STRYKER GLOBAL TECHNOLOGY CENTER PRIVATE LIMITED,DELHI V. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 22(2), DELHI

ITA 4014/DEL/2024

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The case involves Stryker Global Technology Centre Private Ltd., which appealed against the final assessment order passed under various sections of the Income Tax Act, 1961, concerning the Assessment Year 2020-21. The primary issues revolved around the adjustments made by the Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) concerning the arm's length pricing of international transactions related to CAD/engineering design services, software development services, and IT-enabled services. The Tribunal focused on the functional comparability of selected companies and the appropriateness of the interest rate applied to outstanding receivables from associated enterprises (AEs).

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 474582 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Assessment Year: 2020-2021
• Other Referred Cases: Agnity India Technologies Pvt. Ltd. vs. PCIT, M/s Avaya India Pvt Ltd vs. PCIT, Open Text Corporation India Pvt Ltd vs. PCIT, Autodesk India Private Limited vs. PCIT, FCG Software Services (India) Private Limited vs. PCIT, Kaplan India Private Limited vs. PCIT, Manhattan Associates (India) Development Centre Pvt. Ltd vs. PCIT, Symantec Software Solutions Pvt Ltd vs. PCIT, Capgemini Technology Services India Ltd vs. PCIT, Logica Private Limited vs. PCIT, LG Soft India Private Limited vs. PCIT, VeriSign Services India Pvt. Ltd. vs. PCIT, Sandvine Technologies (India) Pvt. Ltd. vs. PCIT, SAP Labs India Pvt. Ltd. vs. PCIT, Agility India Technologies Pvt. Ltd. vs. PCIT, Oracle (OFSS) BPO Service Pvt Ltd vs. PCIT, CNO IT Services (India) P Ltd vs. PCIT, NXP Semiconductors India Pvt Ltd vs. PCIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S.K. JHADAV
• Assessee Lawyers: RAVI SHARMA
• Keywords: Transfer pricing; International transaction; Question of law; Notional interest; Related party transaction; Bogus
• Section: 143(3); 192; 153; 43; 22; 13; 92; 92B; 92D

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘H’: NEW DELHI BEFORE SHRI S.RIFAUR RAHMAN, ACCOUNTANT MEMBER and SHRI VIMAL KUMAR, JUDICIAL MEMBER ITA No.4014/DEL/2024 (Assessment Year: 2020-21) Stryker Global Technology Centre Private Ltd., vs. DCIT, Circle 22 (2), C – 3, 3rd Floor, SDA Commercial Complex, Delhi. Hauz Khas, South West Delhi, New Delhi – 110 016. (PAN : AAJCS9528D) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Ravi Sharma, Advocate Ms. Shruti Khmta, CA REVENUE BY : Shri S.K. Jhadav, CIT DR Date of Hearing : 16.01.2025 Date of Order : 26.03.2025 O R D E R PER S.RIFAUR RAHMAN, AM : 1. This appeal is filed by the assessee against the final assessment order dated 30.07.2024 passed u/s 143(3) r.w.s.144C (13) r.w.s. 144B of the Income Tax Act, 1961 (hereinafter called ‘the Act’) subsequent to the directions of the Ld. Dispute Resolution Panel (DRP)/TPO for Assessment Year 2020-21 raising following grounds of appeal :- “1. On the facts and circumstances, of the case & in law, the final assessment order under section 143(3) r.w.s, 144C(13) of the Income-tax Act, 1961 ('the. Act') dated .July 30, 2024 passed by 2 ITA No.4014/DEL/2024 the Learned Assessing Officer (Td, AO') and directions under section l44C(5) of the Act dated June 26, 2024 passed by the Learned Dispute Resolution Panel ('Ld. DRP') are erroneous and bad in law. 2. On the facts and circumstances of the case & in law, the Ld. AO erred in' assessing the total income of the Appellant at INR 68,20,29,190 as against the returned income of INR 53,49,66,390. 3. On the fads and circumstances of the case & in law, the final assessment order under section 143(3) r.w.s. 144C(13) of the Act dated July 30, 2024 and Ld. DRP's directions under section 144C(S) of the Act dated June 26, 2024 are barred by limitation provided under section 153 of the Act and hence, deserves La be held as void-ab-initio, bad in 1m.V' and time-barred. 4. On the facts and circumstances of the case & in law, the Ld, Assessing Officer/ TPO/ DRP erred in making an adjustment of INR 14,64,48,168 pertaining to provision of CAD/ engineering design services, provision of software development services and provision of IT enabled services and in doing so have grossly erred in: 4.1 disregarding the TP documentation maintained by the Appellant in accordance with section 92D of the Act read with Rule l0D of the Income tax Rules, 1962 ('the Rules'); 4.2 not appreciating that none of the conditions set out in section 92C(3) of the Income tax Act, 1961 ('the Act') are satisfied in the present case; 4.3 not following the specific directions of the PRP for considering the corrected margins from the audited financial statement of the respective companies in violation of section 144C(10); 4.4 modifying comparability analysis undertaken by the Appellant in the TP documentation by /' including below mentioned companies in the final set that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed: 3 ITA No.4014/DEL/2024 (a) Wipro Ltd (b) Infosys Ltd (c) Tata Elxsi Ltd (d) L&T Technology Services Ltd (e) Nihilent Ltd (f) LTI Mindtree Ltd (g) CG- VAK Software & Exports Ltd (h) Inteq BPO Services Pvt Ltd (i) Cybage Software Pvt Ltd (j) AXISCADES Technologies Ltd 4.5 excluding below comparable companies selected by the Appellant on arbitrary grounds even though the said companies are functionally comparable: (a) Satyam Venture Engineering Services Pvt Ltd (b) Sundaram Business Services Ltd (c) Datamatics Business Solutions Ltd (d) Hinode Technologies Pvt Ltd . 5. On the facts and circumstances of the case & in law, the Ld. Assessing Officer/ TPO/ DRP erred in enhancing the income of the Appellant by INR 6,14,636 in respect of notional interest on delay in collection of outstanding receivables from its AEs. In doing so, the Ld. Assessing Officer/TPO/ DRP grossly erred in: 5.1 disregarding the fact. that the credit period allowed to the AEs does not constitute a separate international transaction of an advance or loan! cannot be re-characterized as loan or advance; 5.2 arbitrarily levying the interest rate of 6.256% (interest rate of 6 month LIBOR plus 425 bps) without providing any analysis in arriving at such an interest rate; and 5.3 Not appreciating the fact that the Appellant is a debt- free entity and hence does not incur any interest cost for funding its working capital requirement. 6. On the facts and circumstances of the case & in law, the Ld. AO erred in initiating penalty proceedings under section 270A of the Act.” 4 ITA No.4014/DEL/2024 2. At the time of hearing, ld. AR of the assessee submitted that assessee prefers to press only Grounds No.4.3 & 4.4 relating to deletion of three comparables, namely, Wipro Limited, Infosys Ltd. and Tata Elexi Limited and he submitted that it is suffice to adjudicate these three comparables and other comparables are not pressed at this stage. The relevant facts of the case are, the assessee started its operations from 1st October 2006 as a global technology captive centre for Stryker Group in India and the assessee is engaged in rendering Computer Aided Designing (‘CAD’)/ engineering design, contract software development, and IT enabled back-office support services to the Stryker Group entities under the direction and supervision of the Associated Enterprises (AEs). During the year, the assessee was also engaged in trading of certain medical equipment purchased locally which is unrelated to its international transaction of provision of support services to AEs. The assessee undertook various international transactions with its AEs in the Financial Year (FY) 2019-20. The assessee has benchmarked its international transaction of Provision of CAD/ engineering design services, Provision of contract software development services and Provision of IT enabled services selecting Transactional Net Margin Method (‘TNMM’) as the Most Appropriate Method (MAM) with Operating Profit/Total Cost as the relevant Profit Level Indicator (‘PLI’).: 5 ITA No.4014/DEL/2024 Nature of international transaction Name of the tested party Most appropriate method Net profit indicator Tested Party's price/ operating margin Comparables Margin Mean/Range Provision of CAD/ engineering design services SGTC TNMM OP/TC 17.91% Range: 11.30% to 16.37% Median: 12.86% Provision of contract software development services Provision of IT enabled services 3. During proceedings before the TPO, the TPO proposed adjustment in respect of transactions of provisions of CAD/Engineering Design Services, provisions of contract development services and provision of IT Enabled Services. The TPO rejected the economic analysis submitted by the assessee and also rejected 8 comparables out of 13 comparables selected in the TP documentation submitted by the assessee and proposed 12 new comparables. Accordingly, he determined the Arm’s Length Price (ALP) of OP/OC of 23.66% being the median of the data set with 21.04% being the 35th percentile and 25.12% being the 65th percentile to arrive at the ALP range and accordingly proposed ALP adjustment of Rs.14,64,48,168/-. 4. Aggrieved with the above order, assessee filed objections before the ld. DRP. After considering detailed objections of the assessee, ld. DRP remanded the matter back to the file of TPO to revaluate the functional 6 ITA No.4014/DEL/2024 comparability of some of the comparables excluded/included by it and further directed the TPO to verify and consider the correct operating margins from the annual reports. 5. Post DRP directions, TPO passed the order giving effect on 24.06.2024 and passed the order giving effect to the DRP order by determining the ALP of Rs.14,70,62,804/- to the income of the assessee. Accordingly, final assessment order was passed by the AO. 6. Aggrieved with the above order, assessee is in appeal before us raising various grounds of appeal. At the time of hearing, he prayed that the Bench may consider the plea of the assessee to exclude three comparables which is suffice to address the ALP issues determined by the AO/TPO. At the time of hearing, ld. AR submitted that the OGE passed by the TPO has violated the clear directions of the DRP and not followed the binding directions of ld. DRP by taking the correct operating margins of the comparable companies from the annual reports. With regard to three comparables, he submitted as under :- (i) Tata Elxsi Ltd. 1. Functionally Dissimilar - Tata Elxsi addresses the complete product development lifecycle from R&D, new product development and testing to maintenance engineering for Broadcast, Consumer Electronics, and Communications. It's services include the below: (i)Embedded product design – Provides technology consulting, new product design, development, and testing services etc. (ii)Industrial Design and Visualization – Provides consumer research and strategy, branding and graphics, product design, service design, user experience design, transportation design, visualization, and manufacturing support. (refer page 1616 of ARC) 7 ITA No.4014/DEL/2024 As per company’s website, it is engaged in premium engineering services right from advanced R&D in new technology and system architecture exploration to actual development, validation, and deployment. 2. Non-availability of segmental information (refer page 1721 of ARC) 3. Owns Brands/Intangibles - Tata Elxsi also makes use of its highly innovative and IP led technology to provide its service offerings and solutions to its customers. Undertaking R&D on own account including the owning of IP would mean that this entrepreneurial company is engaged in performing additional functions over and above the routine functions, namely assuming high risks and developing intangible assets, which has resulted in such abnormal results, as compared to the risk insulated captive services provided by the Assessee (INR 12 crores).(refer page 1718 of ARC) 4. High Turnover as compared to Appellant- INR 1609 crores (refer page 1684 of ARC) It is submitted that the diversified activities performed by the comparable cannot be equated to provision of routine CAD / engineering design, contract software development services and IT enables services provided by the Assessee (ii) Infosys Limited 1. Functionally Dissimilar - derives revenues primarily from IT services comprising software development and related services, maintenance, consulting and package implementation, and from licensing of software products and platforms across the Company’s core and digital offerings (together referred to as “software-related services”). It is engaged in premium engineering services right from advanced R&D in new technology and system architecture exploration to actual development, validation, and deployment. This includes emerging technologies such as IoT (Internet of Things), cloud, smart mobility, and artificial intelligence. (refer to page 748 and 779 of ARC) 2. Own IP Brand – Infosys has a huge brand value and is the biggest intangible asset of the company (INR 77 crores of intangibles- Page 677 and 740 of ARC) 3. High Turnover- INR 79,000 crores (refer page 742 of ARC) 4. Tangible Assets- INR 11,000 crores (refer page 740 of ARC) 5. Non-availability of segmental information (refer page 792 of ARC) It is submitted that the diversified activities performed by the comparable cannot be equated to provision of routine CAD / engineering design, contract 8 ITA No.4014/DEL/2024 software development services and IT enables services provided by the Assessee. (iii) Wipro Limited 1. Functionally dissimilar – provides a range of services, which include digital strategy advisory, customer-entric design, technology consulting, IT consulting, custom application design, development, re- engineering and maintenance, systems integration, package implementation, global infrastructure services, business process services, cloud, mobility and analytics services, research and development and hardware and software design. the Assessee submits that the said activity of Wipro is not comparable to the routine software development services rendered by the Assessee. Considering that the Assessee is a low-risk captive service provider. (refer Page 1769 of the ARC) 2. Non-availability of segmental information (refer page 1769 of ARC) 3. Owns IP - Wipro has a rich portfolio of 60+ enterprise-grade products, platforms and frameworks and has been actively investing in strengthening, enhancing and refreshing the portfolio (Virtual Desk, Wipro HOLMES). (refer Page No. 1793 and 1907 of the ARC) 4. High Turnover- INR 50,380 crores (page 1885 of ARC) 5. Tangible Assets- INR 5047 crores 6. Intangible Assets- INR 319 crores (page 1883 of ARC) 7. Incures marketing & brand building expenses - INR 222 crores (Page 1885 of ARC) It is submitted that the diversified activities performed by the comparable cannot be equated to provision of routine CAD / engineering design, contract software development services and IT enables services provided by the Assessee.” 7. Ld. AR of the assessee relied on the following decisions :- 1. Delhi High Court in the case of Agnity India Technologies Pvt. Ltd.- ITA No. 1204/2011 2. Delhi High Court in the case of M/s Avaya India Pvt Ltd- ITA 532/ 2019 3. Open Text Corporation India Pvt Ltd (earlier known as Cordys Software India Products Ltd) [TS-500-ITAT-2018(HYD)-TP] 9 ITA No.4014/DEL/2024 4. Autodesk India Private Limited [TS-532-ITAT-2018(Bang)-TP] 5. FCG Software Services (India) Private Limited [TS-18-ITAT- 2016(Bang)-TP] 6. Kaplan India Private Limited (ITA No. 2907/DEL/2014) 7. Manhattan Associates (India) Development Centre Pvt. Ltd [TS-464- ITAT-2018(Bang)-TP] 8. Symantec Software Solutions Pvt Ltd [TS-500-ITAT 2020(Mum)-TP] and Capgemini Technology Services India Ltd (formerly known as IGATE Global Solutions Ltd) [TS-1095-ITAT-2017(HYD)-TP] 9. Logica Private Limited [IT(TP)A No. 1129/Bang/2011)] 10. LG Soft India Private Limited [IT TP (A) No. 3122/Bang/2018 11. VeriSign Services India Pvt. Ltd.[IT(TP)A No.3151/Bang/2018] 12. Sandvine Technologies (India) Pvt. Ltd. IT(TP)A No.647/Bang/2017]8. M/s. SAP Labs India Pvt. Ltd., (ITA No. 684/Bang/2017) 13. Agility India Technologies Pvt. Ltd. (ITA No.3856 (Del)/2010) 14. Hon’ble Supreme court in the case of Oracle (OFSS) BPO Service Pvt Ltd [TS-1248-SC-2018-TP] 15. CNO IT Services (India) P Ltd (earlier known as Conseco Data Services (India) P Ltd) [TS-63-ITAT-2018(HYD)-TP] 16. NXP Semiconductors India/ Pvt Ltd, IT(TP)A No. 1560/Bang/2012 8. Ld. DR of the Revenue relied on the orders of the lower authorities. 9. Considered the rival submissions and material placed on record. We observed that all the three comparables are discussed in the decision of Delhi High Court in the case of Agnity India Technologies Pvt. Ltd.- ITA No. 1204/2011 (supra) & M/s. Avaya India Pvt. Ltd. – ita 10 ITA No.4014/DEL/2024 No.532/2019 (supra), relied upon by the assessee. The relevant findings of Hon’ble High Court is reproduced below :- “Agnity India Technologies Pvt. Ltd. “8. It is a common case that Satyam Computer Services Ltd. should not be taken into consideration. The tribunal for valid and good reasons has pointed out that Infosys Technologies Ltd. cannot be taken as a comparable in the present case. This leaves L&T Infotech Ltd. which gives us the figure of 11.11 %, which is less than the figure of 17% margin as declared by the respondent- assessee. This is the finding recorded by the tribunal. The tribunal in the impugned order has also observed that the assessee had furnished details of workables in respect of 23 companies and the mean of the comparables worked out to 10%, as against the margin of 17% shown by the assessee. Details of these companies are mentioned in para 5 of the impugned order. 9. In view of the aforesaid position, we do not think that any substantial question of law arises for consideration. The appeal is dismissed.” “M/s. Avaya India Pvt. Ltd. “18. On the aspect of exclusion of comparables that have a high economic upscale viz., Infosys, TCS and Wipro, particular reference may be made to the decision of this Court in PCIT v. BC Management Services Pvt. Ltd. (supra) where a particular reference was made to TCS E-serve as under: “13. ...The third comparable that the AO/TPO excluded is TCS E-serve. The ITAT observed that though there is a close functional similarity between that entity and the assessee, however, there is a close connection between TCS E-serve and TATA Consultancy Service Ltd. which was high brand value: that distinguished it and marked it out for exclusion. The ITAT recorded that the brand value associated with TCS Consultancy reflected impacted TCS E-serve profitability in a very positive manner. This inference too in the opinion of Court, cannot be termed as unreasonable. The rationale for exclusion is therefore upheld.” 11 ITA No.4014/DEL/2024 19. The same decision also noted that one reason for exclusion was the “unavailability of the segmental data” for the above comparable. 20. In M/s. Oracle (OFSS) BPO Services Pvt. Ltd. (decision dated 5th February 2018 in ITA 124 of 2018) while upholding the exclusion of M/s.Wipro Ltd. from the list of comparables it was noted that the ITAT took into account the Related Party Transactions („RPT‟).The filter adopted was to exclude comparables with unrelated party transactions equal to or in excess of 75% of their business. The ITAT did that on the basis that Wipro Ltd. had a significant brand presence in the market and could, therefore, not be deemed to be a comparable entity. This Court explained the RPT filter as under: “The RPT filter, is relevant and fits in with the overall scheme of a transfer pricing study which is premised primarily on comparing light entities having similar if not identical functions. Therefore, if a particular entity predominantly has transactions with its associate enterprise - in excess of a certain threshold percentage, its profit making capacity may resulted in a distorted picture, either way.” 21. A reference may next be made to the decision in The Principal Commissioner of Income Tax-3 v. Evalueserve Sez (Gurgaon) Pvt. Ltd. (supra) where a reference is made to the earlier decision to the BC Management Services Pvt. Ltd. (supra). This decision dealt with the exclusion of three specific comparables, which have also involved in the present case namely M/s.TCS E- Serve Ltd., M/s.TCS E-Serve International Ltd. and M/s. Infosys BPO Ltd. This Court upheld the exclusion of all three comparables and in particular since the entities had “a high brand value and therefore were able to command greater profits; besides they operated on economic upscale.” 22. The Revenue’s appeal against the same Assessee for AY 2011-2012 against another order of the ITAT excluding TCS E- Serve International Limited, Infosys BPO Limited from comparables met the same fate. In its decision dated 29th August, 2018 the Court referred to the earlier decision dated 26th February, 2018 which again pertained to AY 2010-2011. Reference was again made to the decision in BC Management Services Limited. 12 ITA No.4014/DEL/2024 23. It appears therefore that this Court has consistently upheld decisions of the ITAT excluding both these very comparables. The ITAT itself appears to have taken a consistent view in a large number of cases excluding these two comparables and its decisions have been upheld by this Court. Illustratively reference may be made to the decision of the Tribunal in Vertex Customer Services India Private Limited v. DCIT (2017) 88 Taxmann.Com 286 (DelTri), Stryker Global Technology Centre Private Limited v. DCIT (2017) 87 Taxmann.com 43 (Del-Tri), Samsung Heavy Industries Private Limited v. DCIT (2017) 84 Taxmann.com 154 (Del-Tri) and Equant Solutions India Private Limited v. DCIT (2016) 66 Taxmann.com 192 (Delhi-Tribunal). 24. All of these decisions pertained to AY 2010-2011. What weighed invariably is the fact that both companies had huge turnovers when compared to the tested entity. Both entities had close connection of the Tata Group of Companies and TCS E- Serve International had given a huge amount to TCS towards brand equity. Further there was no segmental bifurcation between the transaction processing and technical services. The assets employed by TCS E-Serve along with huge intangibles in the form of brand value were found to have a definite considerable effect on its PLI. These factors vitiated its comparability under the FAR analysis with the tested company, which could be a capital service provider without much intangible and risks. 25. In this context it requires to be noted that the ITAT also referred to the decision of this Court CIT v. Agnity India Technologies Private Limited (2013) 36 Taxmann.com 289. 26. The Court may also note that the Karnataka High Court has in PCIT v. Softbrands (2018) 406 ITR 513 (Kar) noted as under: “48. The Tribunal of course is expected to act fairly, reasonably and rationally and should scrupulously avoid perversity in their Orders. It should reflect due application of mind when they assign reasons for returning the particular findings. 49. For instance, while dealing with comparables of filters, if unequals like software giant Infosys or Wipro are 13 ITA No.4014/DEL/2024 compared to a newly established small size Company engaged in Software service, it would obviously be wrong and perverse. The very word “comparable” means that the Group of Entities should be in a homogeneous Group. They should not be wildly dissimilar or unlike or poles apart. Such wild comparisons may result in the best judgment assessment going haywire and directionless wild, which may land up the findings of the Tribunal in the realm of perversity attracting interference under section 260-A of the Act.” 27. There is merit in the contention of the Assessee that the scale of operations of the comparables with the tested entity is a factor that requires to be kept in view. TCS E-Serve has a turnover of Rs.1359 crores and has no segmental revenue whereas the Assessee‟s entire segmental revenue is a mere 24 crores. As observed by this Court in its decision dated 5th August 2016 in ITA 417/2016(PCIT v. Actis Global Services Private Limited) “Size and Scale of TCS‟s operation makes it an inapposite comparable vis-avis the Petitioner.” As already pointed out earlier there is a closer comparison of TCS E-Serve Limited with Infosys BPO Limited with each of them employing 13,342 and 17,934 employees respectively and making Rs.37 crores and Rs.19 crores as contribution towards brand equity. When Rule 10(B) (2) is applied i.e. the FAR analysis, namely, functions performed, assets owned and risks assumed is deployed then brand and high economic upscale would fall within the domain of “assets” and this also would make both these companies as unsuitable comparables. 28. The Director’s report of TCS E-Serve Limited bears out the contention of the Assessee that both entities have been leveraging TCSs scale and large client base to increase their business in a significant way. The submission that the two comparables offer an illustration of \"an identical transaction being conducted in an uncontrolled manner” overlooks the effect of the Tata brand on the performance of the impugned comparables. The question was not merely whether the margins earned by the Tata group in providing captive service to the Citi entities were at arm’s length. The question was whether they offered a reliable basis to re-calibrate the PLI of the Assessee whose scale of operations was of a much lower order than the two impugned comparables. The mere fact that the transactions were identical was not, in terms of the law 14 ITA No.4014/DEL/2024 explained in the above decisions, either a sole or a reliable yardstick to determine the apposite choice of comparables. 29. For all of the aforementioned reasons, the Court finds merit in the contention of the Assessee that both the impugned comparables viz., TCS EServe Limited and TCS E-Serve International Limited ought to be excluded from the list of comparables for the purposes of determining the ALP of the international transactions involving the Assessee and its AEs.” 10. Respectfully following the aforesaid decisions of Hon’ble Delhi High Court in Agnity India Technologies Pvt. Ltd. & M/s. Avaya India Pvt. Ltd. (supra), we direct to exclude the aforesaid three companies. Accordingly, grounds no.4.3 & 4.4 are allowed. 11. Coming to Ground no.5 raised by the assessee, the relevant facts are, during assessment proceedings, the TPO observed that assessee has huge outstanding receivables and he treated the same as loan advanced to its AEs and accordingly ascertained the arm’s length interest rate at LIBOR plus 425 basis point i.e. 6.256% and thereby proposed the addition of Rs.6,14,630 being the ALP of international transactions relating to outstanding receivables. 12. Aggrieved assessee filed objections before the ld. DRP and ld. DRP sustained the addition. 13. Aggrieved assessee filed the present ground before us on this issue and before us, ld. AR submitted as under :- 15 ITA No.4014/DEL/2024 18. It was submitted that in a case where even if it is assumed to take the aforesaid transaction of delay in receipt of receivable, as a debit balance in the hands of the AEs till the time it has been actually remitted to the Appellant and for which the AEs would have paid interest, it is pertinent to note that a continuing debit balance, in our humble submission, is not an international transaction per se, but is a result of an international transaction. 19. Section 92 of the Act provides for computation of ‘income’ arising from an ‘international transaction’ having regard to the arm’s length price. “International transaction” as defined in section 92B of the Act, is a term of wide amplitude. The essential requirement for a ‘transaction’ to be covered within the ambit of section 92B of the Act is that it should be between two or more 'associated enterprises', either of whom is a non-resident. 20. Thus, it can be concluded that there being no “income arising” from a receivable on a standalone basis, the same would not constitute an international transaction. This aspect has been clearly dealt in the ruling of the Bombay High Court in the case of Vodafone India Services Private Limited vs Union of India (WP No 871 of 2014). 21. Similarly, the Hon’ble Delhi ITAT in the ruling of Bharti Airtel Limited vs Additional Commissioner of Income Tax (ITA 5816/Del/2012) also held the same view of the Hon’ble Bombay High Court. 22. Thus, given the fact that the receivables per se do not fall within the ambit of the definition of “international transaction”, the Appellant contends that there is no need to impute an interest on the overdue receivables and thus the entire adjustment has to be nullified. 23. In the current context, the Hon’ble Hyderabad ITAT in the case of Pegasystems Worldwide India Pvt. Ltd vs ACIT, [ITA No. 1758/Hyd/2014] has considered the use of the rule of the ejusdem generis in the context as to whether deferred receivables constitute an international transaction, considering the amended definition of the international transaction as laid down under the Finance Act 2012 and held that “deferred receivables” would not constitute an international transaction. 24. It was submitted that debit balance relates to the occurrence of a principal transaction. It is not an independent transaction in the sense that they are not undertaken on a standalone basis unlike a loan or advance. 25. In view of the aforesaid, it was respectfully submitted that, even if the Appellant has received receivables from its associated enterprise with time 16 ITA No.4014/DEL/2024 lag, no interest can be charged on such extended credit limit as extension of credit period cannot be construed as “international transaction”. Outstanding receivables cannot be re-characterized as a loan 26. The Appellant placed reliance on a recent update from the Supreme Court of India with respect to the issue on hand in the case of Bechtel India Pvt Ltd (TS-591-SC-2017-TP) wherein the tax department had filed a Special Leave Petition (“SLP”) against the judgment passed by the Hon’ble Delhi HC. The Supreme Court of India had rejected the SLP and the extract of the order is given below: “We are in agreement with the High Court that as far as Question-B concerning adjustment for interest on receivables is concerned the Tribunal has returned a finding of fact. Consequently, no substantial question of law therefore, arises, on the facts of this case……The special leave petition is dismissed.” (Emphasis supplied) 27. Accordingly, post the judgment of the Hon’ble Supreme Court, it can be said that the said issue has attained finality and hence imputing a similar adjustment in the Appellant’s case would be in contravention to the ratio laid down by the Hon’ble Supreme Court. 28. Further the Assessee submitted that element of interest arises only with respect to an indebtedness created out of a loan transaction and the credit period allowed does not constitute a separate international transaction of an advance or loan given to the AEs but instead it is only receivable against services provided by the Assessee to the AEs. Accordingly, since the transaction is not in the nature of loan or advance, there is no need for making the impugned adjustment. 29. In view of the above, reliance is placed on the Hon'ble Delhi Tribunal ruling in the case of Bharti Airtel Limited vs ACTT (ITA No 5816/Del/2012), wherein it was held that transaction should be restructured/ re-characterized only in instance it is deemed to be a sham or bogus transaction or the substance of the transaction is not consistent with its form. Ld. TPO, while proposing to re-characterize the interest on receivables as loan, has not brought out any evidence or material on record vide the notice to substantiate the said claim. 17 ITA No.4014/DEL/2024 30. In view of the aforesaid, Appellant humbly submitted that none of the above characteristics are present in the international transaction of the Appellant with its AEs and it may not be fair treating the international transaction relating to provision of services as loan transaction. Accordingly, computation of interest on the said transaction may not be appropriate. 14. Further he brought or our notice Ground No.5 of the grounds to submit that assessee is a debt free entity, therefore, no addition can be made relating to interest on outstanding receivables. 15. On the other hand, ld. DR of the Revenue relied on the orders of the authorities below. 16. Considered the rival submissions and material available on record. We observed that it is a fact on record that there is outstanding balance declared in financial statements due from its AEs. We cannot agree with the argument to the ld. AR that it is not an international transaction. However, as per the amended provisions of section 92B, it falls within the ambit of international transaction. However, each transaction has to be considered based on the relevant facts on record. We observed that ld. AR submitted that the assessee is a debt free entity, therefore, no adjustment can be made in its case. However, assessee has not filed any Balance Sheet or any financial statement to support its contention. However, we observed that whether there is a debt free entity, it is normal and logical to not collect the outstanding from its AEs. However, as per the trade practice, the terms of payment depend upon mutual agreement 18 ITA No.4014/DEL/2024 between the parties and it is also depend upon the market practice in this line of business. Since assessee has not submitted any agreement to submit the terms of payment already agreed between them. Therefore, we are inclined to permit this issue back to the file of AO/TPO to consider the industry practice in this line of business and in case there exists mutual agreement to show that the assessee has allowed to give terms of payment as per the agreement or determined the industry average in this line of business. If the terms of payment are average period holding of the debtors within the industry average or within the mutual terms of agreement, the same may be allowed. As far as interest rate is concerned, in our considered view, LIBIR plus 425 basis is on the higher side and may be determined upon the terms of payment agreed between parties, it can be proper if the rate of interest on the basis of LIBOR may be computed. Accordingly, Ground No.5 is allowed for statistical purposes. 17. In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open court on this 26th day of March, 2025. Sd/- sd/- (VIMAL KUMAR) (S.RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 26.03.2025 TS 19 ITA No.4014/DEL/2024 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI "