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TMI Blog2016 (11) TMI 975X X X X Extracts X X X X X X X X Extracts X X X X ..... addition of ₹ 15,82,891/- on account of notional interest chargeable on the outstanding debtors (associated enterprises) balances is not tenable and is directed to be deleted - ITA No. 1145/Mum/2014 and ITA No. 1136/Mum/2014 - - - Dated:- 31-10-2016 - SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, JUDICIAL MEMBER. Assessee by : Shri Ronak Doshi Revenue by : Shri N.K. Chand and Shri Mohammed Rizwan ORDER PER G.S. PANNU, AM : These are cross-appeals filed by the assessee and the Revenue against the order of CIT(A)-15, Mumbai dated 02.12.2013, pertaining to the Assessment Year 2009-10, which in turn has arisen from the order passed by the Assessing Officer dated 30.12.2011 under section 143(3) of the Income Tax Act, 1961 (in short the Act ). 2. The Grounds of appeal raised by the assessee and Revenue in their respective appeals are as under :- ITA No. 1145/Mum/2014 (Assessee s appeal) GROUND I: ADDITION ON ACCOUNT OF ARM S LENGTH ADJUSTMENT ₹ 15,82,891/- 1. On the facts and in circumstances of the case and in law, the ld. CIT(A) erred in confirming the action of Income-tax officer 9(2)(3) * the AO + by treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment u/s 92C(3) of the Act by making an addition of notional interest thereof. 4. Briefly put, the relevant facts are that the assessee is a company incorporated under the provisions of Companies Act, 1956 and is, interalia, engaged in the business of software development services. For the Assessment Year 2009-10 it filed a return of income declaring total income of ₹ 6,85,482/- under the normal provisions of the Act after claiming deduction u/s 10A of the Act amounting to ₹ 1,63,23,157/- and it offered tax on book profit of ₹ 1,49,18,266/- u/s 115JB of the Act since tax computed u/s 115JB of the Act was more than the tax computed under the normal provisions of the Act. Be that as it may, for the present purpose, we are concerned with an addition of ₹ 15,82,891/- made by the Assessing Officer on account of notional interest on continuing debit balances of the associated enterprises. The facts relevant for the said controversy are as follows. Assessee is rendering software development services to its associated enterprises at cost + mark-up of 15% and it has been pointed out that revenue earned from the associated enterprises constitute more than 90% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to the associated enterprises remain at arm s length price and hence no addition was warranted separately on this count. The CIT(A) has disagreed with the assessee in principle, but has scaled down the addition. As per the CIT(A), the quantum of addition worked out by the Assessing Officer by applying 7% rate of interest, being the short term deposit rate of State Bank of India, was wrong and instead, he directed that the adjustment be worked out by applying rate of interest of LIBOR + 200 basis points on the amount of delayed recovery of receivables from the associated enterprises. In this background, assessee as well as the Revenue are in appeal before us. The assessee, in its Grounds of appeal, has challenged the sustenance of part addition by CIT(A), whereas Revenue is in appeal challenging the action of CIT(A) in scaling down the addition. Since the cross-disputes relate to the same issue, they are being taken up together. 5. Insofar as appeal of Revenue is concerned, the grievance is against action of CIT(A) in holding that the arm s length rate of interest on the continuing debtor balances of associated enterprises be calculated by applying LIBOR + 200 basis points. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the resultant margin compares favourably with the average margin of the comparables selected. In this context, the plea of assessee is that without admitting that non-charging of interest on continuing debit balances of associated enterprises is an international transaction , the arm s length interest on such debit balances be adjusted/reduced from the assessee s margin of 9.19% and the resultant margin would also be favourable in comparison to the average margin of the comparables selected. It has been explained that assessee has given credit period of 45 days to its associated enterprises and with respect to the payments received beyond the credit period, the Assessing Officer had made the adjustment on account of notional interest. The assessee-company has given a working whereby it has adjusted its operating margin of 9.19% by such notional interest calculated either @ 7%, as done by the Assessing Officer, and/or at LIBOR + 200 basis points, as held by the CIT(A). In the former case, the entity level margin would reduce from 9.19% to 7.61% and in the latter case, the entity level margin would reduce from 9.19% to 7.25%. Thus, it is pointed out that in both the situations, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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