvt. Ltd., vs. ITO in ITA No.139/Mum/2014 dated 31/03/2016. Hence, there cannot be any imputation of interest at all on outstanding receivables for those assessment years. Accordingly, the adjudication of ground No.2 raised by the revenue would be infructuous and is accordingly dismissed. iii) M/s Gimpex Pvt. Ltd., IT(TP)A No.57/Chny/2019, order dated 28.12.2020, wherein the Tribunal in para 7, has held as under :- 7. We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that receivables is included under the definition of international transactions by amending section 92B by the Finance Act, 2012 w.e.f. 01.04.2002. Therefore, we are of the considered view that there is no merit in the arguments advanced by the assessee that receivables is not international transactions. As regards benchmarking international transactions, once the assessee has adopted TNMM as most appropriate method , whether separate adjustment is required to be made in respect of receivables or not has been the subject matter of deliberations by the co-ordinate Bench of the Tribunal in assessee's own case for the assessment year 2014-15 in IT(TP)No. 57/Chny/2018, where the Tribunal after considering relevant facts has held that once TNMM method is considered as the most appropriate method, the net margin worked out thereunder could take care of all such notional interest cost, wherever it could be imputed and there could be no arm's length price adjustment for any overdue receivables. The Bench has also observed that once there is complete uniformity in not charging any interest from any ITA No.3081/Chny/2016 7 party, whether Associated Enterprises or non- Associated Enterprises, there could not be any selective imputing of notional IT(TP)A No.57/Chny/2019 interest on receivable from AE for belated realization of export bills. The relevant findings of the Tribunal in IT(TP) No.57/Chny/2018 dated 05.04.2019 are as under:- 23. Now we take up the dispute regarding the Arms Length Price adjustment imputing interest on overdue receivables. It is not disputed by the Revenue that assessee had not charged interest either from its Associated Enterprise or from Non Associated Enterprises, for delay in collection of receivables. It is also not disputed that out of the total transactions of the assessee almost 57% were with its Non Associated Enterprises. Once there is complete uniformity followed by assessee in not charging any interest from any party, whether Associated Enterprise or Non Associated Enterprises, in our opinion there could not be any selective imputing of notional interest. Submission of the assessee that out of total sales of about of ` 261 Crores to its Associated Enterprise, ` 100 Crores was received well within the due date and small delays were only in the balance of ` 161 Crores has not been disputed by the ld. Departmental Representative. Assessee had not offered any discount to any party for payment of bills before the expiry of the credit period. Hence, it is only a natural corollary that it did not charge any interest for delays also. Where a good part of the dues were collected earlier to the due date, in our opinion the instances where there were delays could not be selectively elected for a levy of charge of notional interest. Such an approach if accepted will completely overlook commercial realties. That apart, once TNMM method is considered as the most appropriate method, as held by Ahmedabad Bench of the Tribunal in the cases of Bisazza India (P) Ltd (supra) and Gemstone Glass Pvt Ltd (supra) the net margin worked out there under could take care of all such notional interest cost, wherever it could be imputed and there could be no Arms Length Price adjustment for any overdue receivables. We therefore delete Arms Length Price adjustment of ` 6,18,43,887/- made on overdue receivables." 8. In this view of the matter and consistent with the view taken by the co-ordinate Bench of this Tribunal in assessee's own case for the earlier assessment year, we are of the considered view that when TNMM method has been applied as most appropriate method it could take care of all notional interest costs wherever it could be applied and there could be no separate upward adjustments on export receivables for belated realization of export bills. Hence, we direct the Assessing Officer to delete upward adjustment made towards overdue receivables from Associated Enterprises. iv) M/s Progress Software Development Private Limited, ITA No.347/Hyd/2015, order dated 15.03.2021, the Tribunal in para 9 has held as under :- ITA No.3081/Chny/2016 8 9. Next comes the Revenue’s second and assessee’s 10th to 12th substantive grounds raising the common issue of interest of receivables. The DRP’s directions in Pgs.4 and 5 take note of the TPO’s observations having merely proposed to charge interest @12% p.a. regarding the receivables exceeding the credit period of 30 days. Suffice to say, the DRP has admittedly directed the TPO to ascertain LIBOR rate for 12 months in FY.2009-10 without even indicating the corresponding comparables in the relevant segment involving the receivables in issue. We make it clear that Chapter-X in the Act is a special provision wherein each and every upward and downward adjustment ought to be made after analysing the array of comparables in the very segment than based on mere proposal lacking any uncontrolled transactions information. We thus deem it proper to delete the impugned arm’s length price of Rs.18,10,432/- for this precise reason alone. The assessee succeeds in its 10 to 12 substantive grounds and the Revenue’s corresponding second substantive ground is declined. 8. On the other hand, ld. CIT-DR with regard to ground No.1, drew our attention to para 3.6 page 8 & 9 of the DRP order and submitted that the DRP has confirmed the action of the TPO relating to the rate of interest of 21% which has been adopted based on the service agreement and as evident from the copies of the several invoices furnished as part of the submission of the assessee that mention very clearly that “Interest @21% per annum will be charged on delayed payments”. With regard to the ground No.2, ld. CIT-DR submitted that the Tribunal in the case of Techbooks International Private Limited, ITA No.240/Del/2015, dated 06.07.2015 and in the case of Logix Micro Systems Ltd., ITA No.524/Bang/2009, ITAT Bangalore and in the case of Ameriprise India Pvt. Ltd., ITA Nos.2010/2575/Del/2014, dated 14.08.2015, has not accepted the objections of the assessee. With regard to ground No.3, the ld. CIT-DR submitted that the DRP vide para 3.6 at pages 8 & 9 has already considered the objections raised by the assessee and while rejecting the same has held that the rate of interest of 21% has been ITA No.3081/Chny/2016 9 levied based on the service agreement and invoices raised. In this regard, ld. CIT-DR relied on the decision of Hyderabad Bench of the Tribunal in the case of DCIT Vs. Verizon Data Services Pvt. Ltd. [2020] 122 taxmann.com 259, 22.10.2019, wherein the Tribunal has held that “interest on delayed realization of receivables is a separate international transaction and, therefore, requires separate benchmarking.” Further the ld. CIT-DR relied on the decision of Hyderabad Bench of the Tribunal in the case of HBL Power Systems Ltd. Vs. DCIT, [2021] 128 taxmann.com 201 (Hyderabad-Trib.), and submitted that the Tribunal in the said case has held that interest on delayed realisation of receivables is an international transaction. It was also held that the Assessing Officer was justified in making ALP adjustment in respect of such interest at rate of 12%. Finally, the ld. CIT-DR submitted that the orders of the authorities below are just and proper which requires no interference and, therefore, the appeal of the assessee deserves to be dismissed. 9. The Ld CITDR further argued that there is an explanation added to section 92B by Finance Act 2012 with retrospective effect from 1 st April 2002 and according to the clauses of the said explanation interest receivable over the delayed outstanding balances from the AEs are subject to Transfer Pricing Adjustment, hence the AO and DRP has correctly increased the taxable income of the assessee to the extent of Rs. 7,85,18,835/-. 10. We have heard the rival submissions of the parties and perused the relevant material available on record. The substantial ITA No.3081/Chny/2016 10 question here is that, whether upward adjustment on account of imputing of interest on notional basis is permissible under transfer Pricing Provisions? To answer the same relevant finding of the coordinate bench of the Tribunal in IT(TP)A No. 57/Chny/2018 dated 05.04.2019, which has duly been considered in another decision of the same bench vide IT(TP)A No. 57/Chny/2019 dated 28.12.2020, The relevant part of the same has also been reproduced above. 11. In light of the above discussion, respectfully following the consistent view taken by the coordinate Bench of this Tribunal and other benches of ITAT, it is decided that notional interest costs are already taken care under TNNM method hence no upward adjustment on receivables for delayed payment are required. Therefore, the AO is hereby directed to delete the addition made on this ground. 12. In the result, appeal filed by the assessee is allowed. Order pronounced as per Rule 34(4) of the ITAT Rules,1963 on 31/03/ 2022. Sd/- (C.M.GARG) Sd/- (ARUN KHODPIA) ÛयाǓयक सदèय / JUDICIAL MEMBER लेखा सदèय /ACCOUNTANT MEMBER Chennai; िदनांक Dated 31/03/2022 Prakash Kumar Mishra, Sr.P.S. ITA No.3081/Chny/2016 11 आदेश की Ůितिलिप अŤेिषत/Copy of the Order forwarded to : 1. अपीलाथŎ / The Appellant- 2. ŮȑथŎ / The Respondent- 3. आयकर आयुƅ(अपील) / The CIT(A), 4. आयकर आयुƅ / CIT 5. िवभागीय Ůितिनिध, आयकर अपीलीय अिधकरण, Chennai / DR, ITAT, Chennai 6. गाडŊ फाईल / Guard file.