2019 (4) TMI 672 - AT - Income Tax

Claim of deduction u/s 10AA - computation of deduction - HELD THAT - As relying on assessee s own case 2017 (12) TMI 862 - ITAT HYDERABAD we direct AO that since the telecommunication charges are excluded from export turnover, the said charges should also be excluded from the total turnover for the purpose of computing deduction u/s 10AA of the Act. Accordingly, this ground is allowed. Adjustment on account of outstanding trade receivables - delay in payment either from AE or non-AE- scope of amendment to section 92B - Held that - As the definition of Section 92B is amended to bring in the nature of financing by way of allowing the AEs to retain the trade receivables beyond reasonable period. In our view, the outstanding trade receivables beyond reasonable period will come under international transactions as per Amended Section 92B. Accordingly, the assessee as well as TPO have to determine what is the reasonable period of outstanding which they can allow to the AEs. It may be as per the bilateral agreement or trade practice in the industry or historical average collection period of the assessee or reference can be drawn from statutory limits fixed by the legislature in the similar enactment. Therefore, we direct the TPO to determine the industry average or average of collection period adopted by the comparable companies selected for the TP study and calculate average collection period of the assessee during this assessment year. TPO has selected only 9 transactions which have crossed one month to determine the adjustment of TP whereas assessee has transacted total 31 transactions during this year. TPO has to calculate the average collection period for this year. Whether the average collection period is within industrial average or not has to be determined. Since we do not know the industry average, we remit this issue back to the file of TPO to determine the industrial average as directed above i.e. calculate the average collection period of the comparable companies selected for the TP study and average collection period of the assessee for the whole year. The collection during the year which are within the industry average should be allowed and only the collection period beyond industrial average alone should be charged with the interest based on the rate of LIBOR since it is international transaction. -Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:

1. Re-computation of deduction under Section 10AA of the Income-tax Act.
2. Adjustment under Section 92(3) on outstanding receivables.
3. Levying of interest under Section 234B of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Re-computation of Deduction under Section 10AA of the Income-tax Act:

The assessee contested the re-computation of the deduction under Section 10AA of the Act. The Ld. TPO, AO, and DRP reduced telecommunication charges from the export turnover but did not exclude these from the total turnover, which affected the deduction computation. The assessee argued that this issue was already settled in its favor by the Tribunal in earlier years, referencing ITA No. 475/Hyd/2017 and others. The Tribunal agreed, citing the Hon'ble Karnataka High Court's decision in CIT vs. Tata Elxsi Ltd. and the jurisdictional High Court in B.A. Continuum, which mandated that if an expenditure is excluded from export turnover, it should also be excluded from total turnover. Consequently, the Tribunal directed the AO to exclude telecommunication charges from both export and total turnover for computing the deduction under Section 10AA, thereby allowing this ground of appeal.

2. Adjustment under Section 92(3) on Outstanding Receivables:

The assessee challenged the adjustment of ?17,71,128/- towards interest on outstanding receivables from Associated Enterprises (AEs). The TPO had proposed interest charges on receivables beyond the due date, treating them as a separate international transaction under the amended Section 92B. The DRP directed the AO to compute interest as per domestic term deposit rates of SBI for FY 2012-13, resulting in a lower adjustment. The assessee argued against this adjustment, citing no interest was charged on delayed payments from both AEs and non-AEs, and that the outstanding receivables were part of normal business transactions. The Tribunal noted that the amendment to Section 92B brought such receivables under the purview of international transactions. The Tribunal directed the TPO to determine the industry average collection period and compare it with the assessee's average collection period, allowing interest charges only on periods exceeding the industry average, using the LIBOR rate for international transactions. This issue was remitted back to the TPO for re-evaluation, thus allowing the ground for statistical purposes.

3. Levying of Interest under Section 234B of the Income-tax Act:

This ground was consequential in nature. The Tribunal directed the AO to levy interest under Section 234B as per the final assessment, considering the directions given on other grounds.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, directing re-evaluation of the average collection period for outstanding receivables and ensuring telecommunication charges are excluded from both export and total turnover for Section 10AA deduction computation. The levy of interest under Section 234B was to be consequentially adjusted. The decision emphasized adherence to industry standards and previous judicial precedents in the computation of deductions and adjustments.