Aithent Technologies Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 6076/DEL/2016

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 1721 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-12-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2004-2005
• Appeal Filed On: 28-11-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Keywords: Depreciation; Transfer pricing; Rectification of order; International transaction; Wholly owned subsidiary; Notional interest; Set aside
• Section: 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.6076/DEL./2016 (ASSESSMENT YEAR : 2004-05) M/S. AITHENT TECHNOLOGIES PVT. LTD., VS. ACIT, CIR CLE 2 (1), A 16/9, VASANT VIHAR, NEW DELHI. NEW DELHI 110 057. (PAN : AAACS2319H) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI ATUL NINAWAT, CA REVENUE BY : SHRI SANJAY I. BARA, CIT DR DATE OF HEARING : 04.11.2019 DATE OF ORDER : 06.12.2019 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER THIS IS SECOND ROUND OF LITIGATION AS IN THE FIRST ROUND, THE CASE WAS SET ASIDE TO THE AO FOR FRESH ADJUDICATION BY THE TRIBUNAL WITH DIRECTION TO RECOMPUTE THE ARMS LENGTH PRICE (ALP) OF THE TRANSACTION OF THE INTEREST ON LOAN. 2. THE APPELLANT, M/S. AITHENT TECHNOLOGIES PVT. LT D. (HEREINAFTER REFERRED TO AS THE TAXPAYER) BY FILI NG THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 28.09.2016 PASSED BY THE AO IN CONSONANCE WITH THE ORDERS PASS ED BY THE LD. ITA NO.6076/DEL./2016 2 DRP/TPO UNDER SECTION 143 (3) READ WITH SECTION 144 C OF THE ACT QUA THE ASSESSMENT YEAR 2004-05 ON THE GROUNDS INTE R ALIA THAT :- 1. THE ORDER OF THE LEARNED ASSESSING OFFICER ('LD . AO') IS BAD IN LAW AND ON THE FACTS AND CIRCUMSTANCES OF TH E CASE. 2. THE LD. TRANSFER PRICING OFFICER ('LD. TPO')/ LD . ASSESSING OFFICER ('LD. AO') HAVE ERRED ON FACTS AN D CIRCUMSTANCES OF THE CASE IN DETERMINING THE ARM'S LENGTH PRICE OF THE APPELLANT'S INTERNATIONAL TRANSACTION WITH I TS ASSOCIATED ENTERPRISES IN RESPECT OF INTEREST ON LOAN ADVANCED TO WHOLLY OWNED SUBSIDIARY THEREBY PROPOSING AN ENHANCEMENT O F RETURNED INCOME BY RS.1,07,27,100/-. 3. THE LD. TPO/AO HAS ERRED IN LAWS AND FACTS OF TH E CASE BY NOT ACTING AS PER THE DIRECTIONS OF HON'BLE DRP. 4. THE LD. TPO/AO HAS FAILED TO RECTIFY THE APPAREN T MISTAKE APPEARING IN ITS RECTIFIED ORDER WHEREIN US PRIME LENDING RATE HAS BEEN USED FOR BENCHMARKING THE INT EREST ON LOAN IGNORING THE DIRECTIONS OF HON'BLE DRP TO USE LIBOR PLUS 500 BASIS POINTS. 6. THE LD. TPO/ AO HAS ERRED IN LAWS AND FACTS OF T HE CASE BY COMPUTING THE INTEREST ON LOAN ON MEDIUM OF OPEN ING AND CLOSING BALANCE OF THE LOAN INSTEAD OF WORKING ON D AILY AVERAGE BASIS. 7. THE LD. TPO/AO/HON'BLE DRP HAS ERRED IN LAWS AND FACTS OF THE CASE BY COMPUTING INTEREST AT US LIBOR FURTHER ENHANCED BY MORE THAN 125% FOR RISK PROFILE ETC. WH ICH IS COMPLETELY UNREASONABLE AND AGAINST THE ACCEPTED IN DUSTRY NORMS. 8. THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTHER. 3. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : M/S. AITHENT TECHNOLOGIES PVT. LTD., THE TAXPAYER IS A SOFTWARE CONSULTING FIRM PROVIDING SO FTWARE SOLUTION TO GLOBAL CLIENTS. THE ASSOCIATE ENTERPRISE (AE), AITHENT INC., IS A NEW YORK BASED COMPANY WHO IDENTIFIES THE CUSTOMERS AND THEREAFTER, WORK IS ASSIGNED TO THE TAXPAYER COMPAN Y. AS PER ITA NO.6076/DEL./2016 3 TRANSFER PRICING (TP) ANALYSIS, THE TAXPAYER IS PRI MARILY ENGAGED IN SOFTWARE DEVELOPMENT ACTIVITIES VIZ. OFF-THE-SHELF SOFTWARE AND SPECIFIED TECHNICAL SOFTWARE SPECIFICATION. THE CO MPENSATION FOR SOFTWARE DEVELOPMENT BETWEEN TWO RELATED PARTIES IS DETERMINED EITHER ON TIME AND MATERIAL CONTRACT BASIS OR ON FI XED PRICE CONTROL BASIS. THE CUSTOMERS ARE PRIMARILY USA, CANADA BAS ED AND AE DETERMINES THE PRICING FOR THE CUSTOMERS. DURING T HE YEAR UNDER ASSESSMENT, THE TAXPAYER ENTERED INTO INTERNATIONAL TRANSACTIONS AS UNDER :- S.NO. INTERNATIONAL TRANSACTION METHOD USED VALUE (IN RS.) 1 SOFTWARE DEVELOPMENT SERVICES TNMM 6.461 CRORE 2 RECRUITMENT SERVICES 0.475 CRORE 3 REIMBURSEMENT OF EXPENSES 0.128 CRORE 4 LOAN GIVEN 14.96 CRORE 4. THE TAXPAYER HAS GIVEN INTEREST FREE LOAN TO ITS AE TO THE TUNE OF RS.14,95,79,141/- AS ON 31.03.2004. IN THE FIRST ROUND OF LITIGATION, LD. TPO VIDE ORDER DATED 29.11.2006 PRO CEEDED TO CONCLUDE THAT THE LOAN WOULD HAVE FETCHED INTEREST IN ARMS LENGTH TRANSACTION AND DETERMINED NOTIONAL INTEREST @ 10% ON THE ABOVE LOAN AS THE ARMS LENGTH VALUE OF THE INTEREST. HO WEVER, THE TAXPAYERS TRANSACTION QUA SOFTWARE DEVELOPMENT SEG MENT HAS BEEN HELD TO BE AT ARMS LENGTH. CONSEQUENTLY, AO ENHAN CED THE AMOUNT OF RS.1,15,19,007/- IN THE INCOME OF THE TAX PAYER ON ITA NO.6076/DEL./2016 4 ACCOUNT OF INTEREST PAYMENT U/S 92CA OF THE INCOME- TAX ACT, 1961 (FOR SHORT THE ACT) IN THE FIRST ROUND OF LITIGAT ION. THEREAFTER, LD. CIT (A) PROCEEDED TO HOLD THAT LIBOR PLUS 400 BASIS POINTS SEEMS APPROPRIATE RATE FOR CHARGING INTEREST AND THEREBY DETERMINED THE INTEREST RATE OF 5.1595% (MARCH 2004 RATE OF LIBOR PLUS 400 BASIS POINTS) ON THE OUTSTANDING LOAN AS THE ARMS LENGTH PRICE. THEREAFTER, MATTER WAS AGITATED BY THE TAXPAYER BEF ORE THE TRIBUNAL WHO HAS RESTORED THE CASE BACK TO THE AO FOR FRESH ADJUDICATION TO RECOMPUTE THE ALP OF THE TRANSACTIONS. 5. AFTER CONSIDERING THE SUBMISSIONS MADE BY THE TA XPAYER, THE TPO PROCEEDED TO CONCLUDE THAT LOAN OR BORROWING MO NEY BETWEEN TWO AES IS AN INTERNATIONAL TRANSACTION AND THE INT EREST CHARGEABLE ON THE LOANS TO AN AE REQUIRES TO BE COMPUTED ON TH E ARMS LENGTH PRINCIPLE WHICH HAS TO BE NOTIONAL AND RELIED UPON THE DECISION RENDERED BY THE TRIBUNAL IN THE CASE OF PEROT SYSTEMS TSI (INDIA) LTD. VS. DCIT AND VVF LTD. VS. DCIT (2010-TIOL-55-I TAT- MUM) . TPO ALSO PROCEEDED ON THE PREMISE THAT NO INDEPE NDENT COMPANY WOULD LIKE TO ADVANCE A LOAN BASED ON THE C OST OF FUNDS, EVEN IF THE SAME ARE REQUIRED THROUGH BORROWINGS. LD. TPO ALSO PROCEEDED TO APPLY THE CUP UNDER WHICH INTEREST RAT E THAT AN INDEPENDENT PARTY WOULD EARN AT ARMS LENGTH ON A L OAN EXTENDED UNDER SIMILAR CIRCUMSTANCES AS NO INDEPENDENT PARTY WOULD EXTEND ITA NO.6076/DEL./2016 5 ITS LOAN BASED ON COST OF ITS FUND ONLY BUT IT WOUL D ADD FURTHER SPREAD OVER AND ABOVE THE INTEREST RATE AT WHICH IT GOT THE FUNDS FOR HIS MARGIN AS WELL AS FOR THE RISK IT IS UNDERTAKIN G BY ADVANCING A LOAN TO A PARTY CARRYING ON BUSINESS OUTSIDE INDIA AND THAT ALSO WITHOUT SECURITY. ACCORDINGLY, LD. TPO DETERMINED THE INTEREST ON LOAN AT RS.1,58,90,255/-. 6. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. D RP BY WAY OF FILING OBJECTIONS, WHO HAS FOLLOWED THE TPO/DRP S ORDER FOR AY 2002-03 DATED 24.12.2014 AND DIRECTED THE TPO TO APPLY LIBOR PLUS 500 BASIS POINTS GIVEN BY THE TAXPAYERS COMPANY TO ITS AE. FEELING AGGRIEVED, THE TAXPAYER HAS COME U P BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 7. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 8. AT THE VERY OUTSET, LD. AR FOR THE TAXPAYER CONT ENDED THAT THE ISSUE IN QUESTION IS DULY COVERED IN FAVOUR OF THE TAXPAYER IN ITS OWN CASE FOR AY 2006-07 DECIDED IN ITA NO.257/DEL/2 017 VIDE ORDER DATED 02.09.2019 . IT IS FURTHER CONTENDED THAT WHEN GRANTING A LOAN TO WHOLLY OWNED SUBSIDIARY IS LESS RISKY AS COMPARED TO LOAN GRANTED BY BANK, TPO/DRP HAVE ERRED IN MAKING THE M ARK-UP OF ITA NO.6076/DEL./2016 6 500BASIS POINTS TO THE LIBOR AND RELIED UPON THE DE CISION RENDERED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. COTTON NATURALS (I)(P) LTD. (2015) 55 TAXMANN.COM 5 23 (DELHI) AND THE DECISION RENDERED BY HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. M/S. VAIBHAV GEMS LTD. (NOW KNO WN AS VAIBHAV GLOBAL LTD.) IN D.B. ITA NO.14/2015 ORDER DATED13.10.2017 . 9. HONBLE DELHI HIGH COURT IN CIT VS. COTTON NATURALS (I)(P) LTD. (SUPRA) REJECTED THE MARK-UP TOWARDS THE TRANSLATI ON COST AND HAS ALSO REJECTED THE COMPARISON BY THE TPO WITH BA NKS AND ALSO HELD THAT RISK FACTOR ATTACHED TO THE LOAN GRANTED BY THE TAXPAYER TO ITS AE BY THE TPO IS ALSO NOT APPROVED BY THE HONB LE HIGH COURT AND RETURNED THE FINDING IN FAVOUR OF THE TAXPAYER AS UNDER:- 32. ON THE QUESTION OF ADJUSTMENT MADE ON ACCOUNT OF THE TRANSACTION COST, WE DO NOT APPRECIATE THE REASONIN G GIVEN BY THE TPO AND FIND IT DIFFICULT TO ACCEPT. THE TRANSACTIO N OR HEDGING COST IS BORNE AND PAID BY THE BORROWER. THESE ARE U NDERTAKEN WHEN THEY TAKE LOANS IN US DOLLARS OR OTHER FOREIGN CURRENCIES BECAUSE THE BORROWER WANTS TO COVER ANY LOSS ON ACC OUNT OF THE DEPRECIATION OF THE INDIAN RUPEE VIS--VIS THE FORE IGN CURRENCY. THE ASSESSEE IN THE PRESENT CASE IS NOT THE BORROWE R, BUT THE LENDER. TRANSACTION COST IS NOT, THEREFORE, APPLICA BLE IN THE CASE IN QUESTION, AS THE LOAN HAD TO BE REPAID IN US DOL LARS. MARK UP TOWARDS THE TRANSACTION COST IS EXORBITANT AND EVEN COMPARISON WITH BANKS IS UNSOUND AND UNINTELLIGIBLE. RISK FACT OR ADJUSTMENT IS ALSO STRETCHED, FOR IT IGNORES THE CLOSE RELATIO NSHIP BETWEEN THE TWO AES AND THE FUNDS WERE THE SHAREHOLDER FUNDS, A ND NOT BORROWED MONEY. 10. SIMILARLY, HONBLE RAJASTHAN HIGH COURT IN CIT VS. M/S. VAIBHAV GEMS LTD. (SUPRA) ALSO DECIDED THE IDENTICAL ISSUE IN ITA NO.6076/DEL./2016 7 FAVOUR OF THE TAXPAYER BY HOLDING THAT THE TAXPAYER IS ENTITLED FOR THE BENEFIT OF AVERAGE LIBOR RATE EXISTING AT THAT TIME WHICH WAS 0.79% AND ALSO REJECTED THE ADDITION OF AD HOC 2% A PPLIED BY THE REVENUE BY RETURNING FOLLOWING FINDINGS :- 11. REGARDING ITA NO.149/2015 PREFERRED BY THE ASS ESSEE IN VIEW OF THE DELHI HIGH COURT JUDGMENT (PARA NO.14), THE INTERNATIONAL TRANSACTION IS REQUIRED TO BE ACCEPTE D, THEREFORE, TRIBUNAL HAS COMMITTED SERIOUS ERROR. THE ASSESSEE WILL BE ENTITLED FOR THE BENEFIT OF AVERAGE LIBOR RATE EXI STING AT THAT TIME WHICH WAS 0.79% AND ADDITION OF ADHOC 2% IS NO T PROPER. IN THAT VIEW OF THE MATTER, THE ADDITION OF 2% INTERES T IN THE INCOME IS REQUIRED TO BE QUASHED AND SET ASIDE. 11. COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2006-07 (SUPRA) DECIDED THE IDENTICAL ISSUE IN FAVOUR OF T HE TAXPAYER BY RETURNING FOLLOWING FINDINGS :- 9. IN SO FAR AS THE FACTS ARE CONCERNED, THERE IS NO DISPUTE THAT THE ASSESSEE ADVANCED THE INTEREST FREE LOAN T O ITS WHOLLY OWNED SUBSIDIARY. IN THE FIRST ROUND OF LITIGATION, THE LD. TPO RECKONED THE NOTIONAL INTEREST AS PER PLR AND WAS C ONFIRMED BY THE LD. DRP, IN THE SECOND ROUND OF LITIGATION, THE LD. TPO BENCH MARKED THE INTEREST ON LOAN AT SBI PLR PLUS 3 00 BASIS POINTS, WHEREAS, LD. DRP, WHILE FOLLOWING THEIR OWN FINDING FOR THE AY 2002-03 MADE IT US LIBOR PLUS 500 BASIS POIN TS. IT IS NOT THE CASE OF THE ASSESSEE THAT THE FACTS INVOLVED IN THE MATTER ARE DIFFERENT FROM THOSE INVOLVED FOR THE AY 2002-03. I T IS NOT THE CASE OF THE ASSESSEE THAT THE FINDINGS OF THE LD. D RP FOR THE AY 2002-03 ARE IN ANY WAY DISTURBED IN ANY SUBSEQUENT PROCEEDINGS. 10. IN THE CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THAT THE LIBOR WITH MARK UP CANNOT BE FOUND FAULT W ITH, HAVING REGARD TO THE FACTS OF THE CASE OF THE ASSESSEE. HO WEVER, WE FIND THAT THE MARK UP OF 500 BASIS POINTS TO THE US LIBO R APPEARS TO BE UNJUSTIFIABLE. WE CONSEQUENTLY, ACCEPT THE ALTER NATE PLEA OF THE ASSESSEE AND FIND THAT THE BENCH MARKING OF THE INTEREST ON LOAN AT US LIBOR PLUS 170 BASIS POINTS WOULD MEET T HE ENDS OF JUSTICE, AND, ACCORDINGLY, DIRECT THE LD. TPO TO RE COMPUTE THE NOTIONAL INTEREST AT US LIBOR PLUS 170 BASIS POINTS , GROUNDS OF APPEAL ARE, ACCORDINGLY, ALLOWED IN PART. ITA NO.6076/DEL./2016 8 12. IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE C ASE DISCUSSED IN THE PRECEDING PARAS AND FOLLOWING THE AFORESAID DECISION RENDERED BY HONBLE HIGH COURTS DISCUSSED IN PRECED ING PARAS AND BY THE COORDINATE BENCH OF THE TRIBUNAL, WE ARE OF THE CONSIDERED VIEW THAT TRANSFER PRICING ADJUSTMENT QUA THE TRANS ACTION OF ADVANCING LOAN BY THE TAXPAYER TO ITS AE IS TO BE D ETERMINED AT US LIBOR PLUS 170 BASIS POINTS. CONSEQUENTLY, THE TPO IS DIRECTED TO RECOMPUTE THE INTEREST AT US LIBOR PLUS 170 BASI S POINTS TO BENCHMARK THE INTERNATIONAL TRANSACTIONS QUA INTERE ST ON LOAN BY THE TAXPAYER TO ITS AE. CONSEQUENTLY, THE APPEAL FILED BY THE TAXPAYER IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON THIS 6 TH DAY OF DECEMBER, 2019. SD/- SD/- (R.K. PANDA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 6 TH DAY OF DECEMBER , 2019 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.