2017-VIL-1519-ITAT-HYD

Income Tax Appellate Tribunal HYDERABAD

ITA No.192/Hyd/2017

Date: 24.10.2017

EPAM SYSTEMS INDIA P LTD (PREVIOUSLY KNOWN AS M/s . ALLIANCE GLOBAL SERVICES IT INDIA P LTD.)

Vs

ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 17 (1) , HYDERABAD

For The Assessee : Shri Dhanesh Bafna, Hirali Desai & Abhiroop Bhargav
For The Revenue : Shri S.V.S.S. Prasad, DR

BENCH

Smt. P. Madhavi Devi, Judicial Member And Shri S.Rifaur Rahman, Accountant Member

JUDGMENT

Per Smt. P. Madhavi Devi, J.M.

This is assessee’s appeal for the A.Y 2012-13. The assessee has raised the following revised grounds of appeal and has also filed a letter stating the reasons for revising the grounds of appeal, the contents of which are as under:

“The Hon'ble Members Hon'ble Income Tax Appellate Tribunal - 'B' Bench Hyderabad

Dear Sir,

Name of the Assessee: Epam Systems India Private Limited (Earlier known as Alliance Global Services IT India Private Limited) ['Epam India' or 'Appellant" or 'We']

Subject : Filing of Revised Grounds of Appeal

Ref : ITA No: 192/Hyd/2017

Assessment Year : 2012-13

PAN : AAACW2012R

We refer to the above appeal which has been fixed for hearing on July 25, 2017 before the Hon'ble 'B' Bench of the Income-tax Appellate Tribunal, Hyderabad.

The Appellant humbly submits that, the Transfer Pricing Officer ('TPO')/ Assessing Officer ('AO') had erred in giving effect to the directions of the Hon'ble Dispute Resolution Panel ('DRP'), which had resulted in a TP adjustment of Rs. 2,43,05,081. The same has resulted in the AO raising a demand of Rs. 1,24,59,090. The Appellant had filed a rectification petition before the AO as well as the TPO seeking to rectify the Assessment Order.

The Appellant had filed a petition for stay of demand before the Hon'ble ITAT, Hyderabad against the demand raised by the AO and stated that the demand would be significantly reduced if the rectification petition is given effect to. The Hon'ble ITAT in the Stay Order has directed the AO to give effect to the rectification at the earliest and granted stay for a period of six months. The TPO has issued the rectification order, attached as Annexure A. On receipt of the said order, the grounds of appeal originally filed along with Form 36B necessitate a revision.

Accordingly, considering the rectification order passed by the TPO, the Appellant hereby wishes to file revised grounds of appeal for the sake of just and proper adjudication by Your Honours'. The same are being enclosed in triplicate.

We request your Honours to adjudicate the matter with reference to the aforesaid revised grounds of appeal in the interest of justice and oblige. Thanking you,

Sd/-

Yours faithfully

For EPAM Systems India P Ltd”

Revised Grounds of Appeal:

“1. On the facts and in the circumstances of the case and in law, the Learned Assessing Officer/Transfer Pricing Officer (Ld.AO/TPO') erred in making an adjustment of Rs. 46,86,925 to the total income of the Appellant in respect of notional interest on delay in collection of dues from Associated Enterprise CAE')

2. Without prejudice to Ground 1, the Hon'ble Dispute Resolution Panel (DRP')/Ld.AO/TPO erred in ignoring that, if at all transfer pricing adjustment has to be sustained with respect to notional interest on overdue receivables, it has to be made at a LIBOR rate and not at short term fixed deposits as determined by the Ld. AO / TPO.

3. On the facts and in circumstances of the case and in law, the Ld. AO erred in levying interest u/s. 234B, 234 C and 234D of the Act

The grounds mentioned herein are without prejudice to one another.

The Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal”.

2. After going through the order of the AO passed consequent to the directions of the DRP, we find that the revised grounds filed now, are relevant for adjudication and accordingly we are consider the same.

3. Brief facts of the case are that the assessee company engaged in the business of rendering software development services to its AEs, filed its return of income for the A.Y 2012-13 on 28.11.2012 declaring an income of Rs. 9,69,55,820. During the assessment proceedings u/s 143(3) of the Act, the AO observed that the assessee has entered into an international transaction with its AEs for rendering of software development services and therefore, the issue of determination of the Arms’ Length Price (ALP) of international transactions was referred to the TPO u/s 92CA of the Act. The TPO, after considering the assessee’s T.P. report, held that the assessee has used multiple year data to find comparables which is not as per the provisions and that this had lead to the selection of 14 comparables out of which some comparables did not have the contemporaneous data. Therefore, he rejected the T.P. study of the assessee and conducted an independent search and using the contemporaneous data and after aggregation of transactions, he arrived at the ALP and after allowing the working capital adjustment, he found that the average margin of the comparables is within ± 5% of the price received. He therefore, proposed no adjustment as far as software development services transaction is concerned.

4. Thereafter, he observed that the assessee is due to receive a sum of Rs. 25,54,91,654 at the end of the relevant A.Y. He therefore, asked the assessee to submit the details of the invoices and the subsequent receipts. On perusal of the information so filed, he observed that a sum of Rs. 21,96,43,078 has been received after considerable delay. He therefore, proposed to charge interest @ 14.75% on the delayed receipts after allowing the grace period of one month. The assessee submitted the relevant data and after examining the same, the AO observed that there is a delay of nearly 7 to 9 months in respect of receipts. He therefore, held that the interest on receivables is to be adjusted u/s 92CA of the Act. In accordance with the order of the TPO, the AO proposed the draft assessment order against which the assessee preferred its objections before the DRP. The DRP granted partial relief to the assessee by directing the AO to adopt the interest rates of the SBI prevailing for the financial year 2011-12 on short term fixed deposits instead of 14.75% applied by the TPO. Further, the DRP also directed that the interest is to be calculated till the end of the relevant financial year only. In accordance with the said directions of the DRP, the final assessment order has been passed against which the assessee is in appeal before us.

5. The learned Counsel for the assessee submitted that the TPO has rejected the TP study of the assessee and has computed the ALP after allowing the working capital adjustment. He submitted that the working capital adjustment takes into consideration, the outstanding receivables and therefore, no fresh ALP adjustment of the outstanding receivables was called for. In support of this contention, he placed reliance upon the decision of the Tribunal at Delhi in the case of Kusum Healthcare Pvt Ltd v ACIT in ITA No.6814/Del/2014 which has been confirmed by the Hon'ble Delhi High Court in ITA No.765 of 2016. Copies of the said decisions are filed before us. He further submitted that the maximum credit period allowed by the assessee was 153 days, whereas the RBI allows six months to one year for the funds to be brought into India. Therefore, according to him, a period of 180 days is a reasonable period within which the assessee can bring the funds into India.

6. Further, without prejudice to the above contention, he submitted that the interest on the receivables is to be calculated at the LIBOR+ 300 basis points and not as per the interest rates prevailing in India as directed by the DRP.

7. The learned DR, on the other hand, supported the orders of the authorities below and submitted that there was considerable delay in receipt of the consideration by the assessee from its AEs and therefore, the notional interest on the outstanding balance is to be brought to tax at its ALP.

8. Having regard to the rival contentions and the material on record, we find that the only transaction, which has been treated as an international transaction by the assessee in its TP study is the provision of software development and consulting services. The assessee has adopted TNMM as the most appropriate method and has adopted 14 companies as comparables whose mean margin was 13.08% as against the assessee’s margin of 12.14%. Since the assessee’s margin was within + or _ 5% of the margin of the comparables, the assessee treated it to be at Arm’s length. In Annexure G of the TP Study, the assessee has detailed the search process adopted by it for selecting the comparables and the method adopted and adjustments made to the margins of the assessee as well as the margins of the comparable companies before arriving at the ALP. One of the adjustments mentioned therein is the adjustment to net working capital and the details and the methodology thereof and that the assessee has retained the option of carrying out this adjustment.

9. During the TP proceedings u/s 92CA of the Act, the TPO considered the above TP documentation and accepted that after allowing working capital adjustment (WCA in short), the price received by the assessee is within +_5% of the average margin of the comparables and therefore, no adjustment was proposed. Thereafter, he proceeded to consider the receivables at the end of the year and noticing that a sum of Rs. 21,96,43,078 has been received after a considerable delay, proposed to charge interest thereon. He accordingly charged interest @ 14.75% p.a on the outstanding receivables. This, in the opinion of the Counsel for the assessee, is not warranted as this already got factored in the working capital adjustment allowed by the TPO. We have gone through the TP study of the assessee and also the TP order of the TPO. Though the AO has stated that the working capital adjustment is allowed, the working of such adjustment is not available on record and it is not evident that the margins of the assessee and the comparables are arrived at after such adjustment. The decisions relied upon by the learned Counsel for the assessee support this contention. Though, we agree with the assessee’s contention that no separate addition of interest on receivables is required after allowing working capital adjustment, in the absence of material on record, we are unable to give any relief to the assessee on this ground. Therefore, we deem it fit and proper to direct the AO to examine if the final margins of the comparables and the assessee have been arrived at after WC adjustment to hold the international transactions of the assessee to be at “ALP” and if it is found to be so, then we direct that no further addition on account of interest on receivables shall be made. However, in the event, it is found that WCA has not been made to the final margins which are compared to the margin of the assessee, then the AO shall allow the reasonable period of credit i.e. three months from the date of notice and on the outstanding balance exceeding such period, the interest at LIBOR rate may be applied for making the adjustment. AO is directed accordingly.

10. In the result, the assessee’s appeal is treated as allowed for statistical purposes.

Order pronounced in the Open Court on 24th October, 2017.

 

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