Gss Infotech Limited, Hyderabad v. Asst. Commissioner Of Income Tax, Circle-2(2), Hyderabad .

ORDER

B. Ramakotaiah, Accountant Member - This is an appeal preferred by assessee against the orders of Assessing Officer (AO) u/s. 143(3) r.w.s. 144C(5) of the Income Tax Act [Act] consequent to the directions of the Dispute Resolution Panel [DRP], Hyderabad. Assessee has raised the following revised grounds:

2. Briefly stated, assessee-company is deriving income from software IT enabled services filed its return of income of Rs. 93,433/- under the normal provisions of the Act and MAT income of Rs. 13,82,37,272/-. Since assessee had international transactions with its Associated Enterprise [AE], the matter was referred to the Transfer Pricing [TPO] u/s. 92CA of the Act. The TPO passed an order u/s. 92CA(3) dt. 28-12-2014 making an addition of Rs. 47,25,188/- towards adjustment of Arm's Length Price [ALP]. In addition to the above adjustment on TP provisions, AO also restricted the deduction u/s. 10A to an amount of Rs. 2,66,252/- on the reason of non-receipt of foreign exchange and other issues and further made adjustment of interest on the receivables on the reason that assessee has advanced credit to its AE more than required. Assessee filed detailed objections before the DRP. DRP vide its order dt. 08-12-2014 has confirmed the levy of interest on loan given to AE and also charging of notional interest on the credit provided to the AE. With reference to the deduction u/s. 10A, it has directed the AO to verify every export realization vis-à-vis the date of invoice and also guidelines issued by RBI and re-determine the deduction. It also directed that assessee has filed Form-56F showing the full claim of deduction and AO is directed to verify the same and re-work the deduction u/s. 10A. It was the contention that AO did not follow the directions; hence assessee has raised the grounds accordingly.

3. We have heard Ld. Counsel and the Ld. DR in detail and considered the above three issues as under:

Levy of interest of Rs. 47,25,188/- :—

4. During the FY 2009-10, assessee advanced a sum of Rs. 30,18,54,791/- as interest-free funds to its AE, M/s. GSS America Inc, wherein the opening balance as on 01-04-2009 was at Rs. 43,12,68,000/- and outstanding as on 31-03-2010 stood at Rs. 73,31,22,791/-. The argument of assessee before the TPO was that the funds were given out of free reserves and the amount was in the nature of quasi-equity and the advances converted into equity in FY 2011-12 and the facts are similar to the decision of the ITAT in the case of Mascan Global Limited in ITA No. 2205/10 dated 12-08-2011. The TPO however, did not accept and determined the interest at 4.06% pa and worked out the levy of interest of Rs. 47,25,188/-.

4.1 Before the DRP, assessee submitted that most of the business of assessee is from the US region and the advances were given to the assessee's subsidiary for the purpose of overall growth of business of the group. It was submitted that amounts were given in the nature of quasi-equity and assessee has not borrowed any funds and there was NIL interest payment. It was further submitted that even the WOS does not have any loans from any third parties and so no interest rate could be benchmarked. It was further submitted that there is no need for levy of interest as the amounts advanced were converted to equity. The DRP however, did not agree and held that these amounts were in the nature of loans and advances to AE and these transactions are clearly international transactions which require adjustment under the transfer pricing provisions. It upheld the decision of TPO not only in charging interest but also rate of interest.

4.2 It was the submission of the Ld. Counsel that company does not have any borrowed funds and has raised zero coupon bonds outside India which were invested for the purpose of equity at zero cost. It was further submitted that investment in subsidiary company is for the purpose of business and advances given upto 31-12-2011 were converted to equity. Ld. Counsel relied on the decision of the Co-ordinate Benches' decisions in the case of M/s. Prithvi Information Solutions Ltd. v. Dy. CIT [IT Appeal No. 472 (Hyd.) of 2014] for the proposition that no interest can be charged on the investment made by assessee in its own subsidiary. It also relied on the Co-ordinate Bench decision in the case of Vijai Electricals Ltd. v. Addl. CIT [2013] 60 SOT 77/36 taxmann.com 386 (Hyd.) and the decision of Hill Country Properties Ltd. v. Addl. CIT [2014] 48 taxmann.com 94 (Hyd. - Trib.) Ld. Counsel also relied on the decision of Commissioner Of Income Tax v. Cadila Healthcare Ltd. [2013] 39 taxmann.com 51/[2014] 146 ITD 502 (Ahd. - Trib.) for the same proposition. It was also contended that investment in subsidiary is not an international transaction as no income is generated. Ld. Counsel relied on the decision of Vodafone India Services (P.) Ltd. v. Union of India [2014] 50 taxmann.com 300/[2015] 228 Taxman 25/368 ITR 1 (Bom.) and Dana Corpn, In re [2010] 321 ITR 178/186 Taxman 187 (AAR - New Delhi) and Amiantit International Holding Ltd., In re [2010] 322 ITR 678/189 Taxman 149 (AAR - New Delhi) . Ld. DR however, relied on the orders of TPO and DRP with reference to the above issue.

4.3 We have considered the rival contentions and perused the documents placed on record. From the orders of the TPO as well as the AO it is not clear whether the amount advanced is for the purpose of equity or the amounts advanced originally as loans and later converted to equity. Since facts are not clear, we are unable to give any finding whether the amounts advanced were in the nature of equity or not? TPO order in fact shows that the sums were shown as outstanding and he categorized them as interest-free loans. There are also opening balances pertaining to earlier year to an extent of Rs. 43,12,68,000/-. It is not known whether department has accepted the advances in earlier year without any TP adjustment. In the absence of relevant facts, it is difficult to give a finding and apply various case law. Therefore, we are of the opinion that the facts required to be examined by the AO afresh. First of all, 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. Ground Nos. 1 & 2 are accordingly considered allowed for statistical purposes.

Deduction u/s. 10A:

5. Ground Nos. 3, 4, 5 & 6 pertain to re-working of the deduction u/s. 10A on the reason that assessee has not received the foreign exchange as per the provisions of the Act. AO restricted the amount by recalculating the export turnover/total turnover. Assessee has furnished the details of total turnover, export turnover, profit and exemption u/s. 10A as under:

5.1 The details of export realization in respect of exports from Hyderabad are furnished as under:

5.2 It was the contention that RBI guidelines allow time after twelve months from the date of invoice to realize relevant export proceeds in case of companies registered under STPI Scheme. Thereafter, extension after six months is granted by the authorized dealer itself. RBI Circular on export of goods and service bearing No. 9/2009 dt. 01-07-2009 is relied upon. It was submitted that assessee-company realised an amount of Rs. 2,84,51,000/- within the period of one year from the date of invoices. Further, Rs. 5,02,20,605/- was realised within 2½ months from the end of one year from the date of invoices. Assessee relied upon the provisions of Section 155(11A) for benefit under this extended period of time. It was further submitted that an amount of Rs. 12,23,68,351/- was converted into equity with the necessary permission from FEMA and RBI. This is in tune with the master circular and also permitted by RBI, therefore, export receivables to that extent are deemed to have been received. Accordingly, Rs. 12,23,68,351/- is also eligible for deduction u/s. 10A.

5.3 The Fourth item in this is 'on-site consultancy' through the branches for which assessee relied upon Explanation 3 and sub-section-I of Section 10A which are deemed to be the profits and gains as per the provisions. It was the contention that profits and gains derived from on-site branches also would be considered as deemed profits for the purpose of export of computer software outside India. We were also informed that in spite of clear directions from the DRP, AO did not examine these issues. Ld. Counsel relied on various case law for various propositions are as under:

6. Ld. DR however, relied on the order of the DRP.

7. We have considered the issue. 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. With these directions, the grounds are considered allowed for statistical purposes.

Interest charged on receivables:

8. AO noticed that assessee has certain outstanding realisables and accordingly proposed levy of interest at 4.06% on the belated receipts of Rs. 5,31,09,900/-. Assessee objected to the same stating that assessee accords credit for a period of twelve months on its receivables to its AE and non-AE. It was submitted that assessee does not charge any interest on any delayed payments irrespective of whether other party was AE or not. Since there is no policy of levying interest, question of levy of interest applying either CUP method or any other method does not arise. It was submitted that assessee is a debt-free company and there is no interest burden on it. It was submitted that when assessee's transactions are analysed under TNMM under which International transactions were accepted as at arm's length, further levy of interest does arise. Assessee placed reliance on various case law as listed in page 12 of the DRP's order. However, the DRP did not accept the contentions but directed the AO to charge interest at 4.06% on the belated payments of the receivables beyond two months. AO accordingly levied interest of Rs. 21,78,647/- calculating the delay of 12 to 13 months on five transactions.

9. It was the submission of assessee that first of all, there cannot be any levy of interest as assessee is not charging interest from any other person whether AE or non-AE. Assessee is also not paying any interest amount to anybody. Further referring to the table of the AO in page 7 of the order, it was submitted that most of the invoices were dated 31-12-2009 and the year ends on 31-03-2010. Thus, if at all there is a delay it was only for a month in the impugned accounting year, whereas, AO levied for a period beyond accounting year also which cannot be upheld.

10. Assessee relied on the following case law that no interest can be charged on credit which are given in the course of business.

10.1 The DR however, while accepting that levy was for the period beyond the accounting year, however, justified the levy of interest on receivables.

11. We have considered the issue and examined the contentions. 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. Grounds are considered allowed.

12. In the result, appeal is considered allowed for statistical purposes.

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