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TMI Blog2022 (6) TMI 1383X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee does not have a right to challenge the order of the CIT (A) for exclusion of these companies before us. Interest on receivables - CIT (A) fixing the interest at 8% - HELD THAT:- Outstanding receivable by the assessee from its AE, is required to be benchmarked, so as to ensure that they should not be any shifting of profit from assessee to its AE. Application of 8% interest, though in strict sense, would be contrary to the principles of TP analysis as the transfer pricing officer was required to bring the comparable either internal comparable or the external comparable by applying CUP method and then fix the rate of interest on the delayed receivables from the AE. However, with a view to give a quietus to the issue , we are of the opinion that instead of 8% interest rate, rate of interest of 6% be applied on outstanding receivable at the year end . In our considered opinion, the submission of the assessee that LIBOR+200 points require to be applied, cannot be upheld in these facts of the case , as it will amount to shifting of profit from assessee to its AE, which cannot be countenanced under Chapter X of the I.T. Act. Moreover, the rate of interest on loan trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PLI of the taxpayer at 20.02%, it was contented that the international transactions with its AEs were at Arm s length. 8. The learned TOP took operating cost of Rs.8,74,49,838/- for software development segment against the actual operating cost of Rs.8,58,03,836/-. The learned TPO carried out fresh search under software development services and ITES and held that the international transactions pertaining to ITES were at arm s length price. However, with respect to software development services, the learned TPO after carrying fresh search, arrived at an arithmetic mean of 20.82% (OP/OC) by considering 18 companies and after making working capital adjustment of -0.47%, adjusted arm s length margin at 20.35% and made an adjustment of Rs.62,56,174/- under software development services. The TPO selected the following comparables as under: S. No Name of company Operating Revenue OP/OC 1 Acropetal Technologies Ltd (Seg) 81,040.16,893 34.59 2 Akshay Software Technologies 11,47,22,877 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .e. Kals Information Systems Ltd (Seg) and Sankhya Infotech Ltd. 10. The assessee company objected 8 companies out of 16 selected companies by the TPO before the CIT (A) and the assessee argued that 8 comparables which were selected by the TPO having turnover of more than Rs.350 crores and also operated in different functions. The list of comparables objected by the assessee before the CIT (A) are as follows: S.No Name of company Operating Revenue OP/OC 1 Igate Global Solutions Ltd 11,92,93,17,000 24.58 2 Infosys BPO Ltd 2,54,46,00,00,00 0 43.74 3 L T Infotech Ltd 23,36,29,52,834 18.08 4 Mindtree Ltd 8,88,02,00,861 11.79 5 Persistent Systems Ltd 6,29,15,80,000 26.68 6 Sasken Communication Technologies Ltd 4,02,87,78 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es being less than 75 per cent of total revenue this company does not satisfy the filter of information technology services revenue being more than 75 per cent of total revenues, applied by the TPO. In this regard, the learned Counsel for the assessee was of the view that in the case of Assistant Commissioner of Income-tax, Circle-4 (1) (2), Bangalore v. Marvel/India (P.) Ltd [2017J 84 taxmann.com 212 wherein the Hon'ble Bangalore Tribunal held that : 14.3.1 We have heard both parties and perused and carefully considered the material on record; including the judicial pronouncement cited. We find that as per the segmental reporting at page 53 of the Annual report of this company, the income from Information Technology Services is Rs. 81.40 crores out of total income of Rs. 141.65 crores. Therefore, it is amply clear that the income from Information Technology Services is less than 75% of total revenues and consequently this company does not satisfy the filter of information technology services revenue being more than 75% of total revenues, applied by the TPO himself. We find that on similar facts for the year under consideration i.e. Assessment Year 2011-12, a co-ordinate b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erformed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co- ordinate bench of this Tribunal in the case of Capitall-Q Information Systems (India) (P) Ltd. (supra) that KPO services are not comparable to software development services and are therefore not comparable. 13.4 Similar view has been taken in the case of Symantech Software Services (I) Pvt, Ltd. v. DCIT ITA No. 614/Mds/2016, as under: 'The comparable company E-Zest Solutions Ltd. is engaged in product engineering services in the nature of high-end knowledge process outsourcing and also in product engineering software Development Company having expertise in emerging technologies cloud Saas, Business Intelligence and mobility for more than 10 years and serving 8 industries across the globe with over 200 software professionals. Whereas, the assessee-company is in the software developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... J 123 taxmann.com 258 (Hyderabad - Trib.) wherein the Hon'ble ITAT held that 9. We have considered the rival contentions. As seen from the orders placed on record and also consistent stand taken by the Tribunal in various such cases, we have no hesitation in excluding two companies, Persistent Systems Ltd., and Sasken Communication Technologies Ltd on functionality basis 13.7 Sasken Communication Technologies limited: According to the assessee, this company is into multimedia product and the research and development in the said year in respect of multimedia wireless broad band and mobile value added services and the breakup of revenue is not available. The same was held good in the case of Symantec Software Services India (P.) Ltd. (supra) wherein the Hon'ble ITAT held that. The company Sasken Communication Technologies Ltd. is functionally non-comparable as they are into multimedia product and the research and development in the said year in respect of multimedia wireless broadband and mobile value added services and the breakup revenue is not available and cannot be considered as comparable. Thus, the TPO is directed to exclude this company from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and no segmental result for software development services is available. The company earns it revenue from software development services and also from sale of software products. Zylog Systems derives its revenue primarily from software development services, consultancy services, projects and e-governance projects. Also, it is pertinent to note that company does not meet the software development services to revenue filter adopted by the learned TPa as it consists of only 21.6%. 13.13 Based on the above fact the Hon'ble Delhi Tribunal in the case of Fiserv India (P.) Ltd Vs ACIT [2020J 121 taxmann.com 211 (Delhi - Trib.) has excluded this company from the final list of comparables. Further, during the year there is an extra-ordinary event in the company i.e., it has acquired M/s. Brainhunter Inc, Canada. 13.14 In the case of Agilis Information Technologies International (P.) Ltd. v. ITO [2017J 88 taxmann.com 6 (Delhi - Trib.}, this comparable was excluded from the list of comparables. The relevant findings of the co-ordinate bench read as under: 4.6 We have heard both the parties and perused the records. The segmental data was not available for the assessment year un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software India (P.) Ltd.}, wherein it has been held that software product companies owning intangibles could not be compared with the software development services provider. 13.18 The similar view has been taken in the case of A/cate/Lucent India Ltd. Vs DelT [2016] 74 taxmann.com 105 (De/hi - Trib.} [24-08-2016] 14. The learned AR for the assessee has submitted , that out of the 12 comparables, the assessee is challenging the inclusion of 4 comparables selected by the TPO and confirmed by the CIT (A). i. Acropetal Technologies (Seg). ii. E-Zest Solutions Ltd. iii. ICRA Techno Analytics Ltd. iv. Persistent Systems Solutions Ltd. FINDINGS OF BENCH 14.1 Firstly we will take E-Zest Solutions Ltd. In this regard, our attention was drawn to Paragraph 165 of the Paper Book wherein the assessee has submitted the objection with regard to the functional dissimilarity and it was submitted as under: 14.2 It was the contention of the learned AR that E-Zest Solutions Ltd was held to be into KPO service and the issue has been considered by the Coordinate Bench of ITAT Bangalore, in the case of Blue Yonder India (P), reported in (2021) 123 ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rables: The taxpayer did not file any objections to the set of comparables proposed by the TPO. The comparables selected by the TPO broadly perform functions similar to the taxpayer and are part of the 11 providers. The functional profile of the taxpayer and the functional profiles of all the comparables selected by the IPO are as under. The taxpayer is engaged in the business of provision of software research, development, implementation and consultancy (referred to as SDS). Zeta USA is involved in the conceptualization and design of the product. The taxpayer and the AE are involved in determining the requirement analysis and functional specifications for the modules to be developed. The taxpayer undertakes software coding and initial testing and is also responsible for the integration of the module developed into the final product. Similarly, the taxpayer is involved in interconnected digital marketing services (referred to as ITES) such as email marketing, search engine marketing, social media marketing and data mining services . 16. The learned DR had further drawn our attention to page No.159 of the Paper Book, on the basis of this it was submitted by the learned DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ularly under TNMM. This constraint has been accepted by the ITAT, Delhi in the case of ST Microelectronics Ltd wherein the ITAT held: ALP of an international transaction Cannot be determined 'accurately in accordance with a scientific formula. It is quite difficult to arrive at any firm conclusion with mathematic precision The ITAT in the case of Deloitte Consulting India Pvt. Ltd (15 ITR (Trib.)573 (Hyd) has also held the same. The ITAT observed: In our considered opinion, no two comparable companies can be replicas of each other. The application of Rule 108 should be carried out and judged not with technical rigor, but on a broader prospective ITAT Delhi in the case of CRM Services (2011-TII-86-ITAT-DEL TP, 48 SOT $1 (Del.) has held: that it is impossible to get comparables with no difference at all Thus, I do not agree with the contention of the appellant and rejected the submission. Thus, ground No.2.3 is partly allowed . 18. From the perusal of the above said discussions, it is abundantly clear that the primary focus of the assessee before the lower authorities was on account of higher turnover, and it was not its case of functional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19,55,81,589 9.73 4 Evoke Technologies P Ltd 14,48,69,912 8.33 5 ICRA Techno Analytics Ltd 16,02,91,000 25.36 6 Kals Information Systems Ltd (Seg.) 2,17,49,052 10.35 7 Persistent Systems Solutions Ltd 18,94,90,457 21.51 8 R S Software (India) Ltd 1,88,23,82,369 16.35 9 Sankhya Infotech Ltd 42,53,23,163 17.64 Total 144.71 Average 16.08 Less:Working Capital Adjustment 1.02 Adjusted Arm s Length Margin 15.06 Since the adjusted arms length margin is 15.06%, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6, the assessee is not only challenging the inclusion of the 4 companies but also submitted in the written submission for exclusion of other 5 companies. Considering the above submissions and the case laws, we request the Hon'ble Tribunal to exclude the companies as mentioned in Ground No. 6 i Acropetal Technologies See Ground No. 6 v E-Zest Solutions Ltd. Ground No. 6 vi ICRA Techno Anal tics Ltd. and Ground No. 6(ix) Persistent Systems Solutions Ltd. 13.0 Without prejudice to the above grounds, we request the Hon'ble Tribunal for the exclusion of the following companies for which detailed submissions were also submitted before the Ld CIT(A) for exclusion of these companies. The list of comparable companies selected by the Ld. TPO and which are requested for exclusion are as under: ITAT Grounds No. Company Name Ground No. 6(vii) Igate Global Solutions Ltd Ground No. 6(viii) Mindtree Ltd Ground No. 6(x) Persistent Systems Ltd Ground No. 6 xii ies Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore than Rs. 200 Crores should be excluded from the list of comparable companies. 15.3 In Capital IQ Information Systems (India) (P.) Ltd v. DCIT [2013J 32 taxmann.com 21 (Hyderabad - Trib.) it was held that 21. On considering the submissions of the assessee in relation to these three companies, we find that the TPO has excluded the companies whose turnover is less than Rs. One Crore, on the ground that they may not be representing the industry trend. That very logic also applies to the companies having high turnover of over Rs.200 crores as against the assessee's turnover of only Rs. 60 crores, and therefore, it would be fair enough to exclude those companies also. 16.0 Our Detailed submissions for exclusion of above 5 companies are as under: 16.1 Ground No. 6(vii) Igate Global Solutions Ltd: Igate Global Solutions Ltd During the year under consideration, the company has acquired majority equity interest in Patni Computer Systems Ltd. resulting in an extra ordinary activity and also the company owns significant intangible in its name. Additionally, the company is engaged in diverse functions like software services ITES, there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis. we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly. Similar view has been taken by Hon'ble Jurisdictional ITAT (Hyderabad Tribunal) in the case of Syniverse Technologies Service (India) (P.) Ltd Vs DCIT [2021J 123 taxmann.com 258 (Hyderabad - Trib.) wherein the Hon'ble ITAT held that 9. We have considered the rival contentions. As seen from the orders placed on record and also consistent stand taken by the Tribunal in various such cases, we have no hesitation in excluding two companies, Persistent Systems Ltd., and Sasken Communication Techno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for software development services is available. The company earns it revenue from software development services and also from sale of software products. Zylog Systems derives its revenue primarily from software development services, consultancy services, projects and e-governance projects. Also, it is pertinent to note that company does not meet the software development services to revenue filter adopted by the learned TPO as it consists of only 21.6%. Based on the above fact the Hon'ble Delhi Tribunal in the case of Fiserv India (P.) Ltd Vs A CIT [2020J 121 taxmann.com 2]] (Delhi - Trib.) has excluded this company from the final list of comparables. 15.3 We have heard rival submission of the parties and perused the relevant material on record. On perusal of the profit and loss account of the company which is available on page 1051 of the paperbook, we find that the Revenue of Rs. 899,11,06,874/- has been shown from Software Development services and the products and no separate revenue or segmental result for software development services have been reported in the annual report. In absence of any separate segmental result of software development services av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available on record. Undisputedly, there is no challenge by the assessee before us that the filter applied by the TPO in the TP study was incorrect or inappropriate and does not have sanction of law. In our view, the assessee was required to maintain the TP analysis document in terms of law and even the assessee has not filed any TP study initially before the TPO and therefore provision of section 92C( 3) were invoked. Thereafter a show cause notice dated 14.7.2014 was issued to the taxpayer, in response thereof the reply along with TP study was filled . Further, the assessee has not challenged any of these comparable selected by the TPO during the proceedings before the TPO and even before the learned CIT (A) . the challenge of the assessee was only with respect to 8 comparable , out of which 3 were excluded by the CIT(A) and remaining 5 comparable were included by the CIT(A) . 29. The learned CIT (A) while passing the impugned order have considered the turnover filter in great details and after considering the turnover filter and the legality of the turnover filter, have excluded the three comparables namely Infosys, L T Infotech and Tata Elexi Ltd. The CIT (A) in Para 13.5 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence at all . Thus, I do not agree with the contention of the appellant and rejected the submissions. Thus ground No.2.3. is partly allowed. 30. In our view, once the assessee has not challenged the functional dissimilarities of these 5 companies before the lower authorities, now it is not permissible for the assessee to raise this issue at this stage, as the assessee was not aggrieved by the order passed by the CIT(A) qua these 5 companies . In our view, we do not find any merit of considering exclusion of these three companies and accordingly we dismiss the challenged raised by the assessee for the exclusion of these 5 companies. In the result the ground 5 6 is partly allowed. We remand the issue of exclusion of E-ZEST SOLUTIONS to the file of CIT(A) , however in respect to the claim of exclusion of other companies , we reject the ground raised by the assessee for the reasons mentioned herein above. Ground no 7 8 31. With regard to Grounds 7 8 pertains to the receivables, the learned AR had drawn our attention to the order passed by the CIT (A) whereby in page 44, the learned CIT (A) at para 15.3. held as under: 15.3 Reasonable Rate of Inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed AR for the assessee that the CIT (A) had erred in fixing the interest at 8% without any basis. In this regard, the written submissions made by the assessee reads as under: 17.0 Trade Receivables 17.1 We would like to submit that the receivables arise in the course of business and arc not to be treated as loans for levy of interest. Whereas arm's length price adjustments can be made only in respect of an 'international transaction' as per section 92B of the Act. Outstanding receivables relates to principal transaction. The explanation brought by amendment in Finance Act, 2012 even though retrospective, does not cover outstanding receivable transaction as the word 'capital financing' used there particularly refers to loans or advances given for capital financing. 17.2 Whereas in Assessee's case, these are outstanding balances for the sale of services but not in the nature of capital financing. The words are to be interpreted invoking the principles ejusdem generis and thus the outstanding receivables from AE cannot be equated to capital financing as amended by the provisions of the Act. The relevant extract from Explanation (i) (c) of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of extending credit period to the AB does not give rise to income to Company and therefore in the absence of any income arising from the transaction, the same cannot be computed having regard to the arm's length price. The above view has been upheld by Hon'ble Bangalore ITAT in the case of Lotus Labs Pvt Ltd [TS-624-ITAT-2017(Bang)-TPJ wherein the Hon'ble Bangalore ITAT set aside matter back to AO/TPO with a direction to reconsider the issue of transfer pricing by clubbing and aggregating this transaction with the main transaction of providing service to the AE. 17.6 The above view has been upheld in various cases by the Hon'ble jurisdictional Hyderabad Tribunal some of them are as follows: a. Dhanush Infotech Pvt Ltd Vs ACIT. ITA No. 2082/Hyd/2017 (AY 2013-14) b. Open Text Corporation India Pvt Ltd Vs DCIT. ITA No. 232/Hyd/16 (AY 201112) c. M/s Hexagon Capability Centre India Private Limited Vs ACIT, ITA Nos. 251/HYD/2016 841HYD/2017 (AY 2011-12 and A~2.0~12-13). 17.7 Further, once the TNMM method has applied it takes into account all the income and expenditure of the entity and takes the net margin as profit level indicated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsumed in the principal international transaction with the AE. 17.10 In the case of ERM India (P.) Ltd. v. National e-assessment Centre, New Delhi {202l J 132 taxmann.com 220 (Delhi - Trib.) the Hon'ble Delhi Tribunal held: 11. From the above, it is, therefore, clear that when once the working capital adjustment is given, it subsumes the interest on receivables and no separate benchmark for it has to be made. Respectfully following the view taken by the Hon'ble jurisdictional High Court in the case of Kusum Healthcare (supra), we hold that the addition made on account of interest on receivables cannot be sustained. Kusum Healthcare Pvt. Ltd. Kusum Healthcare (P.) Ltd. Vs. ACIT [2015} 62 taxmann.com 79 (Delhi - Trib.) (Para 7 to 10) 10. The above analysis empirically demonstrates that the differential impact of working capital of the assessee vis-a-vis its comparables has already been factored in the pricing/profitability of the assessee which is more than that working capital adjusted margin of the comparables. Hence, any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and wholly unjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axmann.com 413 (Bang.) while dealing with an identical issue, has held as follows:- 11.2.2 On the first issue of taxability of notional income, the assessee submitted that the TPO has tried to bring within the ambit of Section 92, a transaction that is non-existent and in the absence of any provision in the Act, the tax-payer cannot be subjected to tax in respect of 'hypothetical income'. In the case on hand, since no income has been earned or can be said to have been earned by the assessee in respect of interest chargeable from AEs, the question of applying the provisions of Section 92 of the Act does not arise. In support of this proposition, the assessee placed reliance on the following judicial pronouncements :- 1. Vodafone India Services Pvt Ltd v. UOI (W.P No. 871 of 2014) 2. Evonik Degussa p.Ltd v. ACIT - OSD, Circle 3(1) (ITA No. 7653/Mum/2011) of 1TAT, Mumbai Bench 11.2.3 It was also submitted by the assessee that it had not charged any interest for delayed realisations even in the case of Non-AE transactions. It was submitted that the debts were outstanding with both the AEs and Non-AEs for a period exceeding the credit period purely becau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnal borrowings. Even if the payments have been made by the AE beyond the normal credit period, there is no interest cost to the assessee. Moreover, there is no such agreement whereby interest is to be charged on such a delayed payment. From the summary of payment submitted by the learned Counsel, it is seen that the billing is done on quarterly basis and, accordingly, the payment is being received. Therefore, the delay is not wholly on account of late payment by the AEs only. Moreover, the T.P. Adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. Thus, on the facts and circumstances of the case, we are of the opinion that addition an account of notional interest relating to alleged delayed payment in collection of receivables from the AEs is uncalled for on the facts of the present case and is, accordingly, deleted. 11.4.2 Following the above decision of the ITAT, Mumbai Bench in the case of Evonik Degussa India P. Ltd. (supra), we also hold that the addition on account of notional interest relating to alleged delayed payment in collection of receivables from AEs is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Hon'ble IT A T observed the following in the judgment: Para 20 _ The only other ALP adjustment in appeal before us is with respect to what the authorities below have treated as, excess credit period allowed to Micro USA. This adjustment must be deleted for the short reason that it was part of the arrangement that specified credit period was allowed and thus the cost of funds blocked in the credit period was inbuilt in the sale price. In view of the above, we reiterate that receivables cannot be considered as a separate international transaction, but arises as a result of the international transaction. Hence the same will have to be aggregated for the purpose of economic analysis. Thus, it is incorrect to consider it as a separate international transaction for determination of arm's length price since the receivables have already been accounted for and subsumed with the principal international transaction. 17.11 Also, in the recent case of Avnet India Ltd v. DCIT [TS-629ITAT-2015(Bang)-TP), the Hon'ble Bangalore Tribunal ruled that interest on delayed realization of sale proceeds from AE is not a separate international transaction but an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. 11. Regarding ITA no. 149/2015 preferred by the assessee in view of the Delhi High Court judgment (para no. 14), the international transaction is required to be accepted, therefore, tribunal has committed serious error. The assessee will be entitled for the benefit of average LIBOR rate existing at that time which was 0.79% and addition of adhoc 2% is not proper. In that view of the matter, the addition of 2% interest in the income is required to be quashed and set aside. 12. The appeal and cross objection of the assessee stands allowed to the aforesaid extent. 13. All the issues are answered in favour of the assessee and against the department. Further, Supreme Court has endorsed the above judgment by dismissing the Special Leave Petition ( SLP ) filed by the revenue in the case of CIT Vs Vaibhav Gems Ltd [2018) 99 taxmann.com 2 (SC). 17.18 Therefore, based on the above se decision even if your goodself consider the trade receivables as a separate international transaction, we pray your good office to consider average LIBOR rate for calculation of interest. 17.19 The similar view has been upheld in the recent case Open Text Corporation In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the lower authorities had rightly found assessee's interest receivables as beyond the period involving uncomparable transactions. In this context, ITAI' stated that the impugned adjustment was not liable to be sustained for the sole reason that the same had been made not as per LIBOR rate applicable in case of international transactions but after taking SBI's prime lending rate (PLR) @14.45% in the TPO order and upheld to the extent between 6.5% to 8% as applicable in case of domestic term deposits. Regarding Revenue's contention that TPO as well as the DRP have rightly treated the foregoing benchmark as per the short term deposit rate in the SBI, ITAI' found no merit in the same on the premise that such a short term deposit cannot be taken at par with an international transaction u/s.92B since the latter involves foreign currency and overseas market conditions. ITAI' also stated that the lower authorities had not adopted any comparable in the very segment as well so as to come to the conclusion that assessee's receivables in case of overseas AEs involved more than the market practice of reasonable time period. Accordingly, ITAI' deleted the AL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of international transactions after taking State Bank of India's term deposit(s) rate only but also no comparable to this effect in the very segment has been found so as to form the necessary benchmarking in uncontrolled circumstances. The impugned ALP adjustment of Rs.82, 66,546/- is directed to be deleted therefore. 33. Per contra, the learned DR had submitted that the total turnover of the assessee company was Rs.9,00,86,960 against which the trade receivable was Rs.5,84,94,810. It was submitted by the learned DR that more than 60% of the total turnover of the assessee was due and receivable from the AE and the contention of the assessee that the LIBOR+200 points is required to be charged as against the interest of 8% cannot be accepted. FINDINGS OF BENCH 34. We have heard the rival contentions and perused the material available on record including the documents and submissions made before us. Before we deal with the issue, we would like to record the three judgments passed by High Courts on this. 35. In the case of Kusum Health Care (P.) Ltd.* [2018] 99 taxmann.com 431 (Delhi), Delhi High court had held as under :- 10. The court is unable to ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction' to be benchmarked at arm's length. It is a case of determination of arm's length price of a transaction. Undoubtedly the receivable or any other debt arising during the course of the business is included in the definition of 'capital financing' as an 'international transaction' as per explanation 2 to section 92B of the Act w.e.f. 01.04.2002 inserted by the Finance Act, 2012. Therefore, even the outstanding receivable partake the character of capital financing and consequently, overdue outstanding is an 'international transaction'. The natural corollary would be of imputing interest on such 'capital financing', if same is not charged at arm's length. Therefore, we reject the contention of the assessee that outstanding receivable is not an 'international transaction' and therefore, hence, according to us, interest on it requires to be imputed. Thus, this is a redundant contention, because as has been highlighted by the ITAT, by a plain reading of the (retrospectively applicable) amendment that introduced the Explanation to section 92B of the Act by Finance Act, 2012, it is determinable that if there is any dela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact, it will amount to shifting the profit of the assessee to its AE situated abroad. In fact the transactions of the assessee is required to be examined from the perspective of a prudent business man and required to be analyzed whether the assessee would give similar benefits to unrelated parties or not. In the present case, the trade receivables were 5.84 crores and if the assessee is required to bear the cost of Rs.5,84,94,810 without any carrying cost, then the assessee would be rendering the services at ALP at a lower rate than the comparable cases . undoubtedly the assessee would be incurring the infrastructure cost, manpower cost, raw material, bank financial charges for the purpose of manufacturing or delivering of the services/goods to its AE , failing to receive Rs.5.86 crores from AE in time had economic consequences , hence assessee is required to be compensated for delay in receiving its outstanding . It needs no business sense, if a person rendering services or supply the goods after making the afront payment, then the services/goods would be available at a lower rate and in case of converse situation of delayed payment goods/services would be available at higher val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yed receipt of the outstanding amount by assessee from its AE, as both stands on different premises having different purpose and nature. In fact if outstanding receivable are due for a longer period, then assessee would be required to deploy more resources either in the form of debt/equity to meet out the cash flow/working capital requirements. 41. The judgments relied upon by the assessee in support of its claim are not applicable to the facts of the present case. The first judgment relied upon by the assessee at page 157 of the Paper Book is Pegasystems Worldwide India P Ltd (ITA No.1758/Hyd/2014) reported in (2015) 64 Taxmann.com 470 (Hyd-Trib). In paragraph 17.3, the Tribunal had not granted the notional interest on the outstanding receivables. As a matter of fact, the said judgment pertains to the A.Y 2010-11 and by the Finance Act 2012 (Expenditure. i(c) was inserted with retrospective effect from 1.4.2002 whereby the international transaction shall include receivables or any other debt arising during the course of business. In our view, the Tribunal was not having the benefit of the said change in law while deciding the issue. Therefore, the said decision of the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he receivables. The 6th judgment relied upon by the assessee is in the case of CIT vs. Vaibhav Gems Ltd reported in (2017) 88 taxmann.com 12 (Raj.). In this case, the Hon'ble Rajasthan High Court after relying upon the decision of the Hon'ble Delhi High Court in the case of CIT vs. Cotton Naturals (I) Pvt. Ltd (2015)231 Taxmann.com 401 had allowed the applicability or LIBOR+200 points interest free loan provided by the appellant to its AEs. In the present case, admittedly, the case is not pertaining to the loan transactions given by the assessee to its AEs. However, in the present case, there is a delay of receiving consideration from the AEs and the total amount due to the assessee from the AEs is more than 60% of its total turnover. Therefore, the LIBOR+200 points rate cannot be applied to a transaction where the cases of delay in receivables from the AEs. Hence, the above judgment is also not applicable. The 7th judgment relied upon by the assessee is in the case of Open Text Corporation India (P) Ltd vs. Income Tax Officer reported in (2021) 127 taxmann.com 399 (Hyd.Trib), In this judgment at Para 2.2 had held that the short term deposit cannot take part with ..... X X X X Extracts X X X X X X X X Extracts X X X X
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