Safran Engineering Services India Private Limited, Bengaluru V. Deputy Commissioner Of Income Tax, Circle-6(1)(1), Bangalore

ITTPA 907/BANG/2022

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The case involves M/s. Safran Engineering Services India Private Limited, which appealed against the final assessment order for the assessment year 2018-2019. The primary contention was regarding the Transfer Pricing adjustments made by the TPO on interest for delayed receivables from Associated Enterprises (AEs) and a disallowance under section 43B of the I.T. Act. The TPO had treated the delayed receivables as international transactions and imputed interest, which was contested by the assessee. The DRP upheld the TPO's decision on the interest on delayed receivables but deleted the addition concerning the software development segment. The Tribunal's decision focused on ensuring that the ALP for the interest on delayed receivables was determined following the prescribed methods under the I.T. Rules.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 115254 (ITAT-BANGALORE)
• Duration Of Justice: 2 month(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 22-11-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Next Hearing Date: 22-11-2022
• Assessment Year: 2018-2019
• Appeal Filed On: 21-09-2022
• Other Referred Cases: Bechtel India Pvt. Ltd. v. DCIT, Safran Engineering Services India Pvt. Ltd. v. DCIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 154; 43B; 143(1); 143(2); 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “C”, BANGALORE Before Shri George George K, JM & Shri Laxmi Prasad Sahu, AM IT(TP)A No.907/Bang/2022 : Asst.Year 2018-2019 M/s.Safran Engineering Services India Private Limited 8/2 and 9, The HUB, Ambalipura Village, Sarjapur Road, Bangalore East Taluk, Sarjapur, Main Road Bangalore – 560 102. PAN : AAFCS9003D. v. The Dy.Commissioner of Income-tax, Circle 6(1)(1) Bangalore. (Appellant) (Respondent) Appellant by : Sri.Ankur Pai, Advocate Respondent by : Sri.Sreenivas T.Bidari, CIT-DR Date of Hearing : 23.11.2022 Date of Pronouncement : 23.11.2022 O R D E R Per George George K, JM : This appeal at the instance of the assessee is directed against final assessment order dated 25.07.2022 passed u/s 143(3) r.w.s. 144C(13) of the I.T.Act. The relevant assessment year is 2018-2019. 2. The brief facts of the case are as follows: The assessee is a private limited company engaged in the business of providing contract software development services to its Associated Enterprises (AEs) outside India. For the assessment year 2018-2019, the return of income was filed on 30.11.2018 declaring total income of Rs.16,24,48,710. The return was processed u/s 143(1) of the I.T.Act vide order IT(TP)A No.907/Bang/2022. M/s.Safran Engineering Services India Private Limited. 2 dated 01.10.2019 by the CPC. The following adjustment was made to the total income by the CPC :- Particulars Amount as per ITR Amount as per 3CD Adjustment in intimation Disallowance u/s 43B of the I.T.Act 2,53,608 72,77,987 70,24,379 ESI/PF amount not remitted before due date -- 1,440 1,440 3. The CPC accordingly determined the income of the assessee at Rs.16,94,74,527 as against the income of Rs.16,24,48,710 declared in the return of income. The assessment was selected for scrutiny and notice u/s 143(2) of the I.T.Act was issued on 23.09.2019 and duly served on the assessee. During the course of assessment proceedings, the Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price (ALP) of the international transactions undertaken by the assessee with its AEs. The TPO passed orders u/s 92CA of the I.T.Act on 30.07.2021 by making the following TP adjustments:- Software development segment Rs.3,53,16,441 Interest on delayed receivables Rs.23,28,370 Total Rs.3,76,44,811 4. Pursuant to the TPO’s order, draft assessment order was passed on 22.09.2021 incorporating the TP adjustment made by the TPO. Against the draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP upheld the TP adjustment on interest on IT(TP)A No.907/Bang/2022. M/s.Safran Engineering Services India Private Limited. 3 delayed receivables. As regards the TP adjustment on software development segment, the entire addition was deleted, pursuant to the DRP’s directions. On receipt of the DRP’s directions, the impugned final assessment order dated 25.07.2022 was passed. In the said final assessment order, the A.O. took the income determined as per the intimation issued u/s 143(1) of the I.T.Act and added the TP adjustment on interest on outstanding receivables. The computation of income in the final assessment order are as under:- Particulars Amount (Rs.) Total income as per 143(1) 16,94,74,530 Add : TP adjustment on delayed receivables 23,28,370 Assessed income 17,18,02,900 5. Aggrieved by the impugned final assessment order dated 25.07.2022, the assessee has filed the present appeal before the Tribunal. The assessee had raised 15 grounds. However, during the course of hearing, the learned AR has confined his submission to grounds 7 and 8 with regard to TP adjustment on interest on outstanding receivables and ground No.10 with regard to disallowance u/s 43B of the I.T.Act (adjustment made in the intimation u/s 143(1) of the I.T.Act). We shall adjudicate the grounds pressed, as under: Grounds 7 and 8 (TP Adjustment) Interest on outstanding receivables. 6. The brief facts in relation to the above grounds are as follows: IT(TP)A No.907/Bang/2022. M/s.Safran Engineering Services India Private Limited. 4 The TPO made adjustment on interest on delayed receivables from AEs. The TPO treated the delayed receivable as international transaction and imputed interest making an adjustment of Rs.23,28,370 (page 78 of the TPO’s order). The TPO applied SBI short term deposit interest rate for the relevant assessment year as the ALP interest rate (refer page 76 of the TPO’s order). The TPO, however, had observed that the credit period of 45 days is allowable as per the agreement and adjustment is computed on amounts outstanding beyond 45 days. 7. The DRP vide its directions dated 13.06.2022, rejected the contentions raised by the assessee. The DRP upheld the order of the TPO treating the interest on outstanding receivables as an international transaction and upheld the benchmarking of the TPO. 8. Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR submitted that the TPO has not provided the working of the adjustment determined in respect of interest on outstanding receivables. Further, it was argued that the TPO has not provided the basis for considering SBI short term deposit interest rate for benchmarking. It was contended that the assessee is a debt free company, therefore, the assessee does not bear any working capital risk as there are no working capital contingencies. Accordingly, it was submitted that no borrowed funds are used to pass on any presumed benefit to the AE. It is also stated that the assessee IT(TP)A No.907/Bang/2022. M/s.Safran Engineering Services India Private Limited. 5 did not pay any interest to its creditors or suppliers on delayed payments. The learned AR by placing reliance on the order of the Delhi Bench of the Tribunal in case of Bechtel India Pvt. Ltd. v. DCIT in ITA No.1478/Del/2015 (order dated 21.12.2015), submitted that since the assessee is a debt free company, no adjustment can be made towards notional interest on receivables. Further, the learned AR submitted that the assessee has trade receivables is Rs.10.57 crore as on 31.03.2018 and AE trade payable is Rs.12.54 crore. It was stated that if the same are netted of, it would result in negative receivable position and thereby would not warrant levy of any interest on delayed receivables. Finally, the learned AR by relying on the Bangalore Bench order of the Tribunal in assessee’s own case for assessment year 2017- 2018 in ITA No.297/Bang/2022 (order dated 24.08.2022), submitted that the matter may be remanded to the TPO for determining the ALP with regard to the interest on delayed receivables by following the Rules with a proper benchmarking study. The learned AR prayed for a similar direction in the present appeal also. 9. The learned Departmental Representative supported the orders of the TPO and the DRP. 10. We have heard rival submissions and perused the material on record. On identical facts, the Tribunal in assessee’s own case for assessment year 2017-2018 (supra) had restored the matter to the AO / TPO with specific IT(TP)A No.907/Bang/2022. M/s.Safran Engineering Services India Private Limited. 6 directions to determine the ALP with regard to interest on delayed receivable by following the rules with a proper benchmarking study. The contentions raised by the learned AR and the findings of the Tribunal, in assessee’s own case for assessment year 2017-2018, reads as follows:- “5. The ld. AR submitted that the assessee is not disputing the view taken by the AO/TPO that the delayed receivable is an international transaction. He submitted that once it is considered to be international transaction, then it is imperative for the TPO to determine the ALP under one of the prescribed methods. The ld. AR further submitted that the TPO has not carried out any benchmarking analysis as per rules, but simply adopted 6 months LIBOR + 400 basis points which is against the TP provision. He also highlighted that the AO has committed computational errors where he has taken the payable figure taken as receivable for computing interest on delayed receivable and has wrongly considered the weighted average period of receipt of payments as 256 whereas the actual is 51 days. The ld AR further submitted that the assessee has filed a petition u/s. 154 [pg. 496 & 497 of PB] for rectification these mistakes apparent on record but the AO has not still passed any order in this regard. The ld. AR submitted that the TPO ignored the fact that the assessee did not charge interest on delayed receivables from non-AEs. The assessee has receivables as on 31st March for an amount of Rs.24.35 crores whereas the receivable is Rs.14.96 crores and if the same are netted off, it would result in a negative receivables position, thereby not warranting levy of any interest on delayed receivables. The ld AR also brought to our attention that the assessee is a debt-free company and it is a settled principle that no adjustment for interest on delayed receivables is warranted for debt free companies since such companies are not required to pay any interest on borrowings. The ld AR relied on the decision of the Delhi Tribunal in the case of Bechtel India Pvt Ltd (ITA No.1478/Del/2015) and this order of the Tribunal is accepted by the Hon’ble Delhi High Court and the SLP filed in this regard before the Supreme Court is dismissed. It is therefore the prayer of the ld AR that the issue requires fresh examination at the end of AO/TPO. 6. Having heard the rival submissions of the parties, we are of the considered view that there is merit in the contentions raised by the ld. AR. As rightly submitted by the ld. AR, the ALP of the international transactions have to be determined by following one of the prescribed methods under the I.T. Rules. Admittedly, the TPO/DRP in the instant case has not followed the same. Accordingly, we deem it proper to remit the issue to the file of AO/TPO for determining the ALP with regard to interest on delayed receivables by following the Rules with a proper benchmarking study. The AO/TPO is also directed to rectify the mistakes IT(TP)A No.907/Bang/2022. M/s.Safran Engineering Services India Private Limited. 7 done in computation of interest raised by the assessee. Needless to say that the assessee may be given a reasonable opportunity of being heard. The assessee is free to raise all the contentions before the AO/TPO.” 11. Since the facts are identical for the relevant assessment year with that of the assessment year considered by the Tribunal for assessment year 2017-2018 (supra), by following the co-ordinate Bench order of the Tribunal in assessee’s own case, we restore the grounds 7 and 8 with regard to the TP adjustment on interest on outstanding receivables to the files of the AO / TPO. The AO / TPO is directed to follow the directions of the ITAT in assessee’s own case for assessment year 2017-2018. It is ordered accordingly. 12. In the result, grounds 7 and 8 are allowed for statistical purposes. Ground 10 : Disallowance u/s 43B of the I.T.Act. 13. We find this issue arises out of adjustment made in the intimation u/s 143(1) of the I.T.Act. The above issue of disallowance u/s 43B of the I.T.Act was not subject matter of adjudication in the draft assessment order nor before the DRP. The present appeal of the assessee arises out of the final assessment order (final assessment order, which has considered the issues which are adjudicated by the TPO, the draft assessment order and the DRP’s directions). Therefore, the issue of adjustment made in the intimation u/s 143(1) of the I.T.Act cannot be raised in the present appeal before the Tribunal. However, we notice that the assessee has filed rectification application as against the intimation u/s 143(1) IT(TP)A No.907/Bang/2022. M/s.Safran Engineering Services India Private Limited. 8 of the I.T.Act. The assessee shall pursue rectification application u/s 154 of the I.T.Act, and if aggrieved, may file an appeal as against the intimation u/s 143(1) / 154 order. With these observations, ground 10 is rejected. 14. In the result, the appeal filed by the assessee is allowed for statistical purposes. Order pronounced on this 23 rd day of November, 2022. Sd/- (Laxmi Prasad Sahu) Sd/- (George George K) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore; Dated : 23 rd November, 2022. Devadas G* Copy to : 1. The Appellant. 2. The Respondent. 3. The DRP - 2, Bangalore. 4. The DCIT TP-2 (2)(1), Bengaluru. 5. The DR, ITAT, Bengaluru. 6. Guard File. Asst.Registrar/ITAT, Bangalore