2016 (7) TMI 243 - AT - Income Tax

Transfer pricing adjustment - Notional interest on sundry debtors - whether the amount advanced is for the purpose of equity or the amounts advanced originally as loans and later converted to equity? - Held that - AO has to ascertain the nature of advances given to assessee whether it is loan or equity and how they are reflected in the respective accounts in the respective years. If assessee has invested them as investment in subsidiary they would be done under the head investment otherwise, the same would figure under the head loans and advances . Likewise, if the amount is advanced as the share capital, the same would also be shown as share application money in the subsidiary hands. These require factual verification. It is also required to verify whether the funds provider or from Zero coupon bonds subscribed abroad or funds from India and necessary approvals from RBI, SEBI, Company Law Board and other statutory authorities governing these funds and finances. Consequently, AO is directed to examine assessee s statements of accounts and also the necessary resolutions passed and information furnished to authorities to establish the nature of amounts advanced. If the amount is advanced towards loans, then, the transaction would be an international transaction and whether interest can be levied or not has to be examined in the light of the various decisions relied upon. What we also notice is that many of the decisions are not in the context of TP provisions but in the context of general income tax computation. Therefore, the issue is to be re-examined viz-a-viz case law relied upon and the applicable provisions of the Act. Then, the rate of interest would be an issue. In case interest is levyable, then, LIBOR 2% is generally accepted as the rate of interest to be levied on international transactions by various decisions of the Co-ordinate Benches. Therefore, without adjudicating the issue on this, we set aside the matter to the file of AO/TPO to re-examine the facts afresh and then decide the issue accordingly, keeping in mind the provisions and the case law relied upon. Assessee should be given an opportunity to substantiate the contentions. - Decided in favour of assessee for statistical purposes. Eligibility of claim of deduction u/s 10A - Held that - As can be seen from the order of the DRP also, it has more or less accepted assessee s contentions. But while implementing the orders of the DRP, AO did not examine the issues at all. Consequently, we are of the opinion that these issues require examination by the AO in detail and then assessee claim u/s. 10A should be allowed. May be because of lack of time, AO did not implement the directions. Be that as it may, we are convinced that assessee is entitled for various deductions on the basis of the provisions of the Act case law relied and therefore, AO is directed to verify the contentions and allow the same, keeping in mind the provisions of the Act and relevant case law relied upon. AO is directed to examine all the above issues afresh after giving due opportunity to assessee. - Decided in favour of assessee for statistical purposes. Interest charged on receivables - Held that - As seen from assessee s contentions, assessee is neither charging interest on any of the receivables outstanding. There is also no basis for adopting only two months as credit period. RBI itself allows an year for the amounts to be realised, if they are in foreign exchange. Whether it is AE or non-AE, it is in the interest of business that assessee receives the foreign exchange early so that it can claim deduction u/s. 10A. Therefore, in our view, putting a limit of two months of credit period itself is arbitrary. Moreover, as seen from the calculation provided in page 7 of the assessment order, the date of realization was shown as 02-02-2011 and interest was levied from 01-04-2010 to 02-02-2011 which is not pertaining to the year under consideration. As far as this year is concerned, the invoices raised on 31-12-2009 were outstanding only for a period of three months by the end of the accounting year. We are of the opinion that this period is reasonable and so no interest can be levied, just because amounts are shown as outstanding . Accordingly, we cancel the interest levied and allow assessee s contentions.

Issues Involved:
1. Addition of ?47,25,188 under Section 92CA on investment made in AE.
2. Re-categorization of "Investment" as "Loan" under Section 145.
3. Non-consideration of foreign exchange received within a specific period for deduction under Section 10A.
4. Non-consideration of export receivables converted into equity for deduction under Section 10A.
5. Non-consideration of "Onsite Consultancy through branches" as foreign exchange received under Section 10A.
6. Deduction of "Onsite Consultancy through branches" from 'Export turnover' without deducting from 'Total turnover' for Section 10A.
7. Charging of notional interest on delayed realization from sundry debtors.

Detailed Analysis:

1. Addition of ?47,25,188 under Section 92CA on investment made in AE:
The assessee advanced ?30,18,54,791 as interest-free funds to its AE, M/s. GSS America Inc, with the outstanding balance as on 31-03-2010 being ?73,31,22,791. The assessee argued that the funds were quasi-equity, converted into equity in FY 2011-12, similar to the ITAT decision in Mascan Global Limited. However, the TPO did not accept this and determined the interest at 4.06% p.a., leading to an addition of ?47,25,188. The DRP upheld this decision, treating the amounts as loans and advances requiring adjustment under transfer pricing provisions. The Tribunal found the facts unclear regarding whether the amounts were loans or equity and directed the AO to re-examine the nature of advances, verify the relevant accounts, and decide accordingly.

2. Re-categorization of "Investment" as "Loan" under Section 145:
The Tribunal noted that the AO and TPO treated the advances as loans without clear evidence. It directed the AO to ascertain the nature of the advances, whether they were loans or equity, and verify the necessary approvals from RBI, SEBI, and other authorities. The issue was set aside for re-examination.

3. Non-consideration of foreign exchange received within a specific period for deduction under Section 10A:
The AO restricted the deduction under Section 10A due to non-receipt of foreign exchange. The assessee provided details showing export realization within the permissible period, including amounts converted into equity with RBI approval. The Tribunal directed the AO to verify these details and allow the deduction as per the Act and relevant case law.

4. Non-consideration of export receivables converted into equity for deduction under Section 10A:
The assessee argued that ?12,23,68,351 converted into equity should be considered for deduction under Section 10A, as permitted by RBI. The Tribunal directed the AO to verify this and allow the deduction accordingly.

5. Non-consideration of "Onsite Consultancy through branches" as foreign exchange received under Section 10A:
The assessee contended that profits from onsite consultancy through branches should be considered as deemed profits for export of computer software. The Tribunal directed the AO to examine this issue and allow the deduction as per the provisions of the Act and relevant case law.

6. Deduction of "Onsite Consultancy through branches" from 'Export turnover' without deducting from 'Total turnover' for Section 10A:
The Tribunal noted that the AO did not follow the DRP's directions to exclude onsite consultancy from both export and total turnover. It directed the AO to re-examine and allow the deduction as per the Act and relevant case law.

7. Charging of notional interest on delayed realization from sundry debtors:
The AO charged notional interest of ?21,78,647 on delayed realization of ?5,31,09,900. The assessee argued that it did not charge interest on delayed payments from any debtor and that the transactions were at arm's length under TNMM. The Tribunal found the AO's calculation arbitrary, noting that the invoices were outstanding only for three months by the end of the accounting year. It canceled the interest levied, allowing the assessee's contentions.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to re-examine the issues afresh, verify the facts, and allow the deductions as per the provisions of the Act and relevant case law.

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