M/s. International Aerospace Manufacturing Private Limited, Bengaluru V. Deputy Commissioner Of Income Tax, Circle-3(1)(1), Bangalore

ITTPA 933/BANG/2022

• Counselvise Citation: [2022] 103 COUNSELVISE.COM (IT) 8831 (ITAT-BANGALORE)
• Duration Of Justice: 1 month(s) 14 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 08-11-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Next Hearing Date: 02-11-2022
• Assessment Year: 2018-2019
• Appeal Filed On: 25-09-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SHREESH KUMAR HEGE
• Keywords: Transfer pricing; International transaction; Retrospective amendment; Question of law; Notional interest
• Section: 92B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER IT(TP)A No.933/Bang/2022 Assessment year : 2018-19 M/s. International Aerospace Manufacturing Private Ltd., Survey No.3, Varthur Hobli, Kempapura Village, Bengaluru – 560 037. PAN: AACCI 4063N Vs. The Deputy Commissioner of Income Tax, Circle 3(1)(1), Bangalore. APPELLANT RESPONDENT Appellant by : Shri Shreesh Kumar Hege, CA Respondent by : Shri K. Sankar Ganesh, Jt.CIT(DR)(ITAT), Bengaluru. Date of hearing : 03.11.2022 Date of Pronouncement : 09.11.2022 O R D E R Per Padmavathy S., Accountant Member This appeal is against the final order of assessment passed u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] dated 29.7.2022 for the assessment year 2018-19. 2. The assessee is a company which was started in 2010 as 50:50 joint venture between Rolls Royce and Hindustan Aeronautics Ltd. for manufacture of high precision aero engine compressor, gas turbine IT(TP)A No.933/Bang/2022 Page 2 of 9 parts. The assessee filed the return of income for AY 2018-19 on 29.3.2019 declaring a total income of Rs.4,71,09,140 under normal provisions of the Act and Rs.8,64,84,560 u/s. 115JB. The case was selected for scrutiny through CASS and accordingly a notice u/s. 143(2) was served on the assessee. Subsequently, a reference was made to the TPO for determination of ALP of the international transaction of the assessee is having with its AE. The TPO made an adjustment of RS.2,75,38,549 towards interest on delayed receivables by applying the rate of 6.57%. The DRP confirmed the TP adjustment. The assessee is in appeal against the final order of assessment passed pursuant to the directions of the DRP. 3. Ground Nos.1 & 2 are general. Grounds 3 to 7 relate to the notional interest charged on delayed receivables. In this regard, the ld. AR submitted that the rate applied @ 6.57% is adopted based on SBI short term lending rates which is not correct since the amount of receivable is in foreign currency. The ld AR further submitted that the assessee has availed working capital facility from bank on which assessee is paying interest determined on LIBOR + basis points and therefore the interest if any on delayed receivables ought to be determined on LIBOR + basis points. In this regard, the assessee relied on the decision of the Hon’ble High Court of Delhi in CIT v. Cotton Natural India P. Ltd. [2015] 55 taxmann.com 523 (Delhi). The ld. AR also submitted that the TPO did not consider the credit period of 75 days as agreed between the assessee and the AE while computing the notional interest. IT(TP)A No.933/Bang/2022 Page 3 of 9 4. The ld. DR relied on the order of the lower authorities. 5. We have considered the rival submissions and perused the material on record. In our opinion, the impugned issues of whether the interest on receivable is a separate international transaction and the rate of interest to be considered has been considered in the decision of the coordinate Bench of the Tribunal in the case of Swiss Re Global Solutions India Pvt. Ltd. (Order dated 21.01.2022 passed in IT(TP)A No. 397/Bang/2021). wherein it was held as under:- “35. The only other issue that remains for adjudication is ground No.15 with regard to re-characterizing certain trade receivables as unsecured loans and computing notional interest on such trade receivables. The main contention of the ld. AR is that deferred receivables would not constitute a separate international transaction and need not be benchmarked while determining the ALP of the international transaction. In our opinion, this issue was considered by the Tribunal in assessee’s own case for AY 2014-15 and in para 23 to 23.9 of the order dated 21.5.2020 this Tribunal held as under:- “23. Ground No. 14-17 alleged by assessee against adjustment of notional interest on outstanding receivables. From TP study, it is observed that payments to assessee are not contingent upon payment received by AEs from their respective customers. Further Ld.AR submitted that working capital adjustment undertaken by assessee includes the adjustment regarding the receivables and thus receivables arising out of such transaction have already been accounted for. Alternatively, he submitted that working capital subsumes sundry creditors and therefore separate addition is not called for. 23.1. Ld.TPO computed interest on outstanding receivables under weighted average method using LIBOR + 300 basis points applicable for year under consideration that worked out to 3.3758% on receivables that exceeded 30 days. It has been argued by Ld.AR that authorities below disregarded IT(TP)A No.933/Bang/2022 Page 4 of 9 business/commercial arrangement between the assessee and its AE's, by holding outstanding receivables to be an independent international transaction. 23.2. Ld.AR placed reliance on decision of Delhi Tribunal in Kusum Healthcare (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT v. Kusum Health Care (P.) Ltd. [2018] 99 taxmann.com 431/[2017] 398 ITR 66, held that no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Delhi Tribunal in case of Bechtel India (P.) Ltd. v. Dy. CIT [2016] 66 taxman.com 6 which subsequently upheld by Hon'ble Delhi High Court vide order in Pr. CIT v. Bechtel India (P.) Ltd. [IT Appeal No. 379 of 2016, dated 21-7-16] also upheld by Hon'ble Supreme Court vide order, in CC No. 4956/2017. 23.3. It has been submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. He also submitted that into company agreements provides for extending credit period with mutual consent and it does not provide any interest clause in case of delay. He also argued that the working capital adjustment takes into account the factors related to delayed receivables and no separate adjustment is required in such circumstances. 23.4. On the contrary Ld.CIT.DR submitted that interest on receivables is an international transaction and Ld.TPO rightly determined its ALP. In support of the contentions, he placed reliance on decision of Delhi Tribunal order in Ameriprise India (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 237 wherein it is held that, interest on receivables is an international transaction and the transfer pricing adjustment is warranted. He stated that Finance Act, 2012 inserted Explanation to section 92B, with retrospective effect from 1.4.2002 and sub-clause (c) of clause (i) of this Explanation provides that: (i) the expression "international transaction" shall include— IT(TP)A No.933/Bang/2022 Page 5 of 9 . . . . . (c) 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 payment or receivable or any other debt arising during the course of business;. . . . ' 23.5. Ld.CIT.DR submitted that expression 'debt arising during the course of business' refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non-payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case noted a decision of the Hon'ble Bombay High Court in the case of CIT v. Patni Computer Systems Ltd. [2013] 33 taxmann.com 3/215 Taxman 108 (Bom.), which dealt with question of law: "(c) 'Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?" 23.6. Ld.CIT.DR submitted that, while answering above question, Hon'ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that IT(TP)A No.933/Bang/2022 Page 6 of 9 non/under-charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO. Insofar as charging of rate of interest is concerned, he relied on decision of the Hon'ble Delhi High Court in CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523/231 Taxman 401 holding that currency in which such amount is to be re-paid, determines rate of interest. He, therefore, concluded by summing-up that interest on outstanding trade receivables is an international transaction and its ALP has been correctly determined. 23.7. We have perused the submissions advanced by both the sides in the light of the records placed before us. This Bench referred to decision of Special Bench of this Tribunal in case of Special Bench of ITAT in case of Instrumentation Corpn. Ltd. v. Asstt. DIT (IT) [2016] 71 taxmann.com 193/160 ITD 1 (Kol. - Trib.), held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per Explanation to section 92B of the Act. We also perused decision relied upon by Ld.AR. In our considered opinion, these are factually distinguishable and thus, we reject argument advanced by Ld.AR. 23.8. Alternatively, it has been argued that in TNMM, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and loans and advances to associated enterprise would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions (P.) Ltd. v. Dy. CIT [2018] 91 taxmann.com 286 has observed that: "There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an AE, the arrangement IT(TP)A No.933/Bang/2022 Page 7 of 9 reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd v. DCIT [2017] 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterised as international transactions." 23.9. In view of the above, we deem it appropriate to set aside this issue to Ld.AO/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in accordance with law.” 36. Accordingly, we are of the opinion that deferred receivables would constitute an independent international transaction and the same is required to be benchmarked independently as held by the Hon’ble Karnataka High Court in PCIT v. AMD (India) Pl. Ltd., ITA No.274/2018 dated 31.8.2018. 37. Once we have held that the transaction between the assessee and AE was in foreign currency with regard to receivables and transaction was international transaction, then transaction would have to be looked upon by applying the commercial principles with regard to international transactions and accordingly proceeded to take into account interest rate in terms of London Inter Bank Offer Rate [LIBOR] and it would be appropriate to take the LIBOR rate + 2%. For this purpose, we place reliance on the judgment of the Bombay High Court in the case of CIT v. Aurionpro Solutions Ltd., 99 CCH 0070 (Mum HC). It is ordered accordingly.” IT(TP)A No.933/Bang/2022 Page 8 of 9 6. In so far as the question of rate of interest is concerned, we find that this issue is no more res integra in view of the judgment of the Hon'ble Delhi High Court in the case of Cotton Naturals (I) (P.) Ltd (supra) in which it has been held that it is the currency in which the loan is to be repaid which determines the rate of interest and hence the prime lending rate should not be considered for determining the interest rate. 7. Following the above order of the Tribunal and the judgment of the Hon’ble Delhi High Court, we hold that the treatment of interest on deferred receivables is an independent international transaction and the interest rate to be adopted is LIBOR rate. Accordingly we direct the AO to adopt interest rate at LIBOR + 3% by placing reliance on the decision of coordinate bench in the case of Xchanging Solutions Ltd vs DCIT [IT(TP)A No.2570/Bang/2019 dated 16.08.2022]. We also direct the AO to consider the credit period as has been agreed between the assessee and the AE while computing the interest on receivables. It is ordered accordingly. 8. Ground No.8 is regarding the AO determining total income to be at Rs.7,46,47,689 as against the returned income of Rs.4,71,09,139. 9. We have heard both the parties. On perusal of record, we notice that the AO has considered the correct income returned as per the provisions of the Act at Rs.4,71,09,140 in the final order of assessment and has added the TP adjustment of Rs.2,75,38,549. However, it is noticed that in the computation sheet for arriving at the tax demand, the IT(TP)A No.933/Bang/2022 Page 9 of 9 income from business/profession is taken at Rs.19,86,14,200 and income from other sources at Rs.2,88,74,001 resulting in a total income of Rs.22,74,88,201 to be the income returned. In this regard, we direct the AO to verify and consider the correct income returned by the assessee. It is ordered accordingly. 10. In the result, the appeal by the assessee is partly allowed. Pronounced in the open court on this 9 th day of November, 2022. Sd/- Sd/- ( BEENA PILLAI ) ( PADMAVATHY S. ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 9 th November, 2022. /Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.