DCIT CORPORATE CIRCLE 6(1), CHENNAI V. SEVIONT GLOBAL SOLUTIONS LIMITED, CHENNAI

ITTPA 49/CHNY/2019

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 0147 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 5 month(s) 24 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 28-12-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2014-2015
• Appeal Filed On: 04-07-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R ANITHA JCIT
• Keywords: Depreciation; Transfer pricing; International transaction; Earning of tax free income; Retrospective amendment; Notional interest; Condonation of delay; Capital expenditure; Rule 8D; Set aside
• Section: 92B; 14A; 13

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , . , BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENTAND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./ IT(TP)A NO.: 46/CHNY/2019 / ASSESSMENT YEAR: 2014-15 M/S. SERVIONT GLOBAL SOLUTIONS LTD., 4/600 & 4/197, 7 TH STREET, DR.VSI ESTATE, PHASE II, THIRUVANMIYUR, CHENNAI 600 041. PAN: AAACI0947F V. THE A CIT, CORPORATE CIRCLE 6(1), CHENNAI - 34 ( /APPELLANT) ( /RESPONDENT) & ./ IT(TP)A NO.: 49/CHNY/2019 / ASSESSMENT YEAR: 2014-15 THE ACIT, CORPORATE CIRCLE 6(1), CHENNAI - 34 V. M/S. SERVIONT GLOBAL SOLUTIONS LTD., 4/600 & 4/197, 7 TH STREET, DR.VSI ESTATE, PHASE II, THIRUVANMIYUR, CHENNAI 600 041. PAN: AAACI0947F ( /APPELLANT) ( /RESPONDENT) [ /ASSESSEE BY : SHRI S.P. CHIDAMBARAM, ADVOCATE /REVENUE BY : MS. R. ANITHA,JCIT /DATE OF HEARING : 10.11.2020 /DATE OF PRONOUNCEMENT : 28.12.2020 / O R D E R PER G. MANJUNATHA, AM: THESE CROSS APPEALS FILED BY THE ASSESSEE AS WELL AS THE REVENUE ARE DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF 2 I.T.(TP)A. NOS. 46 & 49/CHNY/2019 INCOME TAX (APPEALS)-15, CHENNAI, DATED 28.03.2019 AND PERTAINS TO THE ASSESSMENT YEAR 2014-15. SINCE FACTS ARE IDENTICAL AND ISSUES ARE COMMON, FOR THE SAKE OF CONVENIENCE THESE APPEALS ARE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLIDATED ORDER. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS IN ITS APPEAL:- 1. THE ASSESSMENT ORDER PASSED BY THE LEARNED ASSESSING OFFICER (AO') AND THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) ['CIT(A)'] UNDER INCOME TAX ACT, 1961 ('THE ACT') ARE NOT IN ACCORDANCE WITH THE LAW AND ARE CONTRARY TO THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A), AO AND THE TRANSFER PRICING OFFICER (TPO') HAS ERRED IN IMPUTING NOTIONAL INTEREST ON THE OUTSTANDING RECEIVABLES FROM THE ASSOCIATED ENTERPRISE AND THEREBY MAKING A TP ADJUSTMENT IN THIS REGARD. 3. THE LEARNED CIT(A)/ AO / TPO HAS ERRED IN LAW AND ON FACTS IN HOLDING THE ALLEGED DELAY IN THE REALIZATION OF THE RECEIVABLES FROM ASSOCIATED ENTERPRISES ('AE') AS AN INTERNATIONAL TRANSACTION IGNORING THE FACT THAT THE SAME IS NOT AN INTERNATIONAL TRANSACTION IN TERMS OF SECTION 92B OF THE ACT BUT ARISES ONLY AS A CONSEQUENCE OF AN INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISE. 4. WITHOUT PREJUDICE TO OUR GROUNDS THAT THE DELAY IN RECEIVABLES IS NOT AN INTERNATIONAL TRANSACTION, THE LEARNED CIT(A)/ AO / TPO HAS ERRED IN LAW AND ON FACTS BY MAKING TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF DELAY IN THE REALIZATION OF THE RECEIVABLES EVEN AFTER ACCEPTING THE PRIMARY INTERNATIONAL TRANSACTIONS OF THE APPELLANT AT ARM'S LENGTH BASED ON THE TRANSACTION NET MARGIN METHOD AT THE ENTITY LEVEL. 5. WITHOUT PREJUDICE TO OUR GROUNDS THAT THE DELAY IN RECEIVABLES IS NOT AN INTERNATIONAL TRANSACTION, THE LEARNED CIT(A)/ AO / TPO HAS ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THAT THE APPELLANT HAS 3 I.T.(TP)A. NOS. 46 & 49/CHNY/2019 EARNED A VERY HIGH NET MARGIN OF 39.83%, WHICH HAS IMPLIEDLY COMPENSATED THE DELAY IN REALISATION OF OUTSTANDING RECEIVABLES. 6. THE LEARNED CIT(A)/AO/ TPO OUGHT TO HAVE APPRECIATED THAT THE APPELLANT DOES NOT CHARGE INTEREST ON OUTSTANDING RECEIVABLES FROM NON-AE AND THEREFORE THE APPELLANT CANNOT BE EXPECTED TO CHARGE INTEREST ON OUTSTANDING RECEIVABLES FROM AE'S. 7. WITHOUT PREJUDICE TO OUR GROUNDS THAT THE DELAY IN RECEIVABLES IS NOT AN INTERNATIONAL TRANSACTION, THE LEARNED CIT(A)/ AO / TPO HAS ERRED IN LAW AND ON FACTS IN COMPUTING NOTIONAL INTEREST ON OUTSTANDING RECEIVABLES FROM THE DATE OF INVOICE WITHOUT ALLOWING ANY CREDIT PERIOD FOR REALISATION OF RECEIVABLES. 8. WITHOUT PREJUDICE TO OUR GROUNDS THAT THE DELAY IN RECEIVABLES IS NOT AN INTERNATIONAL TRANSACTION, THE LEARNED CIT(A)/ AO / TPO HAS ERRED IN LAW AND ON FACTS IN NOT DEDUCTING THE NOTIONAL INTEREST ON BELATED PAYMENTS MADE TO THE AE WHILE COMPUTING NOTIONAL INTEREST ON OUTSTANDING RECEIVABLES FROM AE. 9. WITHOUT PREJUDICE TO OUR GROUNDS THAT THE DELAY IN RECEIVABLES IS NOT AN INTERNATIONAL TRANSACTION, THE LEARNED CIT(A)/ AO / TPO HAS ERRED IN LAW AND ON FACTS IN NOT DEDUCTING THE NOTIONAL INTEREST ON ADVANCE RECEIVED FROM AE WHILE COMPUTING NOTIONAL INTEREST ON OUTSTANDING RECEIVABLES FROM AE. 10. WITHOUT PREJUDICE TO OUR GROUNDS THAT THE DELAY IN RECEIVABLES IS NOT AN INTERNATIONAL TRANSACTION, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECTING TO ADD APPROPRIATE SPREAD ON THE LIBOR RATES AS AGAINST USING THE AVERAGE LIBOR RATES ITSELF FOR COMPUTING NOTIONAL INTEREST ON OUTSTANDING RECEIVABLES. 11. WITHOUT PREJUDICE TO OUR GROUNDS THAT THE DELAY IN RECEIVABLES IS NOT AN INTERNATIONAL TRANSACTION, THE LEARNED CIT(A)/ AO / TPO HAS ERRED IN LAW AND ON FACTS IN NOT DEDUCTING THE FOREIGN EXCHANGE GAIN EARNED BY THE APPELLANT DUE TO BELATED RECEIPT OF OUTSTANDING RECEIVABLES FROM AE. 3. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS IN ITS APPEAL:- 1. THE ORDER OF THE LD. CIT(A) IS CONTRARY TO THE LAW AND FACTS OF THE CASE. 4 I.T.(TP)A. NOS. 46 & 49/CHNY/2019 2. THE LD. CIT(A) HAS ERRED IN OBSERVING THAT THE ASSESSEE IS NOT IN THE BUSINESS OF FINANCING AND THEREFORE, THE PLR TAKEN AS BENCHMARK RATE MAY NOT REFLECT THE ARM'S LENGTH RATE. 2.1. THE LD. CIT(A) HAVING OBSERVED THAT THE BENEFIT THAT ACCRUES TO THE AE OF THE ASSESSEE SHOULD BE EVALUATED AT THE BENEFICIARY'S END AS TO AT WHAT INTEREST IT WOULD HAVE AVAILED FUNDS, HAD THIS ARRANGEMENT WAS NOT IN PLACE, OUGHT TO HAVE APPRECIATED THAT THIS IS BAD IN LAW SINCE THE CREDIT PERIOD ALLOWED IS MORE THAN THE AGREED PERIOD OF CREDIT WHICH DRASTICALLY AFFECTS THE ASSESSEE'S WORKING CAPITAL. 2.2 THE LD. CIT(A) OUGHT TO HAVE APPRECIATED THAT A BUSINESSMAN IN A GIVEN SITUATION WOULD NOT HAVE ALLOWED ITS RECEIVABLE TO BE OUTSTANDING FOR SUCH A LONG TIME, GIVEN THE REQUIREMENT FOR FUNDS FOR WORKING CAPITAL AND OTHER CAPITAL EXPENDITURE AND THEREFORE IT IS IMPERATIVE THAT THE MONEY WHICH WOULD BE REALISED IN INDIAN RUPEES HAS BEEN ALLOWED TO BE AT THE DISPOSAL AND CONVENIENCE OF THE AES AND HENCE TPO/AO RIGHTLY APPLIED PLR TO DETERMINE THE ARM'S LENGTH PRICE OF INTEREST RECEIVABLE. 2.3 THE LD. CIT(A) ERRED IN NOT FOLLOWING THE BINDING DECISION OF THE CHENNAI BENCH OF THE HON'BLE TRIBUNAL IN THE CASE OF M/S PROFESSIONAL ACCESS SOFTWARE DEVELOPMENT (P) LTD VS. DCIT, CIRCLE- S(2), CHENNAI (2017) 79 TAXMANN.COM 25 (CHENNAI-TRIB.) WHEREIN THE CHARGING OF INTEREST ON THE OUTSTANDING RECEIVABLES AT PLR BY TPO AND DRP WAS UPHELD. 2.4 THE LD. CIT(A) OUGHT TO HAVE APPRECIATED THE DECISION OF THE DELHI BENCH OF THE HON'BLE TRIBUNAL IN THE CASE OF M/S BT E-SERV (LNDIA) (P) LTD VS. LRO, WARD-S(2), NEW DELHI WHICH UPHELD THE CHARGING OF INTEREST ON THE OUTSTANDING RECEIVABLES AT PLR BY TPO. 3. THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE U/S 14A OF THE ACT OF RS.26, 16,743/- RELYING ON THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF REDINGTON (LNDIA) LTD VS. ACIT [392 ITR 633], DECIDED IN FAVOUR OF THE ASSESSEE. 3.1 THE LD. CIT(A) OUGHT TO HAVE APPRECIATED THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT V. CHETTINAD LOGISTICS PVT LTD. (95 TAXMAN 250), WHEN A REVIEW PETITION AGAINST THE SAID DECISION IS IN THE PROCESS OF BEING FILED ON THE VERY SAME ISSUE. 4. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LD.CIT(A) BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 5 I.T.(TP)A. NOS. 46 & 49/CHNY/2019 4. AT THE TIME OF HEARING, THE DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE SUBMITTED THAT THERE IS A DELAY OF 24 DAYS IN FILING THE APPEAL BEFORE THE TRIBUNAL FOR WHICH NECESSARY PETITION FOR CONDONATION OF DELAY ALONG WITH AFFIDAVIT EXPLAINING THE REASONS FOR DELAY IN FILING THE APPEAL HAS BEEN FILED. THE LD.DR FURTHER SUBMITTED THAT THE REASON FOR DELAY IN FILING THE APPEAL WAS NEITHER INTENTIONAL NOR TO DERIVE UNDUE BENEFIT, BUT BECAUSE OF DELAY ON PART OF THE ASSESSEE IN FORWARDING THE DATA REQUIRED BY THE TPO TO SEND REPORT TO THE CONCERNED COMMISSIONERS FOR COMMENTING ON ADVERSE APPELLATE ORDER. BECAUSE OF THIS, THERE IS A SLIGHT DELAY OF 24 DAYS IN FILING THE APPEAL AND THE SAME MAY BE CONDONED IN THE INTEREST OF JUSTICE. 4.1 THE LD.AR FOR THE ASSESSEE ON THE OTHER HAND FAIRLY ACCEPTED THAT THE DELAY IN FILING THE APPEAL BY THE REVENUE MAY BE CONDONED. 4.2 HAVING HEARD BOTH SIDES AND CONSIDERED THE REASONS GIVEN BY THE REVENUE FOR NOT FILING THE APPEAL WITHIN THE DUE DATE PRESCRIBED UNDER THE ACT, WE ARE OF THE CONSIDERED VIEW THAT THE DELAY IN FILING THE APPEAL IS DUE TO BONAFIDE REASONS WHICH WAS 6 I.T.(TP)A. NOS. 46 & 49/CHNY/2019 NEITHER INTENTIONAL NOR TO DERIVE ANY UNDUE BENEFIT. THEREFORE, IN THE INTEREST OF ADVANCEMENT OF SUBSTANTIAL JUSTICE, THE DELAY IN FILING THE APPEAL IS CONDONED AND THE APPEAL OF THE REVENUE IS ADMITTED FOR ADJUDICATION. 5. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND SPECIALIZED IN PROVIDING BUSINESS RESPONSE APPLICATIONS AND SPECIALIZES IN DERIVING A SOLUTION THAT CONTEMPLATES A MERGER OF TECHNOLOGIES (VOICE INTERNET AND DATA COMMUNICATION), INVOLVING A RANGE OF PRODUCTS FROM COMPUTER PHONY INTEGRATION, SWITCHING, HIGH-END MULTIMEDIA, MESSAGING, SPEECH RECOGNITION, WEB ENABLED CALL CENTERS. THE ASSESSEE COMPANY HAS THREE DIVISIONS I.E., SOFTWARE DIVISION WHICH IS ENGAGED IN THE BUSINESS OF EXPORT OF SOFTWARE DEVELOPMENT AND SERVICES AND HARDWARE RESALE AND MAINTENANCE SUPPORT (AMC). THE ASSESSEE CATERS TO BOTH DOMESTIC AND EXPORT MARKET. THE ASSESSEE HAS ENTERED IN TO VARIOUS INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES) FOR SALE OF SOFTWARE AND SERVICES, PURCHASE OF SOFTWARE AND SERVICES, INTEREST FREE ADVANCE AND REIMBURSEMENT OF EXPENSES AT COST. THE ASSESSEE HAS BENCHMARKED ITS TRANSACTIONS WITH AES UNDER TRANSACTIONAL NET MARGIN METHOD AS THE MOST APPROPRIATE METHOD AND ESTABLISHED ITS INTERNATIONAL 7 I.T.(TP)A. NOS. 46 & 49/CHNY/2019 TRANSACTIONS WITH AES ARE AT ARMS LENGTH PRICE. THE ASSESSEE HAD EARNED AN OPERATING MARGIN OF 39.83% FROM ITS TRANSACTIONS WITH AES AS AGAINST THE COMPARABLE COMPANIES OPERATING MARGIN OF 22.92%. 6. THE ASSESSEE HAS FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2014-15 ON 29.11.2013 DECLARING A TOTAL INCOME OF NIL AFTER SET OFF OF BROUGHT FORWARDED LOSS AND DEPRECIATION LOSS. THE ASSESSEE HAS DECLARED A BOOK PROFIT OF RS.26,28,19,014/-. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S.143(2) OF THE INCOME TAX ACT, 1961 (HEREINAFTER THE ACT) WAS ISSUED. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, A REFERENCE WAS MADE TO THE TRANSFER PRICING OFFICER (TPO) U/S.92CA OF THE ACT, FOR DETERMINATION OF ARMS LENGTH PRICE IN RELATION TO INTERNATIONAL TRANSACTIONS WITH AES. DURING THE COURSE OF TP PROCEEDINGS, THE TPO ON THE BASIS OF THE INFORMATION SUBMITTED BY THE ASSESSEE INCLUDING FORM 92CA(3) OF THE ACT, DATED 13.10.2017 HAS ACCEPTED TRANSACTIONAL NET MARGIN METHOD AS THE MOST APPROPRIATE METHOD FOR ALL INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AES. BUT IN SO FAR AS, RECEIVABLES FROM ITS AES IN CONNECTIONS WITH THE SERVICES, THE TPO HAD ALLEGED THAT THE ASSESSEE HAS ALLOWED EXCESSIVE CREDIT PERIOD TO ITS AES AND THE SAME WOULD CONSTITUTE A SEPARATE INTERNATIONAL 8 I.T.(TP)A. NOS. 46 & 49/CHNY/2019 TRANSACTION, IN VIEW OF THE AMENDMENT TO THE DEFINITION OF INTERNATIONAL TRANSACTIONS BY THE FINANCE ACT, 2012 W.E.F. 01.04.2002, WHERE CAPITAL FINANCING INCLUDING DEFERRED PAYMENT OR RECEIVABLES HAVE BEEN INCLUDED IN THE DEFINITION OF INTERNATIONAL TRANSACTIONS AND ACCORDINGLY CALLED UPON THE ASSESSEE TO EXPLAIN AS TO WHY DELAYED REALIZATION OF THE RECEIVABLES FROM ASSOCIATED ENTERPRISE BEYOND CREDIT PERIOD CANNOT BE BENCHMARKED. IN RESPONSE, THE ASSESSEE SUBMITTED THAT DELAY IN RECEIVABLES IS NOT AN INTERNATIONAL TRANSACTION AND THE SAME NEED NOT BE BENCHMARKED, WHEN THE ASSESSEE HAS BENCHMARKED ITS TRANSACTIONS WITH AES BY APPLYING TRANSACTIONAL NET MARGIN METHOD AND PROVED THAT ITS TRANSACTIONS WITH AES ARE AT ARMS LENGTH PRICE. THE ASSESSEE HAS ALSO SUBMITTED BEFORE THE TPO THAT IT HAS UNIQUE POLICY OF NOT CHARGING INTEREST FOR DELAYED REALIZATION OF RECEIVABLES FROM AE AND NON-AE. THEREFORE, THERE IS NO REASON TO TREAT RECEIVABLES FROM AE AS A SEPARATE INTERNATIONAL TRANSACTION WHICH CAN BE BENCHMARKED. 7. THE TPO AFTER CONSIDERING THE RELEVANT SUBMISSIONS OF THE ASSESSEE WAS OF THE OPINION THAT DELAY IN REALIZATION OF RECEIVABLES FROM AE BEYOND SPECIFIED CREDIT PERIOD, AMOUNTS TO INDIRECT FUNDING TO AE, WHICH CONSTITUTES A SEPARATE INTERNATIONAL TRANSACTION IN VIEW OF THE AMENDMENT TO SECTION 92B BY THE FINANCE ACT, 2012, W.E.F. 9 I.T.(TP)A. NOS. 46 & 49/CHNY/2019 01.04.2002 AND HENCE OUTSTANDING RECEIVABLES FROM AE NEEDS TO BE BENCHMARKED. THEREFORE, BY TAKING NOTE OF THE DETAILS FILED BY THE ASSESSEE HAS IMPUTED INTEREST ON RECEIVABLES BY TAKING PLR AS BASE RATE AND MADE TP ADJUSTMENT OF RS.2,31,73,569/-. 8. BEING AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE ASSESSEE HAS REITERATED ITS ARGUMENTS MADE BEFORE THE AO AND CONTENDED THAT RECEIVABLES FROM AE CANNOT BE SEPARATE INTERNATIONAL TRANSACTIONS WHEN THE ASSESSEE HAS BENCHMARKED ITS TRANSACTIONS WITH AE AT ENTITY LEVEL BY APPLYING TRANSACTION NET MARGIN METHOD AS MOST APPROPRIATE METHOD AND PROVED ITS TRANSACTIONS WITH AE ARE AT ARMS LENGTH PRICE. THE ASSESSEE HAS ALSO ARGUED IN LIGHT OF THE MARGIN EARNED BY THE ASSESSEE FROM ITS TRANSACTIONS WITH AE AND SUBMITTED THAT THE MARGIN EARNED BY THE ASSESSEE FROM ITS TRANSACTIONS WITH AE IS AT 39.83% AS AGAINST COMPARABLE COMPANIES MARGIN OF 22.92%, WHICH THE TPO HAS NOT DISPUTED. THEREFORE MAKING A TP ADJUSTMENT ON OUTSTANDING RECEIVABLES AS A SEPARATE INTERNATIONAL TRANSACTION IS INCORRECT. 9. THE LD.CIT(A) AFTER CONSIDERING THE RELEVANT SUBMISSIONS OF THE ASSESSEE AND BY FOLLOWING CERTAIN JUDICIAL PRECEDENTS INCLUDING 10 I.T.(TP)A. NOS. 46 & 49/CHNY/2019 THE DECISION OF THE ITAT BANGALORE BENCH IN THE CASE OF AMD INDIA, TS-840-ITAT-2017(BANG), HELD THAT DELAY IN REALIZATION OF AE RECEIVABLES BEYOND SPECIFIED CREDIT PERIOD AMOUNTS TO INDIRECT FUNDING TO AE WHICH CONSTITUTES AN INDEPENDENT INTERNATIONAL TRANSACTION WHICH REQUIRES TO BE BENCHMARKED INDEPENDENTLY IRRESPECTIVE OF THE FACT THAT THE TRANSACTION OF THE ASSESSEE WITH ITS AE ARE AT ARMS LENGTH PRICE. THE FACT THAT THE MARGIN OF THE ASSESSEE WAS ABOVE ARMS LENGTH PRICE CANNOT BE A JUSTIFICATION BECAUSE DELAY IN RECEIVABLES IS A SEPARATE TRANSACTION WHICH REQUIRES BENCHMARKING UNDER CHAPTER-X OF THE ACT. THEREFORE, HE OPINED THAT THERE IS NO ERROR IN THE FINDING RECORDED BY THE TPO AS WELL AS THE AO TO ARRIVE AT A CONCLUSION THAT DELAY IN REALIZATION OF RECEIVABLES FROM AE IS AN INTERNATIONAL TRANSACTION AND IT NEEDS TO BE BENCHMARKED INDEPENDENTLY. AS REGARDS RATE APPLIED BY THE TPO BY ADOPTING PLR AS BASE RATE, THE LD.CIT(A) NOTED THAT TO CONSIDER A RATE FOR BENCHMARKING THE RECEIVABLES, THE BENEFIT AND DETRIMENT THAT WOULD BE ENJOYED AND SUFFERED BY THE PARTIES TO THE TRANSACTION REQUIRE CONSIDERATION. SINCE THE APPELLANT IS NOT IN THE BUSINESS OF FINANCING, THE PLR RATE ADOPTED BY THE TPO TO BENCHMARK THE RECEIVABLES MAY NOT REFLECT AN ARMS LENGTH RATE. THE BENEFIT THAT ACCRUES TO THE AE SHOULD BE EVALUATED AT THE BENEFICIARYS END AS TO WHAT INTEREST IT WOULD HAVE AVAILED FUNDS, HAD THIS ARRANGEMENT 11 I.T.(TP)A. NOS. 46 & 49/CHNY/2019 HAVE NOT IN PLACE. SINCE THE AE IS A NON-RESIDENT, THE RATE APPLICABLE AT THE COUNTRY OF RESIDENCE OR ANY OTHER INTERNATIONAL LENDING RATE MAY BE APPROPRIATE TO EVALUATE THE BENEFIT DERIVED BY THE AE AND ACCORDINGLY BY TAKING NOTE OF FACTS, DIRECTED THE AO TO ADOPT THE LIBOR RATES WITH AN APPROPRIATE SPREAD BEFITTING THE CREDIT STANDING OF THE AE. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESSEE AS WELL AS THE REVENUE ARE IN APPEAL BEFORE US. 10. THE LD.AR FOR THE ASSESSEE SUBMITTED THAT THE LD.CIT(A) HAS ERRED IN UPHOLDING IMPUTING NOTIONAL INTEREST ON OUTSTANDING RECEIVABLES FROM THE AES WITHOUT APPRECIATING THE FACT THAT DELAY IN REALIZATION OF RECEIVABLES FROM AE IS NOT AN INTERNATIONAL TRANSACTION WITHIN THE MEANING OF SECTION 92B OF THE ACT. THE LD.AR FOR THE ASSESSEE WITHOUT PREJUDICE TO THE ABOVE ARGUMENT MADE AN ALTERNATIVE ARGUMENT IN AS MUCH AS ASSUMING AND NOT ACCEPTING FOR THE MOMENT DELAY IN RECEIVABLES IS NOT AN INTERNATIONAL TRANSACTION, THE LD.CIT(A) HAS ERRED IN MAKING TP ADJUSTMENT ON RECEIVABLES WITH AE EVEN AFTER ACCEPTING THE PRIMARY INTERNATIONAL TRANSACTIONS OF THE AE ARE AT ARMS LENGTH ON THE BASIS OF TRANSACTION NET MARGIN METHOD AT THE ENTITY LEVEL. THE LD.AR FOR THE ASSESSEE FURTHER SUBMITTED THAT THE CIT(A) HAS ERRED IN NOT APPRECIATING THE FACT THAT THE ASSESSEE HAS EARNED A HIGH NET MARGIN OF 39.83% WHICH IS 12 I.T.(TP)A. NOS. 46 & 49/CHNY/2019 MUCH ABOVE THE MARGIN EARNED BY COMPARABLE COMPANIES, WHICH HAS IMPLIEDLY COMPENSATED THE DELAY IN REALIZATION OF OUTSTANDING RECEIVABLES. IT IS FURTHER SUBMITTED THAT THE ASSESSEE HAS A UNIQUE POLICY OF NOT CHARGING INTEREST ON OUTSTANDING RECEIVABLES FROM AE AS WELL AS NON-AE AND THEREFORE THE ASSESSEE CANNOT BE EXPECTED TO CHARGE INTEREST ON OUTSTANDING RECEIVABLES FROM AE. THE AR FURTHER SUBMITTED THAT THE LD.AO HAS ERRED IN NOT ALLOWING ANY CREDIT PERIOD WHILE IMPUTING NOTIONAL INTEREST ON OUTSTANDING RECEIVABLES WITHOUT ALLOWING A NORMAL CREDIT PERIOD. THE LD.AR FURTHER SUBMITTED THAT THE LD.TPO AS WELL AS THE LD.CIT(A) HAS ERRED IN NOT ALLOWING CREDIT FOR NOTIONAL INTEREST ON ADVANCE RECEIVED FROM AE WHILE COMPUTING NOTIONAL INTEREST ON OUTSTANDING RECEIVABLES FROM AE. THE LD.AR FURTHER SUBMITTED IF AT ALL DELAY IN REALIZATION OF RECEIVABLES FROM AE IS AN INTERNATIONAL TRANSACTION, THEN WHILE BENCHMARKING THE AO OUGHT TO HAVE ADOPTED LIBOR RATE AS THE MOST APPROPRIATE RATE FOR COMPUTING NOTIONAL INTEREST ON OUTSTANDING RECEIVABLES. 11. THE LD.DR ON THE OTHER HAND SUBMITTED THAT THE LD.CIT(A) HAS ERRED IN DIRECTING THE AO TO ADOPT LIBOR RATE AS MOST APPROPRIATE RATE WITHOUT APPRECIATING THE FACT THAT WHEN THE ASSESSEE HAS ALLOWED CREDIT PERIOD MORE THAN THE AGREED PERIOD OF CREDIT WHICH DRASTICALLY AFFECTS THE ASSESSEES WORKING CAPITAL AND HENCE THE 13 I.T.(TP)A. NOS. 46 & 49/CHNY/2019 SAME NEEDS TO BE BENCHMARKED AT THE RATE AT WHICH THE ASSESSEE HAS BORROWED FUNDS FROM FINANCIAL INSTITUTIONS FOR WORKING CAPITAL ARRANGEMENTS. SINCE THE ASSESSEE HAS WORKING CAPITAL ARRANGEMENTS FROM BANKS AND HAS PAID INTEREST IN INDIA, THE AO AS WELL AS THE TPO WERE RIGHT IN APPLYING PLR AS THE MOST APPROPRIATE RATE FOR BENCHMARKING NOTIONAL INTEREST ON RECEIVABLES FROM AE. BUT THE LD.CIT(A) WITHOUT APPRECIATING THE FACT HAS DIRECTED THE AO TO ADOPT LIBOR RATE WITHOUT CONSIDERING THE BINDING PRECEDENT OF THE CHENNAI TRIBUNAL IN THE CASE OF M/S. PROFESSIONAL ACCESS SOFTWARE DEVELOPMENT (P) LTD., VS. DCIT [79 TAXMANN.COM 25 (2017)]. 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, 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 14 I.T.(TP)A. NOS. 46 & 49/CHNY/2019 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 15 I.T.(TP)A. NOS. 46 & 49/CHNY/2019 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 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 16 I.T.(TP)A. NOS. 46 & 49/CHNY/2019 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 LD.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 AGREED CREDIT PERIOD BETWEEN ASSESSEE AND AE. IF THERE IS NO AGREED CREDIT PERIOD, THEN THE AO IS DIRECTED TO ALLOW STANDARD CREDIT PERIOD THAT THE INDUSTRY IS ALLOWING IN THIS LINE OF BUSINESS. 14. THE NEXT ISSUE CAME UP FOR CONSIDERATION FROM GROUND NO.3 OF REVENUE APPEAL IS DISALLOWANCE OF EXPENDITURE FOR EARNING EXEMPT INCOME U/S.14A OF THE ACT. THE AO HAS COMPUTED 17 I.T.(TP)A. NOS. 46 & 49/CHNY/2019 DISALLOWANCE OF EXPENDITURE U/S.14A OF THE ACT IN ACCORDANCE WITH PRESCRIBED PROCEDURE PROVIDED UNDER RULE 8D OF THE INCOME TAX RULES, 1962 AND DISALLOWED INTEREST EXPENDITURE UNDER RULE 8D2(II) AND OTHER EXPENDITURE UNDER RULE 8D2(III) OF THE IT RULES, 1962. ACCORDING TO THE AO, IRRESPECTIVE OF THE FACT THAT ANY DIVIDEND INCOME IS EARNED WHICH DO NOT FORM PART OF EXEMPT INCOME, EXPENDITURE RELATABLE TO INCOME WHICH DO NOT FORM PART OF TOTAL INCOME NEEDS TO BE COMPUTED IN ACCORDANCE WITH RULE 8D OF INCOME TAX RULES, 1962. IT IS THE CONTENTION OF THE ASSESSEE THAT WHEN THERE IS NO EXEMPT INCOME EARNED FROM INVESTMENTS, THERE IS NO QUESTION OF DISALLOWANCE OF EXPENDITURE RELATABLE TO SUCH EXEMPT INCOME. 15. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF VARIOUS AUTHORITIES BELOW ALONG WITH CASE LAWS CITED BY BOTH THE PARTIES. THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT THE ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME FROM INVESTMENTS FOR THE YEAR UNDER CONSIDERATION. IT IS A WELL SETTLED PRINCIPLE OF LAW FROM VARIOUS DECISIONS OF HIGH COURT AND SUPREME COURT THAT WHEN THERE IS NO EXEMPT INCOME FOR THE IMPUGNED ASSESSMENT YEAR THEN THERE CANNOT BE ANY DISALLOWANCE OF EXPENDITURE IN RELATION TO SAID EXEMPT INCOME U/S.14A OF THE ACT. 18 I.T.(TP)A. NOS. 46 & 49/CHNY/2019 THE JURISDICTIONAL HIGH COURT OF MADRAS IN THE CASE OF REDINGTON (INDIA) LTD VS. ACIT (392 ITR 633), HELD THAT NO DISALLOWANCE CAN BE MADE U/S.14A OF THE ACT IN THE ABSENCE OF EXEMPT INCOME. THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. CHETTINAD LOGISTICS PVT. LTD., (95 TAXMAN 250) HAD TAKEN A SIMILAR VIEW. THE HONBLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD VS. CIT (378 ITR 33), HAS HELD THAT WHEN THERE IS NO EXEMPT INCOME, THERE CANNOT BE ANY DISALLOWANCE TOWARDS EXPENSES IN RELATION TO SAID EXEMPT INCOME. IN THIS CASE, THE LD.CIT(A) AFTER CONSIDERING THE FACT THAT THE ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME FOR THE YEAR UNDER CONSIDERATION, BY FOLLOWING THE DECISION OF THE JURISDICTIONAL HIGH COURT OF MADRAS IN THE CASE OF REDINGTON (INDIA) LTD VS. ACIT HAS DELETED THE ADDITION MADE BY THE AO TOWARDS DISALLOWANCE OF EXPENDITURE U/S.14A OF THE ACT. THE REVENUE HAS FAILED TO BRING ON RECORD ANY CONTRARY JUDGMENT WHICH IS IN FAVOUR OF THE REVENUE TO COUNTER THE FINDINGS OF FACTS RECORDED BY THE CIT(A) IN THE LIGHT OF BINDING DECISION OF JURISDICTIONAL HIGH COURT OF MADRAS. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THERE IS NO ERROR IN THE FINDINGS RECORDED BY THE CIT(A) AND HENCE, WE ARE INCLINED TO UPHOLD THE FINDINGS OF THE CIT(A) AND REJECT THE GROUND TAKEN BY THE ASSESSEE. 19 I.T.(TP)A. NOS. 46 & 49/CHNY/2019 16. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED AND THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON 28 TH DECEMBER, 2020 AT CHENNAI. SD/- SD/- ( ) (MAHAVIR SINGH) /VICE PRESIDENT ( . ) (G. MANJUNATHA) /ACCOUNTANT MEMBER /CHENNAI, /DATED, THE 28 TH DECEMBER, 2020 RSR /COPY TO: 1. /ASSESSEE 2. /REVENUE 3. ( ) /CIT(A) 4. /CIT 5. /DR 6. /GF.