M/s ERM India P Ltd., New Delhi V. NeAC, New Delhi

ITA 513/DEL/2021

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 5101 (ITAT-DELHI)
• Duration Of Justice: 4 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Assessment Year: 2016-2017
• Appeal Filed On: 13-05-2021
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: ARPAN KHANNA
• Keywords: Transfer pricing; International transaction; Application of stay; Retrospective amendment; Notional interest; TDS
• Section: 92B; 144C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1 NEW DLEHI BEFORE SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER AND SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER ITA NO. 513/DEL/2021 AND SA NO. 92/DEL/2021 (IN ITA NO. 513/DEL/2021) ASSESSMENT YEAR: 2016-17 M/S. ERM INDIA PVT. LTD., VS. NATIONAL E-ASSESSME NT BUILDING NO. 10, 3 RD FLOOR, CENTRE, NEW DELHI. TOWER-B, DLF, CYBER CITY, PHASE-II, GURGAON. PAN : AAACE1502C (APPELLANT) (RESPONDENT) APPELLANT BY :MR. AJIT JAIN, A.R. & MR. ARPAN KHANNA, CA RESPONDENT BY:MR. BHAGWATI CHARAN, SR. DR DATE OF HEARING: 04.08.2021 DATE OF ORDER : 28.09.2021 ORDER PER K. NARASIMHA CHARY, J.M. THIS IS AN APPEAL BY THE ASSESSEE BEING AGGRIEVED B Y THE ASSESSMENT ORDER DATED 26.03.2021 PURSUANT TO THE DIRECTIONS DATED 17.11.2020 OF THE DISPUTE RESOLUTION PANEL -I, NEW DELHI (FOR SHORT HEREINAFTER CALLED LD. DRP) FOR THE ASSESSMENT YE AR 2016-17. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY AND WAS 2 ENGAGED IN THE BUSINESS OF CONSULTING IN THE FIELD OF AN ENVIRONMENTAL, HEALTH AND SAFETY, SOCIAL LAND AND NATURAL RESOURCE S MANAGEMENT. FOR THE ASSESSMENT YEAR 2016-17, THEY HAVE FILED A RETURN O F INCOME ON 30/11/2016 DECLARING AN INCOME OF RS.10,02,95,050/- . NOTING THAT THE ASSESSEE COMPANY MADE INTERNATIONAL TRANSACTIONS WI TH THE ASSOCIATED ENTERPRISES (AES), THE DETERMINATION OF ARMS-LEN GTH PRICE WAS REFERRED TO THE LD. TRANSFER PRICING OFFICER (LD. TPO). BY ORDER DATED 28/10/2019, LD. TPO SUGGESTED TO ENHANCE THE INCOME OF THE ASSE SSEE BY RS.2,10,22,69/-ON ACCOUNT OF INTEREST ON RECEIVABLE S FROM THE AES. AFTER HEARING THE ASSESSEE, LEARNED ASSESSING OFFICER PAS SED THE DRAFT ASSESSMENT ORDER ON 21/12/2019 UNDER SECTION 144C O F THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT). 3. ASSESSEE FILED OBJECTIONS TO THE PROPOSED ADJUST MENT BEFORE THE LD. DRP AND SUBMITTED THAT THE LD. TPO ERRONEOUSLY CONS IDERED THE CONTINUING DEBIT BALANCE OF THE RECEIVABLES FROM THE AES AS AN UNSECURED INTEREST FREE LOAN GRANTED BY THE ASSESSEE TO ITS AES DURI NG THE RELEVANT PREVIOUS YEAR. ACCORDING TO THE ASSESSEE ONCE THE PRIMARY TR ANSACTION OF PROVISION/RECEIPT OF CONSULTANCY SERVICES IS HELD T O BE AT ARMS LENGTH PRICE, THEN THE INTERCOMPANY RECEIVABLES ARISING THEREFROM (BEING CONSEQUENTIAL AND CLOSELY LINKED TO THE MAIN TRANSACTION) ALSO CO NFORM TO THE ARMS LENGTH PRINCIPLE. CASE OF ASSESSEE IS THAT IT IS A DEBT FREE COMPANY, AND THEREFORE NO BORROWED FUNDS WAS UTILISED TO GRANT E XTRA CREDIT PERIOD TO THE AES; THAT NO INTEREST WAS PAID BY THE ASSESSEE TO ITS AES AND THEREFORE, CONSEQUENTLY THE ASSESSEE DOES NOT CHARGE ANY INTER EST FROM AES; AND THAT THE COMMERCIAL FACTORS WARRANT A LONGER PERIOD OF C REDIT AND THE LD. TPO FAILED TO APPRECIATE THIS FACT. ASSESSEE ALSO PLACE D RELIANCE ON THE 3 DECISIONOF THE TRIBUNAL AND ALSO OF THE HONBLE JUR ISDICTIONAL HIGH COURT IN THE CASE OF KUSUM HEALTHCARE PRIVATE LIMITED VS. AC IT[2017] 398 ITR 66 (DELHI), IN SUPPORT OF THEIR CONTENTION THAT WHEN O NCE WORKING CAPITAL ADJUSTMENT IS MADE, IT SUBSUMES THE INTEREST ON REC EIVABLES ALSO AND, THEREFORE, NO SEPARATE BENCHMARKING OF THE INTEREST ON RECEIVABLES COULD BE RESORTED TO. 4. BY ORDER DATED 17/11/2020 LD. DRP HELD THAT THE DECISION IN KUSUM HEALTHCARE PRIVATE LIMITED (SUPRA) CANNOT BE FOLLOW ED IN VIEW OF THE AMENDMENT BROUGHT ABOUT BY FINANCE ACT, 2012 WHEREB Y A NEW EXPLANATION WAS INSERTED WITH RETROSPECTIVE EFFECT FROM 01.04.2002 AND EXPLANATION (I) (C) OF SECTION 92B OF THE ACT CREAT ED A DEEMING FICTION TREATING THE PAYMENTS OR DEFERRED PAYMENTS OF RECEI VABLES OR ANY OTHER DEBT ARISING DURING THE COURSE OF BUSINESS AS A SEP ARATE INTERNATIONAL TRANSACTION. LD. DRP ALSO REFERRED TO THE DELETION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. PATNI COMPUTER SY STEMS LTD (2013) 215 TAXMAN 108 (BOM) AND ALSO THE DECISION OF THE TRIBU NAL IN THE CASE OF BECHTEL INDIA PRIVATE LIMITED VS. ACIT (2017) 85 TA XMANN.COM 121 (DELHI- TRIB) AND CONCLUDED THAT THE WORKING CAPITAL ADJUST MENT AND THE INTEREST ON RECEIVABLES OPERATES IN TWO DIFFERENT FIELDS, IN ASMUCH AS WORKING CAPITAL ADJUSTMENT RELATE TO THE COST OF SERVICE/PRODUCT, T HE AGREEMENT IN RESPECT OF WHICH PERMITS THE PAYMENT WITHIN A STIPULATED PE RIOD, WHEREAS THE BENCHMARKING OF THE INTEREST ON RECEIVABLES COMMENC ES WITH SUCH INTEREST PAYABLE FROM THE EXPIRY OF THE PERIOD PRESCRIBED IN THE AGREEMENT. LD. DRP ACCORDINGLY NEGATIVED THE CONTENTION OF THE ASSESSE E AND WHILE UPHOLDING THE SEPARATE BENCHMARKING OF THE INTEREST ON RECEIV ABLES OUTSTANDING FOR A PERIOD BEYOND 60 DAYS. 4 5. AGGRIEVED BY THE ACTION OF THE LD. DRP, ASSESSEE APPROACHED THE TRIBUNAL IN THIS APPEAL CONTENDING THAT THE AUTHORI TIES BELOW FAILED TO APPRECIATE THE FACT THAT THE ASSESSEE HAS NOT BEEN CHARGING ANY INTEREST FROM THIRD-PARTY CUSTOMERS AS AN OUTSTANDING RECEIV ABLE WHICH REPRESENT AN ARMS LENGTH SCENARIO AND THEREFORE, NO NOTIONAL INTEREST IS WARRANTED IN RESPECT OF THE OUTSTANDING RECEIVABLES BY THE ASSES SEE FROM ITS AES. LD. AR SUBMITTED THAT THE DECISION OF THE TRIBUNAL IN KUSU M HEALTHCARE (SUPRA) HAS BEEN UPHELD BY THE HONBLE HIGH COURT, THE SLP AGAINST WHICH WAS DISMISSED BY THE HONBLE SUPREME COURT AND THEREFOR E, AS THE THINGS STAND TODAY, THE DECISION IN KUSUM HEALTHCARE HOLDS THE F IELD. 6. PER CONTRA, IT IS THE SUBMISSION OF THE LD. DR T HAT THE AMENDMENT BROUGHT IN THE ACT WITH RETROSPECTIVE EFFECT FROM 1 /4/2002 AND INCEPTION OF EXPLANATION (I) (C) OF SECTION 92B OF THE ACT CR EATING A DEEMING FICTION TREATING THE PAYMENTS OR DEFERRED PAYMENT OF RECEIV ABLES OR ANY OTHER DEBT ARISING DURING THE COURSE OF BUSINESS AS A SEP ARATE INTERNATIONAL TRANSACTION, PROVIDES A COMPLETE ANSWER TO THE QUES TION INVOLVED IN THIS MATTER AND THEREFORE, THE DECISION OF THE HONBLE B OMBAY HIGH COURT IN THE CASE OF PATNI COMPUTER SYSTEMS LTD (SUPRA) AND BECHTEL INDIA PRIVATE LIMITED (SUPRA) RIGHTLY FOLLOWED BY THE LD. DRP. AC CORDING TO HIM NO INTERFERENCE WITH THE IMPUGNED ORDER IS WARRANTED I N THIS MATTER. 7. WE HAVE GONE THROUGH THE RECORD IN THE LIGHT OF THE SUBMISSIONS MADE ON EITHER SIDE.LD. DRP, DID NOT FOLLOW THE DEC ISION IN KUSUM HEALTHCARE, RENDERED BY A COORDINATE BENCH OF THIS TRIBUNAL, ON THE GROUND THAT THE REASON THAT THE CONTEXT OF INCORPORATING T HE EXPLANATION TO SECTION 92B OF THE ACT, WHICH WAS TO SPECIFICALLY BRING THE INTEREST ON DELAYED RECEIVABLES WITHIN THE PURVIEW OF TP REGULATIONS, W AS NOT CONSIDERED IN 5 KUSUM HEALTHCARE, WHEREAS IT WAS CONSIDERED IN PATN I COMPUTER SYSTEMS LTD (SUPRA) AND BECHTEL INDIA PRIVATE LIMITED VS. A CIT(SUPRA). 8. A PERUSAL OF THE ORDER OF THE COORDINATE BENCH I N BECHTEL INDIA (P.) LTD. V.ACIT [2017] 85 TAXMANN.COM121 (DEL-TRIB) REV EALS THAT HEAVY RELIANCE WAS PLACED BY THE TRIBUNAL ON THE DECISION S IN TECHBOOKS INTERNATIONAL (P.) LTD. V. DY. CIT [2017] 63 TAXMAN N.COM 114 (DEL-TRIB). MCKINSEY KNOWLEDGE CENTRE (P.) LTD. V. DY. CIT [201 7] 77 TAXMANN.COM 164 (DELHI-TRIB). WHEN THE DECISION IN MCKINSEY KNOWLED GE CENTRE (P.) LTD. V. DY. CIT [2017] 77 TAXMANN.COM 164 (DELHI-TRIB) REAC HED HONBLE DELHI HIGH COURT, VIDE DECISION REPORTED IN [2018] 96 TAXMANN. COM 237 (DELHI) (MCKINSEY KNOWLEDGE CENTRE INDIA (P.) LTD.V.PRINCIP AL COMMISSIONER OF INCOME-TAX) HONBLE COURT OBSERVED THAT BY A PLAIN READING OF THE (RETROSPECTIVELY APPLICABLE) AMENDMENT THAT INTRODU CED THE EXPLANATION TO SECTION 92B OF THE ACT BY FINANCE ACT, 2012, IT IS DETERMINABLE THAT IF THERE IS ANY DELAY IN THE REALIZATION OF A TRADING DEBT A RISING FROM THE SALE OF GOODS OR SERVICES RENDERED IN THE COURSE OF CARRYIN G ON THE BUSINESS, IT IS LIABLE TO BE VISITED WITH TRANSFER PRICING ADJUSTME NT ON ACCOUNT OF INTEREST INCOME SHORT CHARGED/UNCHARGED. HONBLE HIGH COURT, HOWEVER, BY THE ORDER DATED 07.02.2018, ON THE QUESTION WITH RESPEC T TO THE NOTIONAL INTEREST ATTRIBUTED TO THE ASSESSEE AND FOR WHICH A DJUSTMENT WAS MADE BY THE TRANSFER PRICING OFFICER (TPO), OPINED THAT HAV ING REGARD TO THE CONSIDERED VIEW IN THE CASE OF PR. CIT V. KUSUM HEA LTH CARE (P.) LTD. [2017] 398 ITR 66 (DELHI), THE MATTER REQUIRES FURTHER EXA MINATION/SCRUTINY; THE REASONS FOR THE CREDIT OR DELAY IN PAYMENT NEEDS TO BE EXAMINED AND ON THAT GROUND REMANDED THE MATTER. 9. ORDER DATED 07.02.2018 IN ITA 461/2017 & ITA 526 /2017READS THUS: 6 THE OTHER QUESTION URGED WITH RESPECT TO THE NOTION AL INTEREST ATTRIBUTED TO THE ASSESSEE AND FOR WHICH ADJUSTMENT WAS MADE B Y THE TPO, WAS FINALLY AFFIRMED BY THE ITAT. THIS COURT HAS CONSID ERED THE SUBMISSIONS OF THE PARTIES AND IS OF THE OPINION THAT HAVING REGAR D TO THE CONSIDERED VIEW IN THE CASE OF PR. CIT VS. KUSUM HEALTH CARE PVT. L TD. (ITA NO. 765/2016 VIDE ORDER DATED 25.4.2017), THE MATTER REQUIRES FU RTHER EXAMINATION/SCRUTINY; THE REASONS FOR THE CREDIT OR DELAY IN PAYMENT NEEDS TO BE EXAMINED. THE MATTER IS THEREFORE REMITTED BA CK TO THE ITAT WHICH MAY, IF DEEM NECESSARY, FILE A REPORT IN THIS REGAR D. 10. IT IS, THEREFORE, CLEAR THAT EVEN SUBSEQUENT TO THE AMENDMENT BROUGHT BY THE FINANCE ACT, 2012, THE VIEW TAKEN IN KUSUM HEALTHCARE PRIVATE LIMITED REPORTED IN [2017] 398 ITR 66 (DELH I)STILL HOLDS THE FIELD.IN KUSUM HEALTHCARE PRIVATE LIMITED VS. ACIT IN ITA NO . 6814/DEL/2014, A COORDINATE BENCH OF THIS TRIBUNAL HELD THAT NO ADDI TIONAL IMPUTATION OF INTEREST ON THE OUTSTANDING RECEIVABLES IS WARRANTE D IF THE PRICING/PROFITABILITY IS MORE THAN THE WORKING CAPI TAL ADJUSTED MARGIN OF THE COMPARABLES. IN APPEAL THE HONBLE HIGH COURT HELD THAT THE INCLUSION IN THE EXPLANATION TO SECTION 92B OF THE ACT OF THE EXPRESSION RECEIVABLES DOES NOT MEAN THAT DE HORS THE CONTEXT EVERY ITEM OF RECEIVABLES APPEARING IN THE ACCOUNTS OF AN ENTITY, 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 LIMIT, DUE TO A VARIETY OF FACTORS WHICH WILL HAVE TO BE INVESTIGATED ON A CASE TO CAS E BASIS. IMPORTANTLY, THE IMPACT THIS WOULD HAVE ON THE WORKING CAPITAL OF TH E ASSESSEE WILL HAVE TO BE STUDIED. IN OTHER WORDS, THERE HAS TO BE A PROPE R INQUIRY BY THE TPO BY ANALYSING THE STATISTICS OVER A PERIOD OF TIME TO D ISCERN A PATTERN WHICH WOULD INDICATE THAT VIS--VIS THE RECEIVABLES FOR T HE SUPPLIES MADE TO AN AE, THE ARRANGEMENT REFLECTS AN INTERNATIONAL TRANS ACTION INTENDED TO BENEFIT THE AE IN SOME WAY. 11. THE COURT FINDS THAT THE ENTIRE FOCUS OF THE AO WAS ON JUST ONE AY AND THE FIGURE OF RECEIVABLES IN RELATION TO THAT AY CA N HARDLY REFLECT A PATTERN THAT WOULD JUSTIFY A TPO CONCLUDING THAT THE FIGURE OF RECEIVABLES BEYOND 180 DAYS CONSTITUTES AN INTERNATIONAL TRANSACTION B Y ITSELF. WITH THE 7 ASSESSEE HAVING ALREADY FACTORED IN THE IMPACT OF T HE RECEIVABLES ON THE WORKING CAPITAL AND THEREBY ON ITS PRICING/PROFITAB ILITY VIS--VIS THAT OF ITS COMPARABLES, ANY FURTHER ADJUSTMENT ONLY ON THE BAS IS OF THE OUTSTANDING RECEIVABLES WOULD HAVE DISTORTED THE PICTURE AND RE -CHARACTERISED THE TRANSACTION. THIS WAS CLEARLY IMPERMISSIBLE IN LAW AS EXPLAINED BY THIS COURT IN CIT V. EKL APPLIANCES LTD. (2012) 345 ITR 241 (DELHI). 11. FROM THE ABOVE, IT IS, THEREFORE, CLEAR THAT WH EN ONCE THE WORKING CAPITAL ADJUSTMENT IS GIVEN, IT SUBSUMES THE INTERE ST ON RECEIVABLES AND NO SEPARATE BENCHMARK FOR IT HAS TO BE MADE. RESPECTFU LLY FOLLOWING THE VIEW TAKEN BY THE HONBLE JURISDICTIONAL HIGH COURT IN T HE CASE OF KUSUM HEALTHCARE (SUPRA), WE HOLD THAT THE ADDITION MADE ON ACCOUNT OF INTEREST ON RECEIVABLES CANNOT BE SUSTAINED. 12. THE OTHER GROUND ARGUED BEFORE US IS IN RESPECT OF NON-GRANT OF CREDIT OF ENTIRE TDS AMOUNTING TO RS.3,24,57,359/-A S CLAIMED BY THE ASSESSEE. BOTH THE COUNSEL AGREED ON THE POINT THAT IT WOULD BE SUFFICE IF THE LEARNED ASSESSING OFFICER IS REQUIRED TO VERIFY AND GRANT THE CREDIT OF TDS AS PER LAW. WE DIRECT THE LEARNED ASSESSING OFF ICER TO VERIFY AND GRANT THE TDS UNDER LAW. 13. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED IN PART AND FOR STATISTICAL PURPOSE. STAY APPLICATION FILED BY ASSE SSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS THE 28 TH DAY OF SEPTEMBER, 2021. SD/- SD/- (ANIL CHATURVEDI) (K. NARASIMHA CHARY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 28/09/2021/AKS