2024 (3) TMI 713 - AT - Income Tax

TP Adjustment - Interest on delayed receivables - HELD THAT - As per explanation (i)(c) of Section 92B of the Income Tax Act as amended by Finance Act, 2012 w.r.e.f. 01.04.2002, the interest receivables is an international transaction. Section 92B(i)(c) reads 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. In the instant case, the revenue has clearly shown a pattern by analyzing the statistics over a period of time which is spread over more than one year and based on that the AO came to conclusion that there exists an arrangement. In the case of Albany Molecular Research Hyderabad Research Center (P.) Ltd. 2020 (11) TMI 1018 - ITAT HYDERABAD held that interest on outstanding receivables is a separate international transaction and directed to charge interest by applying LIBOR 200 Points. In the case of Apache Footwear India Pvt. Ltd. vs. ACIT 2023 (4) TMI 521 - ITAT HYDERABAD concluded that interest on outstanding receivables from the AE is required to be separately benchmarked and interest should be charged on the delayed period @ 6% on the receivables. We also make it clear that interest cannot be charged on each and every receivable and has to be examined on case to case basis and the TPO has to enquire and analyze the statistics over a period of time to discern a pattern to come to a conclusion that the arrangement reflects an international transaction. The AO has to examine the transactions of similar in nature with non-AEs to come to a conclusion to charge interest and also to determine the basis of interest to be charged. In this case, the inter company services agreement provides for charging of interest on delay of receivables after 60 days. The argument that the chargeability may accrue and doesn t necessarily binding on the assessee to charge the interest cannot be accepted. The very purpose of transfer pricing mechanism and determination of arm s length price is to examine whether the related party is given undue benefit at the cost of the profits and the consequent taxes to be paid in India. Hence, we direct that the adjustment on account of receivables be computed after following the directions of the ld. DRP. The AO has considered each and every transaction and arrived at right conclusion to determine the adjustment. While computing so, it is directed that the AO shall set off the receivables cleared by the AEs in less than 30 days or received in advance as ordered by the ld. DRP. These directions are applicable to the year in question as the chargeability on interest receivables varies from year to year. The LIBOR is an internationally recognized rate which is appropriate to benchmark and to determine ALP on receivables. The mark-up decided by the ld. DRP is held to be reasonable. In the result, the appeal of the assessee on this ground is partly allowed. Capitalization wireless ports - disallowance by capitalizing the cost incurred towards purchase of indoor wireless ports and allowing depreciation at the rate of 15% - as submitted that the cost incurred for purchase of indoor wireless ports is for replacement of parts and not in the nature of acquisition of new plant and machinery - AO has in this regard, has, recorded a categorical finding that these indoor wireless ports are not spare parts replaced but they have been purchased a fresh as a part of or as an acquisition of plant and machinery - HELD THAT - The indoor wireless ports are in the nature of computer peripherals and hence, deprecation @60% is allowable. The appeal of the assessee on this ground is allowed. Allocation-expenses SEZ/non SEZ units - assessee submitted a bifurcation of income and expenses between SEZ and taxable units along with schedule of fixed assets and depreciation for both SEZ and taxable units and employee details for both SEZ and taxable units - HELD THAT - The assessee had maintained separate books of accounts in respect of its SEZ and taxable units, which were audited by its auditor and the certificate furnished before the AO. The assessee had also furnished the statement of computation of income, profit and loss account of the SEZ unit to the AO to substantiate that the expenses (both direct as well as direct) have been correctly accounted in the SEZ unit. The AO has not pointed out any discrepancy in the aforesaid documentary evidences furnished by the Appellant. It is a settled position of law that the actual expenditure which directly pertains to a particular unit cannot be allocated to other unit. AO has also allocated the Repair and Maintenance expense to the SEZ unit ignoring the fact that as per clause 3.10 of the lease agreement of the SEZ unit all repair are to be carried out by Lessor. Thus, the allocation of such expenses is fundamentally flawed. Staff welfare expenses, contribution to gratuity and recruitment expenses being directly identifiable cannot be apportioned on the basis of number of employees. With respect to indirect/ common costs as well, the turnover basis for allocation of indirect/ common expenses is the most reasonable method which had been consistently followed by the Appellant in the preceding years and duly accepted by the revenue authorities. Hence, we find that the reasons given by the Revenue and the case laws relied there upon cannot be said to be reasonable grounds to reallocate the expenses in existence of the facts contrary to the decision taken by the ld. DRP. The appeal of the assessee on this ground is allowed. Increase in Capital Reserve - disallowance of additional claim for deduction paid to the employee towards compensation for cancelled stock awards - HELD THAT - In this case, the amount of additional claim for deduction cannot be taxed since deduction for expenditure of equivalent amount stands disallowed as prior period expenditure and the disallowance be restricted to Rs.11,04,38,263/-. The directions of the ld. DRP are affirmed to that extent.

Summary

Issues Involved:

1. Interest on receivables
2. Capitalization of wireless ports
3. Allocation of expenses between SEZ and non-SEZ units
4. Increase in Capital Reserve
5. Employee compensation

Summary:

Interest on Receivables:

The Tribunal examined whether interest on delayed receivables constitutes an international transaction. The AO/TPO analyzed the pattern over multiple years and concluded that there was an arrangement benefiting the AE. The Tribunal referred to various judgments, including CIT Vs. EKL Appliances and Kusum Healthcare Pvt. Ltd., and concluded that interest on delayed receivables cannot be subsumed in the working capital adjustment. The Tribunal directed the AO to compute the adjustment considering the directions of the DRP and to set off receivables cleared by the AEs in less than 30 days or received in advance. The LIBOR rate with a 200 basis points mark-up was deemed appropriate for benchmarking. The appeal on this ground was partly allowed.

Capitalization of Wireless Ports:

The Tribunal allowed the appeal regarding the capitalization of indoor wireless ports, directing that they should be treated as computer peripherals and depreciation at the rate of 60% should be allowed.

Allocation of Expenses between SEZ and Non-SEZ Units:

The Tribunal found that the AO's reallocation of expenses between SEZ and taxable units was not justified. The assessee maintained separate books of accounts, which were audited and certified. The Tribunal emphasized that actual expenditure directly related to a particular unit cannot be allocated to another unit. The appeal on this ground was allowed, and the Tribunal directed that the expenses should not be reallocated.

Increase in Capital Reserve:

The Tribunal upheld the AO's decision that the reimbursement received from the parent company for employee compensation should be treated as revenue receipt, not a capital receipt. However, the Tribunal agreed to restrict the addition to the amount of corresponding salary expenditure allowed as a deduction for the current year (INR 11,04,38,263). The balance amount (INR 26,78,37,118) was not taxed since it was disallowed as prior period expenditure. The appeal on this ground was partly allowed.

Employee Compensation:

The Tribunal upheld the AO's disallowance of INR 26,78,37,118 as prior period expenditure, as the liability crystallized during the subject year. The Tribunal noted that the payment was governed by the provisions of section 43B of the Income Tax Act, which provides for deduction of bonus on a payment basis. The appeal on this ground was partly allowed.

Conclusion:

The Tribunal provided a detailed analysis for each issue, partially allowing the appeals on interest on receivables, increase in capital reserve, and employee compensation, while fully allowing the appeal on the capitalization of wireless ports and allocation of expenses between SEZ and non-SEZ units.