M/S.SERVIONT GLOBAL SOLUTIONS LTD., CHENNAI V. ACIT, CC-6(1), CHENNAI

ITTPA 22/CHNY/2020

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 4171 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 8 month(s) 23 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 26-05-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Assessment Year: 2012-2013
• Appeal Filed On: 02-09-2020
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Double taxation relief; Principle of natural justice; International transaction; TDS; Set aside
• Section: 92B; 115JB; 13; 22

Judgement Text

आयकर अपील य अ धकरण,‘डी’ यायपीठ, चे नई IN THE INCOME TAX APPELLATE TRIBUNAL , ‘D’ BENCH, CHENNAI ी जी. मंज ु नाथ, लेखा सद य एवं ी अ"नके श बनज%, या"यक सद य के सम& BEFORE SHRI G. MANJUNATHA, ACCOUNTANT MEMBER AND SHRI ANIKESH BANERJEE, JUDICIAL MEMBER आयकरअपीलसं./I.T.(TP)A.No.22/Chny/2020 ( नधा रणवष / Assessment Year: 2012-13) M/s. Serviont Global Solutions Ltd. 4/600 & 4/197, 7 th Street, Dr.VSI Estate, Phase II, Thiruvanmiyur, Chennai-600 041. Vs Assistant Commissioner of Income Tax, Corporate Circle-6(1) Chennai. PAN: AAACI 0947F (अपीलाथ /Appellant) ( यथ /Respondent) अपीलाथ क ओरसे/ Appellant by : Mr.S.P.Chidambaram Advocate यथ क ओरसे/Respondent by : Mr. G.Johnson, Addl.CIT स ु नवाईक तार ख/D a t e o f h e a r i n g : 24.05.2022 घोषणाक तार ख /Date of Pronouncement : 27.05.2022 आदेश / O R D E R PER G.MANJUNATHA, AM: This appeal filed by the assessee is directed against order of the learned Commissioner of Income Tax (Appeals)- 16, Chennai, dated 28.02.2020 and pertains to assessment year 2012-13. 2. At the outset, we find that there is a delay of 128 days in appeal filed by the assessee. During the course of hearing, when defect was brought to the notice of learned AR, he submitted that delay in filing of appeal is mainly due to lockdown imposed by the Govt. on account of spread of Covid- 19 infections and in view of Hon’ble Supreme Court suo motu Writ Petition No.3 of 2020, if the period of delay is covered 2 IT(TP) A. 22 /Chny/2020 within the period specified in the order of the Apex Court , then same needs to be condoned in view of specific problem faced by the public on account of Covid-19 pandemic. 3. The learned DR, on the other hand, fairly agreed that delay may be condoned in the interest of justice. 4. Having heard both sides and considered reasons given by the learned AR, we find that the Hon’ble Supreme Court in suo motu Writ Petition No.3 of 2020, has extended limitation applicable to all proceedings in respect of courts and tribunals across the country on account of spread of Covid-19 infections w.e.f. 15.03.2020, till further orders and said general exemption has been extended from time to time. We further noted that delay noticed by the Registry pertains to the period of general exemption provided by the Hon'ble Supreme Court extending limitation period applicable for all proceedings before Courts and Tribunals and thus, considering facts and circumstances of the case and also in the interest of natural justice, we condone delay in filing appeal filed by the assessee. 5. Brief facts of the case are that the assessee company is engaged in the business of software development. The 3 IT(TP) A. 22 /Chny/2020 assessee had filed its return of income for the assessment year 2012-13 on 29.11.2012 admitting Nil total income and book profit of Rs.8,82,46,886/- under the provisions of section 115JB of the I.T Act, 1961. The case was taken up for scrutiny and assessment has been completed u/s.143(3) of the Act, on 05.05.2016 and determined total income at Rs.Nil, after making various additions, including additions towards disallowance of payment for purchase of software without TDS, disallowance of employees contribution to PF, additions towards foreign exchange gain and additions towards TP adjustment on overdue receivables from AEs. The assessee carried the matter in appeal before the learned CIT(A), but could not succeed. The learned CIT(A) for the reasons stated in his appellate order dated 28.02.2020 sustained additions made by the Assessing Officer towards disallowance of payment towards software purchase, disallowance of employees contribution to PF and transfer pricing adjustment on overdue receivables. Aggrieved by the learned CIT(A) order, the assessee is in appeal before us. 6. The first issue that came up for our consideration from ground no. 2 to 11 of the assessee appeal is disallowance of 4 IT(TP) A. 22 /Chny/2020 payment for purchase of software to non-resident companies u/s.40(a)(ia) of the Act, for non-deduction of TDS u/s.195 of the Act, Income Tax Act, 1961. The assessee had purchased various software from non-resident manufacturers /vendors and made payment without deduction of tax at source. The assessee claimed that payments made towards purchase of software being copy righted article cannot be construed as royalty as per Article 12(3) of DTAA between India and USA and also Explanation 2 to Section 9(1)(vi) of Income Tax Act, 1961. The Assessing Officer, however, was not convinced with explanation furnished by the assessee and according to the Assessing Officer, payment made to non-resident for purchase of software is royalty within meaning of section 9(1)(vi) of the I.T Act, 1961 read with Article 12(3) of DTAA between India and USA, therefore, rejected arguments of the assessee and made additions u/s.40(a)(ia) of the Income Tax Act, 1961. 7. The learned A.R for the assessee submitted that this issue is covered in favour of the assessee by the decision of the ITAT., Chennai, in assessee’s own case for the assessment year 2009-10, where the Tribunal by following decision of the Hon'ble Supreme Court in the case of M/s. Engineering 5 IT(TP) A. 22 /Chny/2020 Analysis Centre of Excellence Pvt.Ltd Vs. CIT (2021) 125 taxmann.com 42 (SC) held that payment made by the Indian end users / distributors to non-residents for purchase of computer software is not royalty within the meaning of section 9(1)(vi) of the Act read with Article 12(3) of the DTAA between India and USA. 8. The learned DR, on the other hand, supporting order of the learned CIT(A) submitted that although, the issue is now covered by the decision of the Hon'ble Supreme Court in the case of M/s. Engineering Analysis Centre of Excellence Pvt.Ltd Vs. CIT (supra), but fact remains that the assessee had made payments for purchase of various software and use of such software in the business of the assessee whether it is for use or resale needs to examined and thus, matter may be set aside to the Assessing Officer for further verification. 9. We have heard both the parties, perused material available on record and gone through orders of the authorities below. There is no dispute with regard to fact that payment made by the assessee to non-resident vendors of software without deduction of TDS on the ground that such payment is not in the nature of royalty as per section 9(1)(vi) of the Act 6 IT(TP) A. 22 /Chny/2020 read with Article 12(3) of DTAA between India and USA. The said controversy has been resolved by the Hon'ble Supreme Court in the case of M/s. Engineering Analysis Centre of Excellence Pvt.Ltd Vs. CIT (supra), where it has been very clearly held that amount paid by resident Indian end-users /distributors to non-resident computer software manufacturers/suppliers, as consideration for resale / use of computer software through EULAs/distribution agreements is not payment of royalty for the use of copyright in computer software and thus, same does not give rise to any income taxable in India. The ITAT., Chennai in assessee’s own case had considered an identical issue for the assessment year 2010-11 in ITA No.756/Chny/2020, where the Tribunal by following decision of the Hon'ble Supreme Court in the above case deleted additions made by the Assessing Officer. Therefore, we are of the considered view that payments made by the assessee to non-resident computer manufacturers/suppliers without deduction of TDS cannot be disallowed u/s.40(a)(ia) of the Income Tax Act, 1961, because such payment is not in the nature of royalty as defined under section 9(1)(vi) of the Act read with Article 12(3) of DTAA 7 IT(TP) A. 22 /Chny/2020 between India and USA. Hence, we direct the Assessing Officer to delete addition towards disallowance of payment made to non-residents u/s.40(a)(ia) of the Act. 10. The next issue that came up for our consideration from ground No.12 and 13 of the assessee appeal is disallowance of employees contribution towards PF u/s.36(1)(v) r.w.s.2(24)(x) of the Income Tax Act, 1961. We find that this issue is also covered in favour of the assessee by the decision of Hon'ble Jurisdictional High Court of Madras in the case of M/s. Industrial Security & Intelligence India Pvt.Ltd in TCA No.585 & 586 of 2015, where it has been held that if employees contribution towards PF is paid on or before due date for filing of return of income u/s.139(1) of the Act, then same cannot be disallowed u/s.36(1)(v) of the Income Tax Act, 1961. An identical issue had been considered by the ITAT., Chennai in the case of M/s.Adyar Aananda Bhawan Sweets India Pvt.Ltd. Vs. CIT reported in (2021) 134 taxmann.com 56, where the Tribunal, after considering amendment to section 36(1)(v) held that said amendment is prospective in nature and applicable to assessment year 2021-22 and thus, employees contribution to PF & ESI paid beyond due date specified under respective 8 IT(TP) A. 22 /Chny/2020 Acts, but within due date for filing return of income u/s.139(1) of the Act is allowable deduction. In this case, there is no dispute with regard to fact that payment made by the assessee towards employees contribution to PF is on or before due date for filing of return of income u/s.139(1) of the Act. Therefore, we are of the considered view that the Assessing Officer has erred in disallowing employees contribution to PF and thus, we direct the Assessing Officer to delete addition made towards disallowance of employees contribution to PF. 11. The next issue that came up for our consideration from ground No. 17 to 25 of the assessee appeal is transfer pricing adjustment on overdue receivables from AE, the assessee had extended overdue credit period to its AE. Therefore, the Assessing Officer had considered said overdue receivables as international transactions within the meaning u/s.92B of the Income Tax Act, 1961, and imputed interest receivable on overdue receivables from AE. 12. The learned A.R for the assessee submitted that outstanding receivables from AEs cannot be construed as separate international transactions since, trade receivables are 9 IT(TP) A. 22 /Chny/2020 mere reporting of balances and there is no active conduct between parties in absence of any explicit agreement. The learned AR further referring to various decisions, including decision of the Hon’ble Delhi High Court in the case of PCIT Vs. Kusum Healthcare P.Ltd. in ITA No.765 of 2015 argued that impact of outstanding receivable has already been factored in working capital adjustment margin of comparable companies used for establishing company’s operating margins at arms’ length price, therefore, there is no separate adjustment is required. The learned A.R further argued that if at all, it has to be considered as international transactions, then for imputing interest average LIBOR rate to be adopted, but not PLR rate charged by Indian banks. 13. The learned DR, on the other hand, submitted that this issue is covered against the assessee by the decision of the ITAT., Chennai, in the assessee’s own case for the assessment year 2014-15 in IT(TP) A.No.46/Chny/2019 dated 28.12.2020, where the Tribunal had considered very same issue and held that outstanding receivables from AE is international transaction and further, same needs to be benchmarked by adopting LIBOR +200 basis point. 10 IT(TP) A. 22 /Chny/2020 14. We have heard both the parties, perused material available on record and gone through orders of the authorities below. We find that an identical issue had been considered by the Tribunal in assessee’s own case for the assessment year 2014-15 in IT(TP)A.No.46/Chny/2020 vide order dated 28.12.2020 and held that outstanding receivable from AE beyond certain credit period is international transactions within the meaning of section 92B of the Income Tax Act, 1961, and thus, same needs to be benchmarked for the purpose of determining arms’ length price of transaction. The Tribunal further held that when it comes to rate at which such interest is to be imputed, it has been held that LIBOR +200 basis point is appropriate rate for benchmarking interest receivables on outstanding receivables. The relevant findings of the Tribunal are as under:- “12. We have heard both the parties, perused the materials available on record and gone through the orders of authorities below along with case laws cited by both the parties. As regards preliminary arguments of the AR for the assessee that delay in realization of receivables from AE beyond credit period is not a separate international transaction, we find that the definition of international transactions has been amended by insertion of clause (c) to explanation to Section 92B by the Finance Act, 2012 with retrospective effect from 01.04.2002, 11 IT(TP) A. 22 /Chny/2020 where the “capital financing including any type of long-term or short-term borrowing, lending or guarantee; purchase or sale of marketable securities or any type of advance, payments or deferred payments or receivables or any other debt arising during the course of business” are international transactions and hence delay in realization of receivables from AE beyond credit period constitutes a separate international transaction with effect from assessment year 2013-14 onwards. Therefore, we are of the considered view that there is no merit in the arguments taken by the assessee that delay in realization of AE receivables is not an international transaction. We further note that after the amendment to clause (c) of explanation to Section 92B of the Act, realization of receivables after abnormal delay beyond credit period would tantamount to indirect funding to AE and merely because the assessee is almost a debt free company or the margin of the assessee is higher than the comparables, no such funds of the assessee should be allowed to be utilized for indefinite period. We further note that once delay in realization of AE receivables constitute an international transaction, whether or not, assessee charges interest on receivables from AE or not, has no relevance because any understanding or arrangement between the assessee and its AE which is detrimental to Revenue and against the principles of scheme of Chapter X of the Act, cannot come to the rescue of the assessee. We further note that merely because there is no provision to chargeability of interest in the agreement between the assessee and its AE for delayed realization and merely because assessee does not pay any interest to the AE on the security deposit, the Revenue cannot be deprived on its legitimate share in accordance with the scheme of Chapter X of the Act and the purpose behind the Chapter X. Therefore, we are of the considered view that there is no error in the 12 IT(TP) A. 22 /Chny/2020 finding recorded by the AO as well as the TPO and the CIT(A) to come to the conclusion that delay in realization of receivables from AE beyond credit period tantamount to indirect funding to AE which constitutes separate international transactions. 13. Having said so, let us examine what is the appropriate rate for benchmarking international transactions for delay in realization of AE receivables. In order to impute interest on receivables, the benefit end detriment that it would be enjoyed and suffered by the parties to the transaction requires consideration. The assessee has allowed credit to its AE which is a non-resident, therefore the benefits that the AE derives from enjoying the long credit period for payment in respect of services rendered has to be measured in terms of the interest that would have been incurred by the AE in the country of residence. If we go by the standards, the LIBOR rate is most appropriate rate of interest in the international market and which is accepted by most of the countries. Therefore, it would be most appropriate if the LIBOR rate is applied as most appropriate rate of interest for imputing interest on delay in receivables from AE. In this case, the AO has imputed notional interest by adopting PLR as the base rate whereas the ld.CIT(A) has directed the AO to adopt LIBOR rate as the base rate for imputing the interest with an appropriate spread befitting the credit standing of the AE. Therefore, we are of the considered view the LIBOR ÷ 200 basis point rate is most appropriate rate and hence, direct the AO/TPO to adopt LIBOR + 200 basis point for imputing interest on overdue receivable. As regards, the argument of Id.AR for assessee that the TPO has not given any credit period, we find that in any trade there is a credit period for payment to services or goods. Therefore the AO is directed to allow normal credit period allowed by the assessee, if any 13 IT(TP) A. 22 /Chny/2020 agreed credit period between assessee and AE. If there is no agreed credit period, then the AC is directed to allow standard credit period that the industry is allowing in this line of business.” 15. In this view of the matter and consistent with the view taken by the co-ordinate Bench of the Tribunal, we are of the considered view that outstanding overdue receivables from AE is international transactions, which need to be benchmarked to determine arms’ length price of transaction. We further are of the opinion that when it comes to imputing interest, LIBOR +200 basis point is appropriate rate for benchmarking transaction and hence, we direct the Assessing Officer to impute interest by adopting LIBOR +200 basis point on overdue receivables. 16. In the result, appeal filed by the assessee is partly allowed. Order pronounced in the open court on 27 th May , 2022 Sd/- Sd/- (अ"नके श बनज%) (जी. मंज ु नाथ) (Anikesh Banerjee) (G.Manjunatha) !या यक सद#य /Judicial Member लेखा सद#य / Accountant Member चे!नई/Chennai, &दनांक/Dated 27 th May, 2022 DS आदेश क त*ल+प अ,े+षत/Copy to: Appellant 2. Respondent 3. आयकर आय ु -त (अपील)/CIT(A) 4. आयकर आय ु -त/CIT 5. +वभागीय त न1ध/DR 6. गाड फाईल/GF.